Mrunal [Budget] Interim Budget 2014 (Part 1of4)_ Revenue reciepts, Direct taxes, Indirect taxes, Gross vs Net taxes, shortfalls in collection » Mrunal

2/24/2014 Mrunal [Budget] Interim Budget 2014 (Part 1of4): Revenue reciepts, Direct taxes, Indirect taxes, Gross vs Net taxes, shortfalls in collection » Mrunal

http://mrunal.org/2014/02/budget-interim-budget-2014-part-1of4-revenue-reciepts-direct-taxes-indirect-taxes-gross-vs-net-taxes-shortfalls-collection.html/print… 1/23

[Budget] Interim Budget 2014 (Part 1of4): Revenue reciepts, Direct taxes, Indirecttaxes, Gross vs Net taxes, shortfalls in collection

1. Prologue

2. 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 what’s interim budget?

6. Vote on Account vs Interim budget

7. Interim budgets in the past

3. Parts of Budget

4. #1: Direct Taxes

1. Direct taxes under Interim Budget 2014

2. Income Tax

3. Shortfall in Direct tax collection = #EPICFAIL

4. But Why shortfall in Direct tax collection?

5. #2: Indirect taxes

1. Indirect Taxes in Interim Budget 2014

1. #I1: Service Tax

2. #I2: Excise Duty: Automobiles

3. #I3: Excise: Mobile handsets

4. #I4: Custom Duty: soap industry

5. #I5: Custom Duty: Bank note Mill

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

2. Indirect Tax collection = #EPICFAIL shortfall

3. Why shortfall in indirect tax collection?

6. MCQ Data for Tax collection: Ascending descending

1. Table1: Direct vs indirect

2. 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 revenue

8. Appendix

1. #1: Direct taxes can be levied on Expenditure also

2. #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):

http://mrunal.org/



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 Chindu’s budgetspeech.

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 he’llhave to “Explain” to mommy why he needs money.

Same is the case government’s money. Government stores its money in three places:

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

Held by the President of India. (doesn’t mean Pranab carries the chequebook. This isoperated – by finance Secretary).President can spend ca$h from this fund- for emergency/unforeseen circumstancesWithout the authorization of parliament. (mommy’s permission not needed)

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

http://www.flickr.com/photos/97816112@N02/12627174583/



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 parliament’s permission to spend money from here? Nope.

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

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 parliament’s approval to spendmoney 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 fromConsolidated fund 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,

“I’m 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?

harsha

Highlight

harsha

Highlight

harsha

Highlight



In an ordinary year,

February: Chindu put these files in parliament, Media Walla go crazy about itFebruary to April: Parliament and its Committees will study these files, find spellinggrammar mistakes and vote on the demandsApril-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:

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 year’s 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?

ContingencyNo. this is meant for emergency situation only.

harsha

Highlight




Fund of India This fund barely has 500 crore rupees=not even sufficient to themonthly salary and lightbill of army-navy-airforce!

Publicaccounts ofIndia

No. Because its components have specific function. e.g. the cashfrom National Calamity & contingency fund (NCCF) is meant onlyfor disaster relief type work.

Congressparty’s Swissbank account

hell no. If Chindu withdraws money from here, to run the government =>this “Robinhood-giri” will defeat the whole purpose of doing scams andtaking bribes in the first place!

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

FM(to Lok Sabha) maai baap, please allow me to spend money from consolidated fund ofIndia, 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 what’s interim budget?

Consider the situation in 2014

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

31st March 2015.April/May 2014: General election, new party comes in power. But then they’ll 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

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight



economy.Therefore, political parties have developed an unwritten convention, “Ruling party shouldNOT to initiate major changes in the tax/expenditure during General election year.”Such “Slim” version of Budget is called “interim budget”.There is no legal/Constitutional obligation on the ruling party to launch an interimbudget during election year. This is only an unwritten convention.

So let’s compare/contrast:

Vote on Account vs Interim budget

VOTE ON ACCOUNT INTERIM BUDGET

only presents demand forExpenditure part. (i.e. allowgovernment to spendmoney from CFI, untilbudget is passed)

Deals with both income (taxation) part and Expenditure part. +annual financial statement showing incoming and outgoingmoney of the government.

only one article applicable:116(2)

many articles applicable

112: have to put annual financial statement265: have to put finance bill (to get parliament’spermission to collect taxes)266: have to put appropriation bill (to get parliament’spermission to spend money from consolidated fund ofIndia)

Only Lok Sabha hasDecision Making powerhere. Because art 116(2)specifically says “House ofpeople” can grant suchmoney.

