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BUDGET GLOSSARY
The government's annual budget exercise is no different from the way we all
manage our household budgets. The only difference: the former's intimidating
jargon. Bankers Choice simplifies the important budget items for its readers. We
have, however, departed from the usual way glossaries are presented, in
alphabetical order, to a flow-type format wherein terms are explained as the
reader would encounter them in the budget. Read on

On the budget day, the finance minister tables 10-12 documents. Of these, the main and most
important document is the Annual Financial Statement.

ANNUAL FINANCIAL STATEMENT:
Article 112 of the constitution requires the government to present to the Parliament a statement
of estimated receipts and expenditure in respect of every financial year, April 1 to March 31.
This statement is the annual financial statement.
The annual financial statement is divided into three parts, Consolidated Fund, Contingency Fund
and Public Account. For each of these funds the government has to present a statement of
receipts and expenditure.

CONSOLIDATED FUND:
This is the most important of all the government funds. All revenues raised by the government,
money borrowed and receipts from loans given by the government flow into the consolidated
fund of India. All government expenditure is made from this fund, except for exceptional items
met from the Contingency Fund or the Public Account. Importantly, no money can be withdrawn
from this fund without Parliament's approval.

CONTINGENCY FUND:
As the name suggests, any urgent or unforeseen expenditure is met from this fund. The Rs 500-
crore fund is at the disposal of the President. Any expenditure incurred from this fund requires
a subsequent approval from Parliament and the amount withdrawn is returned to the fund from
the consolidated fund.

PUBLIC ACCOUNT:
This fund is to account for flows for those transactions where the government is merely
acting as a banker. For instance, provident funds, small savings and so on. These funds do
not belong to the government. They have to be paid back at some time to their rightful owners.
Because of this nature of the fund, expenditure from it are not required to be approved by
Parliament.

For each of these funds the government has to present a statement of receipts and expenditure. It
is important to note that all money flowing into these funds is called receipts, the funds
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received, and not revenue. Revenue in budget context has a specific meaning. The Constitution
requires that the budget has to distinguish between receipts and expenditure on revenue account
from other expenditure. So all receipts in, say consolidated fund, are split into Revenue
Budget (revenue account) and Capital Budget (capital account), which includes nonrevenue
receipts and expenditure. For understanding these budgets - Revenue and Capital - it is
important to understand revenue receipts, revenue expenditure, capital receipts and capital
expenditure.

REVENUE RECEIPT/EXPENDITURE:
All receipts and expenditure that in general do not entail sale or creation of assets are
included under the revenue account. On the receipts side, taxes would be the most important
revenue receipt. On the expenditure side, anything that does not result in creation of assets is
treated as revenue expenditure. Salaries, subsidies and interest payments are good examples of
revenue expenditure.

CAPITAL RECEIPT/EXPENDITURE:
All receipts and expenditure that liquidate or create an asset would in general be under capital
account. For instance, if the government sells shares (disinvests) in public sector companies, like
it did in the case of Maruti, it is in effect selling an asset. The receipts from the sale would go
under capital account. On the other hand, if the government gives someone a loan from which it
expects to receive interest, that expenditure would go under the capital account. In respect of all
the funds the government has to prepare a Revenue Budget (detailing revenue receipts and
revenue expenditure) and a capital budget (capital receipts and capital expenditure). Contingency
Fund is clearly not that important. Public Account is important in that it gives a view of select
savings and how they are being used, but not that relevant from a budget perspective. The
consolidated fund is the key to the budget. We will take that up in the next part.

CORPORATION TAX:
Tax on profits of companies.

TAXES ON INCOME OTHER THAN CORPORATION TAX:
Income tax paid by non-corporate assesses, individuals, for instance.

FRINGE BENEFIT TAX (FBT):
The taxation of perquisites or fringe benefits provided by an employer to his
employees, in addition to the cash salary or wages paid, is fringe benefit tax. It was
introduced in the 2005-06 budget. The government felt that many companies were disguising
perquisites such as club facilities as ordinary business expenses, which escaped taxation
altogether. Employers have to now pay a tax (FBT) on a percentage of the expense incurred
on such perquisites.

