Mrunal (Budget) Interim Budget 2014 (Part 1of4) - Revenue Reciepts, Direct Taxes, Indirect Taxes, Gross Vs Net Taxes, Shortfalls in Collection Mrunal

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[Budget] Interim Budget 2014 (Part 1of4): Revenue reciepts, Direct taxes, Indirect taxes, 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 whats 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):
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provisions and issues related to them. Part 2: Interim Budget => Revenue Part=> Non-tax revenue: sources, issues. [+ Capital part] 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.
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. (Unless mommy checks the passbook/bank statement!) 2. Ask mommy to give the ca$h from bedroom cupboard. In this case 11/10 times hell have 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 is operated 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:
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1. 2. 3. 4. 5. 6. 7.
bank savings account of the departments/ministries (for day to day transactions) National Investment fund (money earned from disinvestment, goes here) National Calamity & contingency fund (NCCF) (for disaster Management) National small savings fund, defense fund. Prarambhik Shiksha Kosh, MNREGA fund Provident fund, Postal insurance etc. and so on
Does government need parliaments 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 taxes 2. all the loans taken by government of India 3. 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 Consolidated 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 112 4. (+ 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?
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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 from consolidated 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 years appropriation Act (2012-13) is valid upto 31st March 2013) But Parliament discussion still on going. Appropriation bill for 2013-14, is yet to be passed. so where to arrange money in the meantime?- for staff salary, lightbill, phone bill everything? Fund Can FM arrange money from here until budget is passed?
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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! No. Because its components have specific function. e.g. the cash from National Calamity & contingency fund (NCCF) is meant only for disaster relief type work. hell no. If Chindu withdraws money from here, to run the government => this Robinhood-giri will defeat the whole purpose of doing scams and taking bribes in the first place!
Public accounts of India
Congress partys Swiss bank account
So, ultimately, we are back to square one: the consolidated fund of India. He must arrange cash 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. April/May 2014: General election, new party comes in power. But then theyll have to live 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 vote
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bank), then suddenly new party comes in power, and re-starts the excise duty = policy uncertainty, 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 election year. 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 only presents demand for Expenditure part. (i.e. allow government to spend money from CFI, until budget is passed) INTERIM BUDGET Deals with both income (taxation) part and Expenditure part. + annual financial statement showing incoming and outgoing money of the government. 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 of India) Both houses involved. Because Art 112: Annual financial statement has to be laid in both houses Lok Sabha and Rajya Sabha.although Rajya Sabha doesnt really have any Decision Making power here either, but they could stall it for 14 days.
only one article applicable: 116(2)
Only Lok Sabha has Decision Making power here. Because art 116(2) specifically says House of people can grant such money.
Asks parliament to grant 1/6th Asks parliament to grant entire money for total estimated of the total estimated expenditure. expenditure If the new Government doesnt give new (full) budget after election, then Interim budgets provision remain valid for Validity: 2 months the whole financial year i.e. 1st April 2014 to 31st March 2015. done in non-election years and only during election years/extreme situation. election years. interim budget contains vote on account. (Because here also, budget presented in Feb, while passed somewhere in late Vote on account doesnt April/May.) so government needs money in between. contain interim budget. However, the vote on account will be of longer duration e.g. 3-4 months. (than during normal full budget years.)
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Interim budgets in the past
Yashwant04 Gave quite a few schemes and tax-benefits Pranab09 Did not announce any new taxes or schemes. No changes in direct tax. Few concessions in indirect tax Few schemes/provisions related soldier pension, education loans, skill development, Nirbhya fund etc.
12 page 18 page
Chindu14
14 pages
Enough theory, lets try a mock question from 2011s 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 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 The provision of a vote on account is used by a regular government, while an interim budget is a provision used a caretaker government. 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 expired In this case how can FM present the (interim/full) budget?
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after PM/CM has resigned No-confidence motion passed Parliament/assembly is dissolved.
In this case, entire council of minister is automatically gone. So, how can Finance minister Exist and present the (interim) budget In this case, even if FM presents (interim) budget, itll be defeated. Then where will FM place the interim budget?
On 17/4/2014, Chindu presented interim budget for UPA-II. So, is UPA-II a caretaker government? 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: 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
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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 expense type of thing? Well come to that in third article. For now, lets 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. REVENUE PART CAPITAL PART Receipt Expenditure Receipt Expenditure Tax Non Tax 1. Direct taxes
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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/ Expenditure 1. 2. 3. 4. 5. Income tax Corporate Tax (and MAT) Interest tax (on banks)* Fringe benefits tax * Hotel receipt Tax* on properties/assets/Capital transaction 1. 2. 3. 4. 5. Wealth Tax Securities transaction Tax (STT) Banking cash transaction tax* Estate duty* 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 TAXES OF UNION Taxes on Income Income tax Corporation Tax (and MAT) Taxes on assets Wealth Tax STT DIRECT TAXES STATE Taxes on income Agriculture income tax Professional tax Taxes 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 Budget 2013. Observe
Income Tax
Taxable Income 2 to 5 lakh 5 to 10 >10
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Income Tax 10% 20% 30%
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Other direct taxes Corporate tax (desi company) Corporate tax (foreign company) MAT Minimum alternative tax Wealth tax (for wealth >30 lakh rupees) STT Securities Transactions tax ~34% ~43% ~21% 1% 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 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.
if company spent money on in-house Research development = they can claim tax benefits.
Did not implement 1. GAAR 2. 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 taxes accordingly.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 Wealth Tax Securities Transaction Tax Income Tax Corporation Tax Total from Direct tax BE 2013 950 6720 240919 419520 668109 RE 2013 950 5497 236194 393677 636318 BE 2014 950 5992 300474 451005 758421
Absolute numbers are not important but interpretation is. Lets try a clichd MCQ. Which of the following direct tax, fetches maximum revenue to government of India
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A. B. C. D.
Wealth Tax Securities Transaction Tax Income Tax Corporation Tax
For all three columns, you can see: Corp>>IT>>STT>>Wealth tax. Anyways, lets enter into a deeper analysis. Observe the total collection from direct Tax (in above table). In Feb 2013, Chindu estimated ~6.68 lakh crore rupees would come from direct taxes alone! (BE2013) But he revised the data yesterday, we see barely 6.36 lakh crore have come from direct taxes (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 evade tax? NOPE. B. Because Chindu (Harward Graduate) and his finance Secretary (IAS) are weak in maths and 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=> people spend less money on consumer durables mobile, TV, fridge etc.=> sales down=>profit down=> corporate tax goes down. 2. Less profit=> company cuts jobs, doesnt give salary raise to existing staff= people pay less income tax. 3. Less profit = less dividends to shareholders => mutual fund/sharemarket investment declines= security transaction tax also goes down. 4. High inflation = real interest rates are negative (recall Urjit Patel) = people invest more in gold and less in mutual funds/sharemarket etc.=> security transaction tax collection is lower 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 jawaani will be spent in analyzing the direct tax only.
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REVENUE PART Receipt Tax 1. Direct taxes (DONE) 2. Indirect Tax (now lets study this)
CAPITAL PART Expenditure Receipt Expenditure Non Tax
#2: Indirect taxes