Both houses involved. Because Art 112: Annual financialstatement has to be laid in both houses Lok Sabha and RajyaSabha.although Rajya Sabha doesn’t really have any DecisionMaking power here either, but they could stall it for 14 days.

Asks parliament to grant

1/6th of the total estimatedexpenditure

Asks parliament to grant entire money for total estimatedexpenditure.

Validity: 2 months

If the new Government doesn’t give new (full) budget afterelection, then Interim budget’s provision remain valid for the

whole financial year i.e. 1st April 2014 to 31st March 2015.

done in non-election yearsand election years.

only during election years/extreme situation.

Vote on account doesn’tcontain interim budget.

interim budget contains vote on account. (Because here also,budget presented in Feb, while passed somewhere in lateApril/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

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight



Yashwant04 Gave quite a few schemes and tax-benefits12page

Pranab09 Did not announce any new taxes or schemes.18page

Chindu14

No changes in direct tax.Few concessions in indirect taxFew schemes/provisions related soldier pension, education loans,skill development, Nirbhya fund etc.

14pages

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

Q. 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 interimbudget 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 B4. Neither A nor B

Statement B is correct. That eliminates option “D”. Now the final answer (B or C) depends onwhether “A” is right or not?

Observe the statement “A”

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

Focus on the word “Caretaker” government. What do we understand by Caretakergovernment?Until new PM/CM takes charge, the earlier government continues to be in office, as in“caretaker” position. This happens when:

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

after PM/CM hasresigned

In this case, entire council of minister is automatically gone. So,how can Finance minister “Exist” and present the (interim) budget

No-confidencemotion passed In this case, even if FM presents (interim) budget, it’ll be defeated.

harsha

Highlight




Parliament/assemblyis dissolved.

Then where will FM place the “interim” budget?

On 17/4/2014, Chindu presented interim budget for UPA-II. So, is UPA-II a caretakergovernment? Nope. Not yet. its term (5 years) has not expired yet. They’ve still got ~90 daysto misrule the country. Therefore statement “A” is wrong. Interim budget is not used by acaretaker government. Eliminate choices accordingly:

1. The provision of a vote on account is used by a regular government, while an interimbudget 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 B4. 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 what’s the difference between themtwo?Remaining topics related to polity: money bill vs finance bill, Committees ofparliament, CAG , vote on grant etc. you prepare from (the great) M.Laxmikanth.

Now let’s start the technical/financial aspects of budget.

Parts of Budget

harsha

Highlight

harsha

Highlight

http://www.flipkart.com/indian-polity-4th/p/itmdmmsnbhqfwj3a?pid=9781259064128&affid=mrunalrugm




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 what’s the need of this labour? Why can’t we just have a simple income vs expense typeof thing? We’ll come to that in third article.

For now, let’s focus on…

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 taxes2. Indirect Tax

Thus, we’ve come to the main topics of today’s article= direct and indirect taxes andprovisions of interim budget 2014 (related to these taxes).

#1: Direct Taxes

Have two subtypes

On Income/ Expenditure on properties/assets/Capital transaction

1. Income tax2. Corporate Tax (and MAT)3. Interest tax (on banks)*4. Fringe benefits tax *5. Hotel receipt Tax*

1. Wealth Tax2. Securities transaction Tax (STT)3. Banking cash transaction tax*4. Estate duty*5. Gift tax*

Taxes marked in (*) have been abolished long time ago. I’ve mentioned them here, onlyin case the nostalgic UPSC professor wants to ask classification type MCQs.

