On February 1, 2024, India’s Finance Minister Nirmala Sitharaman is set to present her fifth Union budget for the financial year 2024-2025. Like all Union Budgets, Budget 2024 is set to be a detailed and comprehensive report of the country’s revenues as well as estimated expenditures for the fiscal year ahead.
Owing to the wide range of information and complex terms contained within the Budget 2024 document, it could seem quite overwhelming. However, for the sake of simplifying the upcoming document and its key takeaways, here are a few important terms that can help:
- Revenue Budget: The Union Budget is divided into two parts: the revenue budget and the capital budget. The Revenue Budget consists of the Government’s regular revenue receipts and payments. Revenue receipts are largely made up of the revenue received by the government via taxes and other sources. Revenue expenditure consists of the amount spent on running the government and providing services to the people.
- Capital Budget: The capital budget consists of capital receipts and payments and deals with elements of a more long-term nature. Capital receipts consist of loans taken by the government from the public and other countries and borrowings from the Reserve Bank of India. Capital expenditure is the money spent by the government on building essential facilities such as health and education, as well as for investments and acquiring assets.
- Gross Domestic Product: A country’s Gross Domestic Product, or GDP, is defined as the total value, measured in monetary terms, of all the goods and services produced by that country within a year. As a figure, it is considered the most significant indicator of a country’s economy and overall development and progress.
- Fiscal Deficit: A Fiscal Deficit is a difference between the total revenue or income generated and the total expenditure incurred by the government. It indicates the total borrowings required by the government. Owing to circumstances, a Fiscal deficit can occur either when there is a deficit in the collection of revenue or a sudden increase in capital expenditure.
- Capital Expenditure: Capital expenditure refers to expenditure by the government that creates assets such as schools, hospitals, and institutes. It also includes investments made by the government to yield long-term profits in the future.
- Revenue Expenditure: On the other hand, expenditure by the government that does not create assets is known as revenue expenditure. These expenditures are incurred in the process of a functioning government, running its various departments, providing subsidies, providing services to the citizens, and more.
- Direct and Indirect Taxes: Direct taxes are the types of taxes that are paid directly by an individual or organisation on their income or profits generated within a financial year. The discussion’s most relevant direct tax laws are income and corporate tax.
Indirect taxes, on the other hand, are taxes levied on goods and services. These are paid by the consumer only when they buy a product or avail a service. These indirect tax laws include Goods and Services Tax (GST), Value Added Tax (VAT), and excise duty.
- Long-Term Capital Gains (LTCG) Tax: Long-term capital gains (LTCG) are profits from selling an asset held for an extended period, usually more than a year. This includes investments like stocks and real estate. Governments often tax LTCG at lower rates than short-term gains to encourage long-term investing. The tax rates vary by asset class, and exemptions may apply based on factors such as the type of asset and holding period.
- Revenue Deficit: The Union Budget of a country also helps shed light on its revenue deficit. It is the difference between the government’s total revenue expenditure and revenue receipts. Revenue Deficit arises if the government’s revenue expenditure exceeds its revenue receipts. To bridge this gap, the government may raise taxes, reduce unnecessary expenditures, sell assets, or borrow.
- Tax Revenue: Tax revenue simply refers to the total income generated by the government through taxation. This includes taxes on incomes, profits, goods and services, transfer of property, and others. The percentage of tax revenue in the total GDP indicates how much control the government has over the country’s resources.
- Non-Tax Revenue: On the other hand, non-tax revenue is the type of income the government generates through sources other than taxation. These typically include interest on loans provided by the government, dividends and profits from its profit-making enterprises, and money earned by its various services, such as medical, police, and defence facilities.
- Fiscal Policy: A fiscal policy is how the government controls revenue collection and expenditure and influences the economy. It is through fiscal policies that the government determines how much money it should make through the system and how much it should spend on economic activities to support the economy.
- Income tax: Income tax is a direct form of tax levied on the earnings of individuals and corporations. The central government collects Income Tax under the Income Tax Act of 1961. Income taxes are a primary source of revenue for the government, used for funding government projects, paying government obligations, and providing goods for citizens.
The government can change income tax rates every year during the Union Budget.
- Inflation: Inflation refers to declining purchasing power or the persistent rise of prices of available products and services, resulting in an increased cost of living. In other words, it measures the gap between aggregate demand and supply. When aggregate demand surpasses aggregate supply, it increases the price level.