What are the indirect taxes of Union and States? Indirect taxes (Union) Indirect Taxes (States) i. ii. iii. iv. v. vi. vii.
i. ii. iii. iv.
Sales Tax/ VAT Excise duty on DESI liquor and Narcotics Custom Duty (Import, Motor vehicle tax, Taxes on boats and animals. Export) Toll tax (opposed by MNS/Shiv Sena) Excise Duty (CENVAT Electricity tax. system) Luxury tax (on restaurant, spa etc.) Service Tax Taxes on Betting and gambling (on whether Modi will Central sales tax (CST)* 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 in budget estimates, its collection is listed as or 00. But for MCQ purpose, know that it is
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the 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 slight reductions/tweaking for certain items, to boost the economy. Lets 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 2% educational cess. Meaning tax on tax = 2% of 12% 1% Senior & Higher Education Cess= 1% of 12% Effective service tax 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 Exempted list Theoretically, these services are taxable under Govt. cannot levy Service tax on the names service tax, BUT for the time being, FM gave included in this list (total 17 items.) them exemption. To modify this list, FM needs parliament FM can modify this list by a simple approval (because he needs to amend the notification. He doesnt need parliaments Finance Act.). approval. Examples a. Services by the Reserve bank of India; b. Betting and gambling. (because they fall under State list.) c. Funeral, burial Examples a. Rice loading-unloading b. Cord blood bank 12.00% +0.24 +0.12 =12.36%
#I2: Excise Duty: Automobiles

