Come January end and we listen a lot about the budget. We hear about the tax slabs, deductions, exemptions, fiscal deficit, finance bill etc. For a normal person, these terms are alien. We know that budget is somewhat related to the money matters but we are not sure about our information.
In this post, I would tell you all about the budget. I would give details of Budget Related important Facts which you must know.
Budget is a Plan of Earning and Expense
The budget of any state or country is the detailed planning of the ‘earning and expense’ for next financial year. The financial wing of the state makes an estimation of the incomes from different sources.
Similarly, a Plan is prepared for different types of expenses. This exercise is required to keep the economy of the country on track. If there is no plan, the income may be insufficient for the expenses. And country may face shutdown once the money dries up.
You would agree that we feel more confident and organised when we plan or house budget. Otherwise, we always remain short of money. Thus, for a good financial health, budgeting is important. It becomes much more important for large organisations and Nations.
Review of Income Tax Rate
The primary source of government’s income is different types of taxes. The government levies tax in two ways- Direct tax such as income tax and Indirect Tax such as GST. So, to fulfil its estimated expenses, it makes an adjustment of the tax rates. It has to also consider the changing scenario and people’s situation. The tax rates are the dynamic thing.
So, in every budget, the government reviews the income tax rate. It can change income tax slab and exemptions as well. Since it directly affects the common public, we are concerned about it.
In India, income tax is levied on the basis of income slab. The tax rate would rise as you go to the higher income slab. Income Tax Slab is most awaited information of the union budget.
Income up to a limit is not subjected to the tax. Hence, the low-income people do not pay any income tax.
GST Rates are Out
In the budget, we also used to learn about the products which were going to be cheaper or costlier. It happens because the government also changes the tax rate for the products and services.
You would be aware that, GST is the main indirect tax. It is levied on products and services. So, any change in the GST rate would affect the prices. But, GST rates are not reviewed in the budget exercise. Rather, it is reviewed at GST council meeting. This meeting happens after every few months.
However, customs duty and tax on petroleum are still part of the budget. You can expect some rate changes there.
Railway Has become a Part of General Budget
The railway is a Big department of Indian Government. It is the primary source of travelling long distances. It so important, that only Railway had a separate budget. But, Since 2017, the government has ended the tradition of Separate railway budget. Now, it has become a part of the General budget. The provisions for Railway is similar to the defence, commerce, or any other department.
Now the government do not announce new trains or special trains in the budget. It has become an ongoing process.
Central Government Presents General Budget
The general budget is presented on 1 February. All the talks of the budget are also centred around this budget. But, we should understand that general budget is the financial estimate of the central government. In this budget, the central government presents its estimation of receipts and expenses.
So in this budget, You would find the provisions of only those sectors which are managed by the central government. These sectors are the railway, defence, telecom, external trade etc. The income tax is also levied only by the central government. While GST is divided between central and state government.
State Governments Also Presents Their Own Budget
Like central government, every state government also presents the annual budget. But there is lesser talk about this budget. Since state governments do not charge income tax, people are less concerned about this. It gets most of its revenue from the GST. Whereas the GST rates are decided by the GST Council.
However, State government still fixes the tax rate for liquor. So this rate is the part of their budget. States also decide the rate of municipal taxes.
In the state budget, there is an estimate of expenses on various state projects. States manage the roads, bus transport, health, education, electricity, land development, irrigation etc. The state budget has the provisions about these projects.
Revenue Budget For Regular Expenses
There are two types of the budget- Revenue budget and capital budget. In the revenue budget, we present the estimation of regular expenses such as salaries of employees, running of rail. Security expense, embassy expense, defence preparedness. The interest payment of loans is also categorized as revenue expenditure.
The government collects money for this expense from the taxes. So the money collected from the taxes are spent in that year. This budget is necessary for the running of the government.
The expenditure which does not create assets is treated as revenue expenditure. When union government gives a grant to states or other parties it is also called as the revenue expenditure however it may create some assets.
Capital Budget For Nation Building
The capital budget is used for nation-building. In this budget, the government estimates the expenses on long-term infrastructure projects such as roads, Rail tracks, Power grid, dams, Broadband cables etc. The investment in these projects is called as the capital expenditure. The Investment in shares, companies and loans are also the capital expenditure.
The government arranges money for the capital expenditure by borrowings or selling a capital asset. The government borrows a lot of money from the general public in the form of bonds. It also borrows from the financial institutions such as IMF and world bank.
Interim Budget or Vote on Account for Transition Period
When a government is not going to complete next financial year, it does not present the full budget. Instead, it presents the budget for a shorter period. Its provision lasts till next government presents its own full budget.