We should also know the direct taxes of state government.

harsha

Highlight

harsha

Highlight


http://mrunal.org/2014/02/budget-interim-budget-2014-part-1of4-revenue-reciepts-direct-taxes-indirect-taxes-gross-vs-net-taxes-shortfalls-collection.html/pri… 10/23

DIRECT TAXES OF UNION DIRECT TAXES STATE

Taxes on Income

Income taxCorporation Tax (and MAT)

Taxes on assets

Wealth TaxSTT

Taxes on income

Agriculture income taxProfessional tax

Taxes on properties

Land RevenueStamp duty/registration dutyProperty tax in urban areas

Now let’s 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 anychanges in the direct taxes. That means, direct tax system remains the same like Budget 2013.Observe

Income Tax

Taxable Income Income Tax

2 to 5 lakh 10%

5 to 10 20%

>10 30%

Other direct taxes

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 taxbenefits.

Chindu proposed to setup a neworganization called “Research FundingOrganisation“.This org. will fund fund researchprojects selected through a competitiveprocess.If company gives cash to thisorganization, it’ll be deducted from

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight



taxable income.

Did not implement

1. GAAR2. Direct tax code (DTC)3. Goods and services tax (GST)

Shortfall in Direct tax collection = #EPICFAIL

Observe

Feb 2013: FM proposes taxes for year 2013-14. Along with this, he’d give estimate oftax collection e.g. x crore from income tax, y crore from corporate tax and so on. Let’slabel 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, he’d 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 againmake budget estimates for next (interim budget) so let’s label it (BE)2014.

Thus total we’ve three estimates:

harsha

Highlight

harsha

Highlight

harsha

Highlight




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. Let’s try a clichéd MCQ.

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

A. Wealth TaxB. Securities Transaction TaxC. Income TaxD. Corporation Tax

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

Anyways, let’s 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, what’s 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.They’ll 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, doesn’t give salary raise to existing staff= people payless income tax.

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

4. High 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.

harsha

Highlight

http://mrunal.org/2014/02/economy-rbi-urjit-patel-committee-4-cpi-nominal-anchor-multiple-indicator-monetary-policy-framework-reforms-part-1-of-2.html#579



Why Policy paralysis = Low collection of Direct taxes?

Run the same logic and you’ll see the connection. e.g.

1. Policy paralysis=corporates cannot open new factories=> less profit=>less corporatetax.

2. Since corporates cannot open new factories=> less new jobs=>less people fall in theincome tax bracket (starting from Rs.2 lakh to 5 lakh).

ok enough of direct taxes. let’s move on. otherwise our remaining jawaani will be spent inanalyzing the direct tax only.



Tax Non Tax

1. Direct taxes (DONE)2. Indirect Tax (now let’s study this)

#2: Indirect taxes

What are the indirect taxes of Union and States?

Indirect taxes (Union) Indirect Taxes (States)

i. Custom Duty (Import,i. Sales Tax/ VAT

ii. Excise duty on DESI liquor and Narcotics




Export)ii. Excise Duty (CENVAT

system)iii. Service Taxiv. Central sales tax

(CST)*

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 Modi will

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, it’s 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. Let’s check them one by one

#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: they’re exempted, but not put in “negative list”.

Service tax “negative list” Exempted list

Govt. cannot levy Service tax on thenames included in this list (total 17items.)

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 simple notification.He doesn’t need parliament’s approval.

Examples

a. Services by the Reserve bank of Examples

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight



India;b. Betting and gambling. (because they

fall under State list.)c. Funeral, burial

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 sectorwill see boost in sales.

#I3: Excise: Mobile handsets

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 offoreign 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, that’dalso make desi phones cheaper!

Reasons:

1. US/China may drag us to WTO2. Higher custom duty doesn’t 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!)

harsha

Highlight

harsha

Highlight

harsha

Highlight

harsha

Highlight



#I5: Custom Duty: Bank note Mill

Bank Note Paper Mill India ltd. (Bangalore)They make the special paper for producing currency notesFM 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.Consequence: 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 calledcounter veiling duty (CVD).

Interim budget & CVD

Import of Road construction machinery will be subjected to CVD. (= it’ll 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

Excise 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 taxes?



5.65 MINUS 5.19 =~45000 Crore rupees.

Why shortfall in indirect tax collection?

#1: Excise 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 they’ve 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 won’t need to import anyraw material/ machines/construction-vehicles etc. (Even if he wants to!) thereforecustom duty declined.

#3: Service tax

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 let’s update tables

Table1: Direct vs indirect

Tax BE 2013 RE 2013 shortfall BE 2014

Direct 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

ya but What’s the wisdom here for MCQs? =that DIRECT tax brings MORE revenue togovernment that INDIRECT tax.