For past few months, Automobile sector was facing slowdown because 1. High inflation =people postpone purchase of high value items
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2. 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

To decrease the imports of mobile phones, FM has reduced the excise duty on mobile handsets 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, thatd also make desi phones cheaper! Reasons: 1. US/China may drag us to WTO 2. 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?
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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 than Desi. Consequence: domestic industry gets less sales. IIP declined, job loss, industrial sickness. Possible- Solutions: 1. 2. 3. 4. Give subsidy to desi vehicle makers Reduce excise duty on desi vehicle (and its inputs) Increase custom duty on foreign vehicle. 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 Import of Road construction machinery will be subjected to CVD. (= itll help desi manufactures, 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 Excise Duties Customs Service Tax Total from Indirect Tax BE 2013 196804 187308 180141 5.65 lakh cr. RE 2013 178787 175056 164927 5.19 lakh cr. BE 2014 199831 201314 215478 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,
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ceramic tiles and carpets. (all these subjected to excise duty) High level of inflation =>people spend less on consumer durables. (because theyve to spend 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!) therefore custom 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 than target, hence they had been running ads of Voluntary Compliance Encouragement Scheme (VCES) for service tax. From July 2013 onwards. But still, barely ~6000 crore recovered 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 about economy. So lets update tables
Table1: Direct vs indirect

Tax Direct Indirect Total (lakh cr.) BE 2013 6.68 5.65 12.35 RE 2013 6.36 5.19 11.58 shortfall 32k 45k 77k BE 2014 7.58 6.2 13.78
ya but Whats the wisdom here for MCQs? =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.
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Table2: Ranking Among all taxes (2013-14)

Type direct direct indirect indirect indirect direct direct Taxes Wealth Tax Securities Transaction Tax Service Tax Customs Excise Income Tax Corporation Tax RE 2013 950 5497 164927 175056 178787 236194 393677
Table3: Ranking Among all taxes (2014-15)

Type direct direct indirect indirect indirect direct direct Taxes Wealth Tax Securities Transaction Tax Excise Customs Service Tax Income Tax Corporation Tax BE 2014 950 5992 199831 201314 215478 300474 451005
lets make one final table
Table3: Tax collection highest to Lowest

Rank 2013 (Revised Estimate) 2014 (projected)
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1 2 3 4 5 6 7
Corporation Tax Income Tax Excise Customs Service Tax STT Wealth Tax
Corporation Tax Income Tax Service Tax Customs Excise STT 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 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 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

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 ministry Part of Public account (hence parliament approval not necessary.) Now coming to the main point:
Gross Tax revenue

It includes
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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