SECURITIES TRANSACTION TAX (STT):
Sale of any asset (shares, property etc) results in loss or profit. Depending on the time the asset is
held, such profits and losses are categorised as long term or short term capital gain/loss. In the
2004-05 budget, the government abolished long-term capital gains tax on shares (tax on profits
made on sale of shares held for more than a year) and replaced it STT. It is a kind of turnover tax
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where the investor has to pay a small tax on the total consideration paid/received in a share
transaction.

CUSTOMS:
Taxes imposed on imports. While revenue is an important consideration, customs duties may
also be levied to protect the domestic industry or sector (agriculture, for one),against the
measures taken by other countries.

UNION EXCISE DUTY:
Duties imposed on goods manufactured in the country.

SERVICE TAX:
It is a tax on services rendered. Telephone bill, for instance, attracts a service tax.
While on taxes, let us take a look at an important classification: direct tax and indirect tax, which
finds wide mention in the budget.

DIRECT TAX:
Traditionally, these are taxes where the burden of tax falls on the person on whom it is levied.
These are largely taxes on income or wealth. Income tax (on corporate and individuals), FBT,
STT and BCTT are direct taxes.

INDIRECT TAX:
In the case of indirect taxes the incidence of tax is usually not on the person who pays the tax.
These are largely taxes on expenditure and include Customs, excise and service tax.

Indirect taxes are considered regressive, the burden on the rich and the poor is alike. That is why
governments strive to raise a higher proportion of taxes through direct taxes. Moving on, we
come to the next important receipt item in the revenue account, non-tax revenue.

NON-TAX REVENUE:
The most important receipts under this head are interest payments (received on loans given by
the government to states, railways and others) and dividends and profits received from public
sector companies.

Various services provided by the government general services such as police and defence,
social and community services such as medical services, and economic services such as power
and railways also yield revenue for the government. Though Railways are a separate
department, all its receipts and expenditure are routed through the consolidated fund.

GRANTS-IN-AID AND CONTRIBUTIONS:
The third receipt item in the revenue account is relatively small grants-in-aid and contributions.
These are in the nature of pure transfers to the government without any repayment obligation.

We now look at the disbursements section of the Revenue Account of the consolidated fund. It
lists all the revenue expenditures of the government. These include expense incurred on organs
of state such as Parliament, judiciary and elections. A substantial amount goes into administering
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fiscal services such as tax collection. The biggest item is interest payment on loans taken by the
government. Defence and other services such as police also get a sizeable share. Having looked
at receipts and expenditure on revenue account we come to an important item, the difference
between the two, the revenue deficit.

REVENUE DEFICIT:
The excess of disbursements over receipts on revenue account is called revenue deficit. This is
an important control indicator. All expenditure on revenue account should ideally be met from
receipts on revenue account; the revenue deficit should be zero. When revenue disbursement
exceeds receipts, the government would have to borrow. Such borrowing is considered
regressive as it is for consumption and not for creating assets. It results in a greater proportion of
revenue receipts going towards interest payment and eventually, a debt trap. The FRBM Act,
which we will take up later, requires the government to reduce fiscal deficit to zero by 2008-09.

RECEIPTS IN THE CAPITAL ACCOUNT of the consolidated fund are grouped under three
broad heads public debt, recoveries of loans and advances, and miscellaneous receipts.

PUBLIC DEBT:
In normal accounting, debt is a stock, to be measured at a point of time, while borrowing and
repayment during a year are flows, to be measured over a period of time. In Budget parlance,
however, you'll find public debt receipts and public debt disbursals. These are respectively
borrowings and repayments during the year. The difference between the two is the net accretion
to the public debt.

Public debt can be split into two heads, internal debt (money borrowed within the country) and
external debt (funds borrowed from non-Indian sources).

The internal debt comprises of treasury Bills, market stabilisation scheme, ways and means
advance, and securities against small savings.

