Saturday 23 February 2013

Budget made easy, understanding budget in layman terms

Budget  made easy, understanding budget in layman terms

Its budget time in India and the Finance Minister, Mr.P.Chidambaram will present the Finance Bill for 2013-14 in the Parliament for approval and vote on 28.2.2013.  A common man knows nothing about the budget.  For him the budget is a yearly roundup of price increases on various items of use.  Most Indian look at the budget with a negative bias.  However to help you understand the budget I am writing this article.  Hope it helps.

The Government of India receives money and spends money through the Consolidated Fund of India (CFI).  This is where the money you pay in taxes, cess, service taxes are parked and from it the payment is made to various ministries for expenditure in the next year.  The expenditure is divided into two parts the Capital Expenditure and Revenue Expenditure.  Capital expenditure is meant for one time expenditures on various projects of the Indian Government and revenue expenditure is meant for the day to day running expenses of the Government of India.  The Budget which will be announced on Thursday, 28th Feb, 2013 will lay the provisions or outlay for these expenditures. 

Government expenditure is calculated for a financial year in three parts.  On  28.2.2013, the Government will give a outlay of expenditure it expects to incur for full of 2013-14.  This is called the budget estimates.  When the outlay is made to a particular ministry, they get a budget grant for the said amount.  The ministry after 4 months compiles a estimate based on the actual expenditure incurred from April to July and likely expenditure for next 8 months.  This is called the Revised estimates.  Again in the month of Jan, the Ministry prepares a final list of expenditure for expenditure in that year including the expenditure incurred for 10 months and likely expenditure for next 3 months.  This estimate is the one most likely to meet the outlay, give or take some crores, and therefore it is called the Final Estimates.

When Mr.P.C. will announce his budget outlay for each of the Ministry and department of Government of India, he will make a provision for expending the same.  To match the expenditure with the income the Government decides on the rates of taxes it receives in form of Direct or Indirect taxes.  Direct taxes are those taxes which are remitted directly into the Government Accounts.  Income Tax and Corporate Tax (Tax paid by the Companies that run business in India)  form the bulk of the Direct taxes.  The indirect taxes are taxes which you pay to the dealer to in turn pays it to the manufacturer who in turn pays it to the Government.  The common forms of indirect tax are sales tax, service tax etc.  The difference between the income and expenditure of the Government is called the Fiscal deficit.

The  primary expenditures on Government Books are expenditure towards Military, expenditure towards subsidies, civilian employees including their pension funds and expenditure for its flagship programs like MGNREGA, RTE, FSA etc.

The more the Government promises populist measures the more the expenditure is.  This leads to ballooning of Fiscal Deficit.  There is a act which the Government has enacted in 2003.  It is called the Fiscal Responsibility and Budget Management Act of 2003.  It makes imperative on the Government in power at the time to take steps to maintain a reasonable fiscal deficit with a targeted road map for achieving it.

As of today due to rising subsidies and expenditure on its flagship programs the Fiscal deficit is estimated at 5.5 % to 5.8 %.  This is way over what the Government will be comfortable with.  The comfort level for the Government is in the region of 4.5 to 5 %.

What to expect from the Budget 2013.

1. The Income tax slab of minimum income taxable will be raised to around 2.00 lakhs from the current 1.80 lakhs per annum with PC tinkering the tax rates to tax the rich more.  As of now a formula of 10-20-30 is being followed, however I expect PC to tinker the 30 to 35 % in Budget 2014.

2. The Government is likely to introduce a cess on SUV/MPV/MUV running on diesel and also likely to increase the cess on petroleum products called the Road Cess.  At present it is 2.00 per litre, It may be increased by 0.50 paise to Rs.2.50 per litre.  

3.  On the excise front I dont expect much change other than increase in the excise rates of usual suspects like cigarettes, alcohol etc.

4. There is a chance that the Government may reduce the duties on  purchase of mobiles and laptops to make it cheaper by at least 7%.

Other than that it will be a feel good budget for everybody especially with the next year being a General Elections years.  So I don't think Government would want to increase any taxes given that its own political fate is very much dicey.

I will post a complete writeup on the budget and its effects on us after the Budget is presented in the Parliament on 28.2.2013.

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