The budget which is for a shorter period and presented during the government transition is called as the interim budget or Vote on Account.
- Just like a full budget, the interim budget has the estimate of earnings and expenses of next few months.
- There should be a full budget within 6 months of the interim budget. Thus, the interim budget does not last more than 6 months.
- A government can’t announce populist welfare schemes in a full budget as it can impact the election. It is a direction of the election commission.
SuppleMentary Budget For Additional Expense
Sometimes original budget estimates turn insufficient or new expense may arise. To fulfil new financial demands the government has to make provisions. But a Government can’t spend a penny without the approval of the parliament. In such situation, the government has to present a supplementary budget for the new and extra expense.
When the government presents a budget for additional money to meet the required expenditure it is called as the Supplementary budget or Supplementary grants. The process of a Supplementary budget is more or less same as the general budget.
Finance Bill and Appropriation Bill
In the budget, the government proposes some kind of changes in taxation and duties. These changes are presented in the form of finance bill. The parliament has to approve this bill within 75 days of its introduction. However, The government tries to pass it before 31st March. So that it can be implemented from the 1st April- The new Financial Year. After the approval of parliament, the president gives its approval and the new Finance bill becomes the law.
The government can’t spend without the approval of the parliament. A government takes this approval in the form of the Appropriation bill.
The Appropriation Bill empowers the Centre to withdraw funds from the consolidated fund to meet its expenditure.
This is passed by the parliament before the 31st March. So that government can use the consolidated fund for its use.
Loksabha Approval is Sufficient For Finance Bill
In Indian parliamentary system, you have to present a bill to make a law. The change in tax rate is also a change in the law. Hence, the government presents the budget proposal in the form of a Bill.
A bill becomes law only after the approval of parliament and President. As parliament has two houses the Loksabha and Rajyasabha, the bill should be passed from both the houses. But in some cases, a relaxation is given. When a bill is money related, the approval from Rajyasabha is not necessary. This relaxation is required for smooth functioning of the government machinery.
The finance bill is also a money bill as it has the provision of government income and expense. Thus, a Finance bill is considered approved if it is passed only by the Loksabha. The Approval by the Loksabha is necessary.
Process Flow of Budget
Budget Session Starts
The Indian parliament has 3 regular sessions of parliament. These are the Budget session, Monsoon session and Winter session. Among these Budget session is longest and most extensive one. This session has two parts. An introductory small phase of about 8-9 days and 4-5 weeks long second phase. There is a recess of about one month during the budget session.
The First phase of budget session starts during the last week of the January and ends on the second week of April. Dates may vary.
Presentation of Economic Survey
The economic survey is presented on the first day of the budget session. The survey tells us the economic situation of the country during the current financial year. It gives us a better idea to understand the budget provisions.
Presentation of Finance Bill
On the 1st February, the finance minister presents the finance bill in Loksabha and gives the budget speech. In the beginning, finance minister speaks about the achievements of the various schemes. Further, minister tells about the financial allocation to different plans and ministries. At the end of the speech, he/she gives details of indirect and direct tax provisions. The finance bill is also presented in Rajyasabha after the speech.
General Discussion on Finance Bill
The Budget is discussed in two phases. First, there is a General Discussion on the Budget as a whole. This lasts about 4 to 5 days. Only the broad outlines of the Budget and the principles and policies are discussed at this phase.
House Adjourned for a month
After the general discussion both the house of parliament is adjourned for a month. This break is given so that MPs can read and understand the budget provisions. You would know that understanding finance in the official language is not an easy task.
Standing Committees considers grants
Meanwhile, Different standing committees of parliament consider the budget provisions related to their sector. There are many standing committees consisting of MPs from both Lok Sabha and Rajyasabha. There are standing committees on public accounts, public undertakings, estimates etc. These committees submit their report within the given time frame. The recommendation of this committee is of the suggestive nature. It is not binding upon the government.
Detailed Budget discussion
In the second phase of the budget session, the budget is discussed in detail. The discussion is conducted for the ministry wise grants. Thus it is structured in nature. Meanwhile, Parliament also conducts normal business and passes other legislation.
Voting until 31st March
The discussion on budget ends before the 31 March. And at the end of the discussion, the voting happens. Only Loksabha votes. Rajya Sabha only discusses the budget provisions. During the voting, the majority can shoot any provision of the budget. However, in practice, rarely a government proposal is declined. As the government would have the majority in the Loksabha.
Before the approval of Finance bill, appropriation bill is also put to vote.
President approves Finance and appropriation bill
After the parliament approval, both the bill is sent to President. Once president gives assent the new finance bill becomes law. The new law of taxes is enacted on the 1st April of every year.