TREASURY BILL (T-BILLS):
These are bonds (debt securities) with maturity of less than a year. These are issued to meet
short-term mismatches in receipts and expenditure. Bonds of longer maturity are called dated
securities.

MARKET STABILISATION SCHEME (MSS):
The scheme was launched in April 2004 to strengthen Reserve Bank of India's (RBI) ability to
conduct exchange rate and monetary management. The RBI mops up excess liquidity, created,
for instance when the central bank buys up huge quantities of dollar inflows to prevent
undesirably fast appreciation of the rupee, by selling its stock of government securities to banks.
When the RBI began to run short of government securities that had been issued to meet the
government's borrowing requirement, the MSS was launched. These securities are issued not to
meet the government's expenditure but to provide the RBI with a stock of securities with which
to intervene in the market for managing liquidity.


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WAYS AND MEANS ADVANCE (WMA):

One of the many roles of the RBI is to serve as banker for both the Central and State
governments. In this capacity, the RBI provides temporary support to tide over mismatches in
their receipts and payments in the form of ways and means advances.

MISCELLANEOUS RECEIPTS:
These are primarily receipts from disinvestments in public sector undertakings.
The capital account receipts of the consolidated fund public debt, recoveries of loans and
advances, and miscellaneous receipts and revenue receipts make up the total receipts of the
consolidated fund.

We now take up the disbursements on capital account from the consolidated fund. The first part
deals with capital expenditure incurred on the various services general services, social
services and, economic services. Some of the biggest expenditure items under these heads are
defence services, investment in agricultural financial institutions and capital to railways. The
second part takes up the public debt (repayments of loans) and various loans made by the
government.

The consolidated fund has certain disbursements "charged" to the fund. These are obligations
that have to be met in any case and, therefore, do not have to be voted by the Lok Sabha. These
include interest payments and certain expenditure such as emoluments of the President, salary
and allowances of speaker, deputy chairman of the Rajya Sabha, and allowances and pensions of
Supreme Court judges. Parliament and so on. This concludes the discussion on consolidated
fund. We now move on to the other budget documents, which give a more detailed presentation
of the consolidated fund.



BUDGET AT A GLANCE ALSO SEGMENTS EXPENDITURE INTO PLAN AND NON-PLAN EXPENDITURE,
INSTEAD OF SPLITTING INTO REVENUE AND CAPITAL

CENTRAL PLAN:
Central or annual plans are essentially the five year plans broken down into five annual
instalments. Through these annual plans the government achieves the objectives of the Five-Year
Plans. The funding of the central plan is split almost evenly between government support (from
the budget) and internal and extra budgetary resources of public enterprises. The government's
support to the central plan is called the budget support.

PLAN EXPENDITURE:
This is essentially the Budget support to the central plan and the central assistance to state and
Union territory plans. Like all Budget heads, this is also split into revenue and capital
components.

NON-PLAN EXPENDITURE:
This is largely the revenue expenditure of the government. The biggest item of expenditure are
interest payments, subsidies, salaries, defence and pension. The capital component of the non-
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plan expenditure is relatively small with the largest allocation going to defence.

It is important to note that the entire defence expenditure is non-plan expenditure. We will now
take up the various deficits and the components of plan and non-plan expenditure. In the Budget
at a Glance, the plan and the non-plan expenditure make up the total government expenditure.
This brings us to the concept of deficit.

FISCAL DEFICIT:
When the government's non-borrowed receipts (revenue receipts plus loan repayments received
by the government plus miscellaneous capital receipts, primarily disinvestment proceeds) fall
short of its entire expenditure, it has to borrow money from the public to meet the shortfall. The
excess of total expenditure over total non borrowed receipts is called the fiscal deficit.

PRIMARY DEFICIT:
The revenue expenditure includes interest payments on government's earlier borrowings. The
primary deficit is the fiscal deficit less interest payments. A shrinking primary deficit would
indicate progress towards fiscal health.