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 A.(Gross) Tax Revenue [=direct + indirect + UT w/o legislature] B.MINUS tax revenue shared with States/UT C.MINUS money transferred to calamity fund (NCCF) NET Tax revenue=A-(B+C) 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 MCQ 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, REVENUE PART CAPITAL PART RE 2013 1158906 318230 4650 836026 BE 2014 1379199 387732 5050 986417
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Receipt Tax 1. Direct taxes (DONE) 2. Indirect Tax (DONE)
Expenditure Receipt Expenditure Non Tax
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 service sector= self-explanatory- doctor, spa, hotel etc. Salman himself joins a posh Gymnasium, Annual fees Rs.1 lakh (+12% service tax) paid 1,12,000 to Gym Owner. Gym owner pays 12k to government as service tax. FBT Fringe benefit=when boss gives some facility to worker, Apart from his usual salary. Salman buys membership to a posh gym, for his bodyguard Shera. = 1 Lakh + 12% service tax + 30% FBT on. Pay Rs. 1,12,000 to Gym owner (fees + service tax) Pay Rs. 30000 to government (FBT)
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lets try a very cheap MCQ: 1. 2. 3. 4. A Direct tax can be levied only on the income OR property of a person Fringe Benefit tax is an example of Indirect tax. Both A & B 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. 2. 3. 4. Canon of Equality: taxes should be Proportionate to income. Canon of Certainty: about deadline and rates. Canon of Convenience: to the tax payer. 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.
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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 acount of 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 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 Questions After the article series is complete. Visit Mrunal.org/Economy For more on Money, Banking, Finance, Budget, Taxation and Economy.
URL to article: http://mrunal.org/2014/02/budget-interim-budget-2014-part-1of4-revenuereciepts-direct-taxes-indirect-taxes-gross-vs-net-taxes-shortfalls-collection.html Posted By Mrunal On 19/02/2014 @ 10:19 In the category Economy
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Mrunal (Budget) Interim Budget 2014 (Part 1of4) - Revenue Reciepts, Direct Taxes, Indirect Taxes, Gross Vs Net Taxes, Shortfalls in Collection Mrunal

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Mrunal (Budget) Interim Budget 2014 (Part 1of4) - Revenue Reciepts, Direct Taxes, Indirect Taxes, Gross Vs Net Taxes, Shortfalls in Collection Mrunal

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Mrunal [Budget] Interim Budget 2014 (Part 1of4): Revenue reciepts, Dire... http://mrunal.org/2014/02/budget-interim-budget-2014-part-1of4-revenue...

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

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

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

Then what is Vote on Account?

Contingency Fund of India

Public accounts of India

Congress partys Swiss bank account

Ok then whats interim budget?

Vote on Account vs Interim budget

only one article applicable: 116(2)

Interim budgets in the past

after PM/CM has resigned No-confidence motion passed Parliament/assembly is dissolved.

#1: Direct Taxes

Now lets check the provisions of:

Direct taxes under Interim Budget 2014

Income Tax 10% 20% 30%

Shortfall in Direct tax collection = #EPICFAIL

Wealth Tax Securities Transaction Tax Income Tax Corporation Tax

But Why shortfall in Direct tax collection?

Why high Inflation = Low collection of Direct taxes?

Why Policy paralysis = Low collection of Direct taxes?

CAPITAL PART Expenditure Receipt Expenditure Non Tax

#2: Indirect taxes

i. ii. iii. iv.

the Indirect tax of the Union.

Indirect Taxes in Interim Budget 2014

#I1: Service Tax

#I2: Excise Duty: Automobiles

#I3: Excise: Mobile handsets

#I4: Custom Duty: soap industry

#I5: Custom Duty: Bank note Mill

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

Indirect Tax collection = #EPICFAIL shortfall

Why shortfall in indirect tax collection?

MCQ Data for Tax collection: Ascending descending

Table1: Direct vs indirect

Table2: Ranking Among all taxes (2013-14)

Table3: Ranking Among all taxes (2014-15)

lets make one final table

Table3: Tax collection highest to Lowest

Gross vs net Tax revenue

#1: Tax sharing

Gross Tax revenue

Net Tax revenue

Receipt Tax 1. Direct taxes (DONE) 2. Indirect Tax (DONE)

Expenditure Receipt Expenditure Non Tax

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

#1: Direct taxes can be levied on Expenditure also

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

Gift tax (abolished)

Estate duty (abolished)

Hotel Receipt Tax (abolished)

Banking cash transaction tax (Abolished)

Fringe Benefit tax (Abolished)

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