Types of deficits and FRBM Act

The fiscal deficit this financial year is expected to touch 6 per cent of the country’s gross domestic product (GDP) -- the highest in 14 years – because of falling tax collections and rising expenditure. Frbm Breached

Deficits
What is revenue deficit?

Revenue deficit is the gap between revenue expenditure and revenue receipts. It is therefore the borrowing undertaken to meet the current needs of the Government.

What is fiscal deficit?

Fiscal deficit is the total borrowing of the Government. It is equal to the total expenditure by the Government minus the total receipts.

What is wrong with running deficits?

Running deficits today means promising to pay interest on them tomorrow. Today, the Central Government borrows about Rs 4.51 lakh crore. Out of this, Rs 2.25 lakh crore is paid out as interest on previous borrowing. At this rate, all additional borrowing will be going only to service the debt!

What is FRBM?

The FRBM is the Fiscal Responsibility and Budget Management Act. It was passed by Parliament in 2003. Under this Act, the Government was required to bring down revenue deficit to zero by 2007-08.

How is fiscal deficit different from revenue deficit?

Every government raises resources for funding its expenditure. The major sources for funds are taxes and borrowings. Borrowings could be from the Reserve Bank of India (RBI), from the public by floating bonds, financial institutions, banks and even foreign institutions. These borrowings constitute public debt and fiscal deficit is a measure of borrowings by the government in a financial year.
In budgetary arithmetic, it is total expenditure minus the sum of revenue receipts, recoveries of loans and other receipts such as proceeds...
When the government is also running a revenue deficit, then it has to borrow not just to meet the spending on the capital account but also to finance the revenue deficit.
Currently, two-thirds of the fiscal deficit is on account of the revenue deficit! That is why the FRBM puts emphasis on cutting the revenue deficit. Once this is zero, total borrowing will come down substantially.

How will it help in redeeming the fiscal situation?

The FRBM Rules impose limits on fiscal and revenue deficit. Hence, it will be the duty of the Union government to stick to the deficit targets.
As per the target, revenue deficit, which is revenue expenditure minus revenue receipts, should have reduced to nil in five years beginning 2004-05. Each year, i.e the government was required to reduce the revenue deficit by 0.5% of the GDP.

How are these targets monitored?

The Rules have mid-year targets for fiscal and revenue deficits. The Rules required the government to restrict fiscal and revenue deficit to 45% of budget estimates at the end of September (first half of the financial year).
In case of a breach of either of the two limits, the FM will be required to explain to Parliament the reasons for the breach, the corrective steps, as well as the proposals for funding the additional deficit.

Do economies need a fiscal deficit?

Many economists, including Lord Keynes, had advocated the need for small fiscal deficits to boost an economy, especially in times of crises. What it means is that government should raise public investment by investing borrowed funds. This exercise is also called pump-priming. The basic purpose of the whole exercise is to accelerate the growth of an economy by public intervention. Hence, there is nothing fundamentally wrong with a fiscal deficit, provided the cost of intervention does not exceed the emanating benefits.
The darker side of the story is that the borrowed funds, which always remain on tap, have to be repaid. And pending repayment, these loans have to be serviced.
Ideally, the yield on investment on borrowed funds must be higher than the cost of borrowing.
For example, if the government borrows Rs 100 at 10%, it must earn more than 10% on investment of Rs 100. In that situation, fiscal deficit will not pose any problem.
However, the government spends money on all kinds of projects, including social sector schemes, where it is impossible to calculate the rate of return at least in monetary terms. So, one will never know whether the borrowed funds are being invested wisely.

Goods and Services Tax

Goods and Services Tax (GST) is a part of the proposed tax reforms that center round evolving an efficient and harmonized consumption tax system in the country. Presently, there are parallel systems of indirect taxation at the central and state levels. Each of the systems needs to be reformed to eventually harmonize them.
In the Union Budget for the year 2006-2007, Finance Minister proposed that India should move towards national level Goods and Services Tax that should be shared between the Centre and the States. He proposed to set April 1, 2010 as the date for introducing GST. World over, goods and services attract the same rate of tax. That is the foundation of a GST. The first step towards introducing GST is to progressively converge the service tax rate and the CENVAT rate.

The goods and service tax (GST) is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at a national level. Integration of goods and services taxation would give India a world class tax system and improve tax collections. It would end the long standing distortions of differential treatments of manufacturing and service sector. The introduction of goods and services tax will lead to the abolition of taxes such as octroi, Central sales tax, State level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services, and eliminate the cascading effects of multiple layers of taxation. GST will facilitate seamless credit across the entire supply chain and across all states under a common tax base.

Roadmap to GST

As we have parallel systems of indirect taxation at the central and state levels, each of the systems needs to be reformed to eventually harmonise them. The central excise duty should be converted into a full fledged manufacturing stage VAT on goods and services and the states sales tax systems should be transformed into a retail stage destination based VAT, before the two are integrated. At the central level, beginning has been made by converging widely varying tax rates and extending input tax credit to convert excise duties into a CENVAT

Minimum Alternative Tax (MAT)

Minimum Alternative Tax (MAT)
Minimum Alternate Tax (MAT) to be increased to 15 per cent of book profits from 10 per cent and The period allowed to carry forward the tax credit under MAT to be extended from seven years to ten years.

Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the income tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. There were large number of companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act was either nil or negative or insignificant. In such case, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. These companies are popularly known as Zero Tax companies. In order to bring such companies under the income tax act net, section 115JA was introduced w.e.f assessment year 1997-98.
According to this section, if the taxable income of a company computed under this Act, in respect of previous year 1996-97 and onwards is less than 30 % of its book profits, the total income of such company is chargeable to tax for the relevant previous year shall be deemed to an amount equal to 30 % of such book profits.
i.e if the taxable income of a company is less than 30% of its book profits, the company will be deemed to have a taxable income amounting to 30% of the book profits and taxed accordingly.A new tax credit scheme is introduced by which MAT paid can be carried forward for set-off against regular tax payable during the subsequent five year period subject to certain conditions, as under:-
-> When a company pays tax under MAT, the tax credit earned by it shall be an amount which is the difference between the amount payable under MAT and the regular tax, i.e excess of Tax paid under Mat and regular tax. Regular tax in this case means the tax payable on the basis of normal computation of total income of the company.
-> MAT credit will be allowed carry forward facility for a period of five assessment years immediately succeeding the assessment year in which MAT is paid. Unabsorbed MAT credit will be allowed to be accumulated subject to the five year carry forward limit.
->In the assessment year when regular tax becomes payable, the difference between the regular tax and the tax computed under MAT for that year will be set off against the MAT credit available.
->The credit allowed will not bear any interest.