India has two critical inflation indices: the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).
- Monetary policy: It refers to a set of tools in the hands of the monetary authority, or the Central Bank of the country, used to promote sustainable economic growth—controlling the overall supply of money in the hands of banks, consumers, and businesses.
For example, the Central bank may increase the cost of borrowing to discourage spending and control the inflation rate.
- Excise duty: The Excise Duty Tax is an indirect tax the government collects on domestic goods based on production, licensing and sales. In 2017, the government replaced the older practice of multiple Excise Duties with the single Goods and Services Tax (GST). Presently, only petroleum and liquor are still on the Excise Duty list.
- Cess: Cess is a type of tax imposed by the government for a period to generate funds for a specific project. An example of a cess tax is the Swachh Bharat cess, which the government levies to fund the cleanliness drive undertaken across India.
A cess is an additional tax imposed on the existing tax or tax on tax. Also, there are differences in how it is managed and utilised.
- Zero-based budget: A budget is a Zero-based Budget when it is based on a zero-base or without reference to the previous budget, meaning no previous costs get carried forward and there are no pre-committed expenses.
- Corporate tax: A corporate tax is imposed on the profit of a corporation. A company’s taxable income is the revenue minus costs of goods sold and general and administrative expenses.
- Service tax: It was introduced in the Union Budget of 1994, Under Section 65 of the Finance Act 1994. Before being included in the Goods and Services Tax (GST) in 2017, it was collected by the government and paid by service providers. The service providers used to recover the tax from consumers who have purchased or availed of the services.
- Short-Term Capital Gain: Short-term capital gains are profits from selling assets held for a year or less. They are taxed at ordinary income rates, which are often higher than the rates for long-term capital gains (assets held for more than a year). It’s crucial to consider these tax implications when managing investments.
- Primary deficit: Primary Deficit is the difference between the current year’s fiscal deficit and interest payment of the previous year’s borrowing. It depicts a gap in the government’s expenses, other than interest-earning, that can be funded through borrowing.
- Current Account Deficit: Current account deficit or CAD is the difference between income from exports and expenditure from imports. If the value of goods that we have imported exceeds the income earned from exports, it is called a deficit. The current account includes net income, including interest and dividends, and transfers, such as foreign aid.
- Dividend Distribution Tax: The Dividend Distribution Tax (DDT) levies domestic companies’ dividend distribution to shareholders on their profit. The DDT is collected at the source under the Income Tax Act, except when the shareholders receive more than ₹10 lakh in dividends, they must pay additional tax on the dividend income. The current rate of DDT is 15%.
- Vote-on-Account: Article 116 defines the Vote-on-Account as a grant made in advance to the central government from the consolidated fund to meet short-term expenditures. Usually, the advances last for a few months till the new financial year starts.
- Interim Budget: A government going through a transition or at the end of its tenure, before the general election, presents an Interim Budget. Traditionally, an incumbent government is not allowed to prepare a complete budget. Hence, the finance minister presented an interim budget.
The incumbent government needs a vote of approval on the interim budget to withdraw funds from the Consolidated Funds of India to meet expenses.
- Sin Tax: The sin tax is charged on products and services considered harmful to society, like tobacco, gambling, liquor or cigarettes. It serves a dual purpose. Firstly, it discourages the consumption of undesirable items by making them more expensive. It makes companies producing these items pay higher taxes. And secondly, it generates revenue for the government to fund different developmental programs.
- Banking Cash Transaction Tax: The BCTT is a direct tax levied on cash withdrawals from the bank above a specific limit. It was first introduced in 2005 but rolled back in 2009. There are discussions about reintroducing it again to encourage digital transactions.
- Excess Grants: An Excess Grant is an excess fund given to the government when the already allocated money falls short to meet all the expenditures. The provision for the extra fund is granted under Article 115.
- Expenditure Profile: As a part of budget planning, the Expenditure Profile refers to consolidating information from all ministries to analyse the Union government’s financial performance on essential policies. It contains consolidated information on government schemes such as centrally sponsored schemes, subsidies, and investment in public-sector undertakings.
Summing Up
As India anticipates the presentation of Budget 2024, familiarity with terms becomes paramount. As Finance Minister Nirmala Sitharaman outlines the budgetary allocations for the upcoming fiscal year, these terms provide insights into the government’s financial operations, economic priorities, and revenue generation and expenditure strategies.
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