FRBM ACT:
Enacted in 2003, the Fiscal Responsibility and Budget Management Act requires the elimination
of revenue deficit by 2008-09. This means that from 2008-09, the government will have to meet
all its revenue expenditure from its revenue receipts. Any borrowing would then only be to meet
capital expenditure repayment of loans, lending and fresh investment. The Act also mandates
a 3% limit on the fiscal deficit after 2008-09. This is a reasonable limit that allows significant-
cant leverage to the government to build capacities in the economy without compromising fiscal
stability.
It is important to note that since the entire Budget is at current market prices the deficits are also
calculated with reference to GDP at current market prices.

RESOURCES TRANSFERRED TO THE STATES
We now look at the resources transferred to the states. As per the 13
th
Finance commission the
share of states in net proceeds of shareable central taxes shall be 32 per cent in each of the
financial years from 2010-11 to 2014-15.

VALUE-ADDED TAX (VAT) AND GST:
VAT helps avoid cascading of taxes (tax being levied upon a price that includes one or more
elements of tax) as a product passes through different stages of production/value addition. The
tax is based on the difference between the value of the output and the value of the inputs used to
produce it. The aim is to tax a firm only for the value added by it to the inputs it is using for
manufacturing its output and not the entire input cost. VAT brings in transparency to commodity
taxation: right now, only the final tax paid by the consumer is apparent to her, while with value
added tax generalised to a goods and services tax (GST) that subsumes both central and state
level taxation, the entire element of tax borne by a good (or a service) would be represented by
the GST paid on it. A GST of 20% might seem high, but it would be about half the actual
incidence of tax in most goods at present.

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CESS:
This is an additional levy on the basic tax liability. Governments resort to cesses for meeting
specific expenditure. For instance, both corporate and individual income is at present subject to
an education cess of 2%. In the last Budget the government had imposed an another 1% cess
Secondary and higher education cess on income tax to finance secondary and higher education.

COUNTERVAILING DUTIES (CVD) :
Countervailing duty is a tax imposed on imports, over and above the basic import duty. CVD is
at par with the excise duty paid by the domestic manufacturers of similar goods. This ensures a
level playing field between imported goods and locally produced ones. An exemption from CVD
places domestic industry at disadvantage and over long run discourages investments in affected
sectors.

EXPORT DUTY:
This is a tax levied on exports. In most instances the object is not revenue but to discourage
exports of certain items. In the last Budget, for instance, the government imposed an export duty
of Rs 300 per metric tonne on export of iron ores and concentrates and Rs 2,000 per metric tonne
on export of chrome ores and concentrates.

FINANCE BILL:
The proposals of government for levy of new taxes, modification of the existing tax structure or
continuance of the existing tax structure beyond the period approved by Parliament are submitted
to Parliament through this bill. It is the key document as far as taxes are concerned.

FINANCIAL INCLUSION:
Financial inclusion is universalising access to basic financial services (to have a bank account,
timely and adequate credit) at an affordable cost. Exclusion from financial services imposes costs
on those excluded; these are typically the disadvantaged and low income group. Exclusion forces
them into informal arrangements such as borrowing from local money lenders, etc at high rates.
Financial inclusion remain a serious issue in India. The government has proposed a no-frills
account to provide cheap banking.

MINIMUM ALTERNATE TAX (MAT):
This tax on corporate profits was introduced in 1996-97 and has been modified since. If the tax
payable by a company is less than 10% of its book profits, after availing of all eligible
deductions, then 10% of book profits is the minimum tax payable. Book profits are profits
calculated as per the Companies Act, while profits as per the Income Tax Act could be
significantly lower, thanks to various exemptions and depreciation.


SUBVENTION:
The term subvention finds a mention in almost every Budget. It refers to a grant of money in aid
or support, mostly by the government. In the Indian context, for instance, the government
sometimes asks institutions to provide loans to farmers at below market rates. The loss is usually
made good through subventions.

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SURCHARGE:
As the name suggests, this is an additional charge or tax. A surcharge of 10% on a tax rate of
30% effectively raises the combined tax burden to 33%.