Budget Related Terms
You may be hearing many financial terms during the budget day. You might know some of them. But there may be some jargons which are not very easy to understand. I have tried to explain such words.
Income Tax Slab
When you earn, government charges income tax. But the government does not use same income tax rate for everyone. Rather, the income tax rate rises with your income. Even income up to a limit is not subject to any tax.
Presently, income up to 2.5 lakhs is exempted from tax. You do not pay any tax. But any income above this 2.5 lakh is taxed at the rate of 5%. Similarly, the earning above the 5 lakh is taxed at the rate of 20%. The amount you earn above the 10 lakh is taxable at the rate of 30%.
The income bands for a tax rate is called as the income tax slab. There are 4 income tax slabs on the basis of the tax rate.
|Income Tax Slab||Tax Rate|
|0- 2.5 Lakhs||Nil|
|2.5 – 5 Lakh||5%|
|5 – 10 Lakh||20%|
|Above 10 Lakh||30%|
Note in this system of the Income Tax slab, there is no injustice with the high earners. As a person with 15 lakh income also enjoys 0% rate. In fact, Out of his 15 lakh income, only 5 Lakh is subjected to 30% tax rate.
|Tax Calculation 15 Lakh Income|
|Income Amount||Tax Rate of the Slab||Tax|
|Upto 2.5 Lakh||0%||0|
Latest: New Income Tax Slab For FY 2018-19
Income Tax Deductions
The government want to promote long-term investment in industry and infrastructure. To persuade common people it waives tax in return for the specific investments. In fact, the amount you invest in those investments is deducted from your taxable income.
So, the income tax deductions are those investment or expense which reduces your taxable income by the same amount. Which in turn reduces your final tax outgo. However, You can’t claim unlimited amount for such deductions. There are limits. Such as investments of section 80C has the limit of 1.5 lakhs.
Income Tax Exemptions
The government charges income tax on your income. However, Some types of incomes are not taxable. The government has given relief to such income for various consideration.
When the government omits certain types of income from the tax calculation, it is called as the income tax exemptions. Such as there is a tax exemption for agriculture income. The EPF and PPF maturity amount is also exempted from the tax. There are many examples of income tax exemptions.
When the government spends more than its tax earning it is called as the fiscal deficit. This gap is filled by the borrowing.
The government borrows from the public by selling bonds. But, as the government borrowing rises, the interest payment also increases. Because of the higher interest payment, the government would have less money to spend for the development.
In a way, we are transferring our present expense to future generations by borrowing too much. That is why a higher fiscal deficit is considered bad for the economy. The global rating agencies decide the health of the economy on the basis of fiscal deficit. If rating agencies give us a lower rating, the foreign investors would invest less money in Indian projects which would further hamper our development.
The fiscal deficit is measured in comparison to the GDP. The government is trying to bring the fiscal deficit to 3.2% of the GDP. The budget gives a clear picture of the fiscal deficit.
Current Account Deficit
The current account deficit is related to the external trade of the country. When a country imports more goods, services and capital than the exports there is a current account deficit. As the current account deficit rises the country loses credibility and value of its currency go down.
In the budget speech, the direct tax provisions are put in the last. We the common people are concerned most about it.
The direct taxes are those taxes which are directly taken from us. It is taken as we are earning. An unemployed person or loss-making company does not pay any direct tax. The examples of direct taxes are income tax, corporate tax, professional tax.
When the government takes tax from us through the intermediaries it is called as the indirect tax. The indirect tax is not based on income. Rather, we pay indirect tax when we use a service or product. A shopkeeper, company or service provider charges this indirect tax in the price. They deposit these taxes in the government account. GST is a type of indirect tax. However, It is not reviewed in the budget.
GST is an indirect tax on services and products. The rate of GST for a particular service or product remains same in the whole country. The money collected from this tax is distributed among central and state government. There are 5 rates of GST. The applicable GST rate makes a product costlier or cheaper.
When government want to collect tax for a particular objective it charges cess. The cess is a tax on tax as it is charged as the percentage of the applicable tax. It doesn’t have any relation to your income. Presently government charges primary and higher education cess of 2% and 1% respectively. So we have to pay 3% of our income tax as education cess.
To collect more tax, the government levies an extra tax on super rich. This extra tax is taken in the name of the surcharge. Like cess, It is also a tax on tax. It is charged as a percentage of the applicable tax. However, it not taken for a specific purpose. It is just like a normal income tax earning.
GDP is the abbreviation of Gross Domestic Product. The GDP of a country tells the value of goods and services produced within the geographical borders. The GDP is measured for a year. The growth of GDP tells that country is growing. That is why the GDP rate is an important indicator of the economic performance of a country.