So far, we’ve data for Direct taxes and indirect taxes. Now for MCQs, we need the overallranking (of which tax brings highest/lowest revenue.) Since we’ve revised estimates (RE2013), so we can now ignore the ORIGINAL estimates of BE 2013.



Table2: Ranking Among all taxes (2013-14)

Type Taxes 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)

Type Taxes BE 2014

direct Wealth Tax 950

direct Securities Transaction Tax 5992

indirect Excise 199831

indirect Customs 201314

indirect Service Tax 215478

direct Income Tax 300474

direct Corporation Tax 451005

lets make one final table

Table3: Tax collection highest to Lowest

Rank 2013 (Revised Estimate) 2014 (projected)




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

From exam 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 isunlikely to change.)While tax ranking of 2014 is just projected revenue from interim budget. It’ll changewhen new government makes new (full) budget (=tax rates changed= collection rankingwill be changed).Then you’ll have to mugup the new updated ranking accordingly. (we’ll see when fullbudget comes after election).

Gross vs net Tax revenue

Before going into gross vs net, let’s take two quick bites:

#1: Tax sharing

80th amendment 2000: 29% of total taxes of the Union need to be shared with states

13th FC (Kelkar)= Union to share 32% with states.

14th FC (YV Reddy): yet to give recommendation.

#2: NCCF

National Calamity Contingency Fund (NCCF)

Under Home ministryPart 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 taxesare also counted here.

Net Tax revenue

This equals, Gross tax revenue MINUS [revenue shared with states + money sent to Nationalcalamity contingency fund]

Let’s 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 387732

C.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 calamityfund=> remaining money is the “actual” money left in the hands of Union government (thatthey can spend as per their own wishes).

Let’s try a very cheap MCQ

Which of the following statements is/are correct

a. In union budget, gross tax revenue is always lower than net tax revenueb. 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 Bd. Neither A nor B

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

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

Appendix

some allied topics that’d 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 somefacility to worker, Apart from his usualsalary.

Salman himself joins a posh Gymnasium,Annual fees Rs.1 lakh (+12% service tax)

Salman buys membership to a posh gym, forhis bodyguard “Shera”. = 1 Lakh + 12%service tax + 30% FBT on.

paid 1,12,000 to Gym Owner. Gym ownerpays 12k to government as service tax.

Pay Rs. 1,12,000 to Gym owner (fees+ service tax)Pay Rs. 30000 to government (FBT)




Hence it’s called “indirect” tax, becauseSalman paid the tax but government did nottook it from his hand. But from that Gymowner.

Called direct tax, because Salman directlyhad to pay FBT to government (and not tothe Gym owner, not to bodyguard Shera.)

this is a tax on “expenditure” (on services)this is also a tax on “expenditure” (on fringebenefits)

still levied as of 2014 discontinued from 2009

let’s try a very cheap MCQ:

1. A Direct tax can be levied only on the income OR property of a person2. Fringe Benefit tax is an example of Indirect tax.3. Both A & B4. Neither A nor B

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

Mind the spelling: “canon” (rules/principles) and not “cannon” (used for bombing).Adam Smith gave four canons of good taxation system.

1. Canon of Equality: 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. forexample

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 doesn’t mean there is no taxon expensive gifts- they’re counted under Taxable income (of the person who receives thegift)

Estate duty (abolished)

Estate duty was charged during the “inheritance” of estate. (although this was a Uniontax- entirely cash was given to states.)

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

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 andnot 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 othersin 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 and acountof every little fringe benefit they gave to employees)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 toemployees in pretext of giving those fringe benefits= employee’s pay less income tax. so indirectly, government was axing its own leg. (Recall our MCQ tables: income tax isthe second largest source of revenue for union government!)

Mock Questions

After the article series is complete.

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

URL to article: http://mrunal.org/2014/02/budget-interim-budget-2014-part-1of4-revenue-reciepts-direct-taxes-indirect-taxes-gross-vs-net-taxes-shortfalls-collection.html

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

http://mrunal.org/Economy

Documents

Mrunal [Budget] Interim Budget 2014 (Part 1of4)_ Revenue reciepts, Direct taxes, Indirect taxes, Gross vs Net taxes, shortfalls in collection » Mrunal