Public Finance

INTRODUCTION #

Public finance is a branch of economics, which deals with the financial matters of the government whether central, state or local. The word public in this context refers to government. The scope of public finance includes public revenue (government income), Public expenditure, Public debt (bor- rowings of government), economic and financial stabilization, and financial administration. Financial administration is the study of the machinery of the government which is incharge of performing finan- cial functions of the state. Preparation of budget is the most important component of financial admin- istration.

Fiscal Policy: It is the policy of the government regarding taxation, public expenditure and public borrowings for achieving economic stabilization and development. For eg: Through fiscal policy the government tries to control inflation/deflation and also achieve higher economic growth rates.

Budget is the annual financial statement of the government. It is the statement of estimated receipts and expenditure of the government in of every financial year which runs from 1st April to 31st March. Balanced Budget occurs when the total sum of money a government collects in a year is equal to the amount it spends on goods, services and debt interest during a financial year. In other words, when the proposed expenditure and anticipated revenue of the government are equal, it is called as balanced budget. When public revenue exceeds the public expenditure, it is called as surplus budget. When the proposed expenditure of the government exceeds its anticipated revenue, it is called as deficit budget.

Performance Budget is the budget of the Minis- try/ Department in terms of functions, programmes and activities and gives appraisal reports separately in respect of major central sector projects/pro- grammes estimated to cost Rs.100 crores or more. It also includes a statement on the programmes and performance of the various Public sector undertak- ings under the ministry/department indicating among other things, the capacity installed and utilized, phys- ical targets and achievements, results of operation, return on capital etc. Performance budget serves the management as a tool of administrative and finan- cial control in the implementation of development programmes. Zero base budgeting refers to framing a budget for the ensuring year of the government by starting from ground zero instead of treating the current budget as the starting point or the base.

The Budget indicates the receipts and payments of government under three parts in which govern- ment accounts are kept namely,

• Consolidated Fund
• Contingency Fund and
• Public Account

Consolidated Fund

All revenues received by government, loans raised by it, and also granted by its receipts from recoveries of loans granted by it, form the consol- idated fund. All expenditure of the government is incurred from the consolidated fund and no amount can be withdrawn from the fund without authoriza- tion from legislature.

Contingency Fund

This fund is to meet the urgent unforeseen expenditure of the government without parliament/

legislature’s authorization. The fund is at the disposal of the president/governor to incur such expenditure. Parliamentary approval for such expenditure and for withdrawal of an equivalent amount from the consolidated fund is subsequently obtained and the amount spent from contingency fund is recouped to the fund.

Public Account

There are certain other transactions which enter government accounts, in respect of which govern- ment acts more as a banker. For example, trans- actions relating to provident funds, small savings collections, other deposits, etc. These are kept in the public account and the connected disbursements are made. Generally speaking, public account funds do not belong to government and have to be paid back some time or the other, to the persons and authorities who deposited them. Parliamentary authorization for payments from the public account is, therefore, not required.

In a few cases, a part of the revenue of the government is set apart in separate funds for expend- iture on specific objects like sugar development, replacement of depreciated assets of commercial undertaking etc. These amounts are withdrawn from consolidated fund with the approval of parliament and kept in the public account for expenditure on the specific objects.

THE BUDGET COMPRISES OF REVENUE BUDGET AND CAPITAL BUDGET #

Revenue Budget #

It consists of the revenue receipts of government (tax revenues and other revenues) and the expendi- ture. Tax revenues comprise proceeds of taxes and other duties levied by the union. The estimates of revenue receipts shown in the Annual Financial Statement take into account the effect of the taxation proposals made in the finance bill. Other receipts of government mainly consist of interest and dividend on investments made by the government, fees, and other receipts for services rendered by the government.

Revenue Expenditure is for the normal running of government departments and various services, interest charges on debt incurred by government,

subsidies etc. Broadly speaking, expenditure which does not result in creation of assets is treated as revenue expenditure. All grants given to state gov- ernment and other parties are also treated as revenue expenditure even though some of the grants may be for creation of assets.

Capital Budget consists of capital receipts and payments of government. Items of capital receipts are loans raised by government from public which are called Market loans, borrowings by government from Reserve Bank and other parties through sale of Treasury Bills, loans received from foreign gov- ernments and bodies and recoveries of loans granted by central government to state and union Territory government and other parties.

Capital Payments consist of capital expenditure on acquisition of assets like land, building, machin- ery, equipment as also investments -in shares, etc. and loans and advances granted by central govern- ment to the States and Union Territory governments, government companies, corporations and other parties. Capital Budget incorporates transactions in public account also.

Voted and Charged items of expenditure #

Certain items of expenditure like emoluments of the President/Governor, salaries and allowances of the Chairman and the Deputy chairman of the Rajya Sabha/Legislative Council and the Speaker and Deputy Speaker of the Lok Sabha/Legislature, salaries, allowances and pensions of judges of the supreme court/high court and the Comptroller and Auditor – General of India, interest on and repay- ment of loans raised by government and payments made to satisfy decrees of courts etc., are charged on the consolidated fund and are not required to be voted by the Lok Sabha/Legislature. Budget shows the expenditure charged on the consolidated fund separately.

Demands for Grants #

As per article 113 of the constitution, the esti- mates of expenditure from the consolidated fund included in the Budget and required to be voted by Lok Sabha/Legislature are submitted in the form of Demands for Grants. Generally, one demand for grant is presented in respect of each ministry except in case of large ministries.

Each demand normally includes the total provi- sions required for a service, that is, provisions on account of revenue expenditure, capital expenditure, grants to state and union territory governments and also loans and advances relating to the service. A separate demand for each Union Territory without legislature is presented.

Where the provision for a service is entirely for expenditure charged on consolidated fund, for example interest payments, a separate Appropriation, as distinct from a demand is presented for that expend- iture and it is not required to be voted by parliament.

Where expenditure on a service includes both ‘Voted’ and ‘Charged’ items of expenditure, the latter are also included in the Demand presented for that service but the ‘voted’ and ‘charged’ provisions are shown separately in that demand. Each demand for grants gives the totals of ‘voted’ and ‘charged’ expenditure as also the ‘revenue’ and ‘capital’ expenditure included in the Demand separately and also the grand total of the amount of expenditure for which Demand is presented. This is followed by the estimates of expenditure under different major heads of account. The break – up of the expenditure under each major head between ‘Plan’ and ‘Non – Plan’ is also given. The summery of Demands for Grants is given at the beginning of the Demand for Grants document, whereas the details of ‘New Instrument of Service’ such as formation of a new company, under taking a new scheme etc., if any, are indicated at the end.

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 arc submitted to parliament through the Finance Bill.

The excess of government’s revenue expenditure over revenue receipts constitutes revenue deficit of a government. When total government expenditure exceeds total receipts (revenue receipts + capital receipts + borrowings) then it is shown as budgetary deficit.

The difference between the total expenditure of government by way of revenue, capital and loans net of repayments on the one hand and revenue receipts of government and capital receipts which are not in

the nature of borrowing but which finally accure to government on the other, constitutes fiscal deficit. Fiscal deficit is budgetary deficit plus loans taken by government.

Fiscal deficit = Revenue Deficit + Capital expenditure or

Total expenditure – revenue receipts or Revenue receipts + Recoveries of loans +

other receipts – Total expenditure Primary Deficit is measured as fiscal deficit reduced by gross interest payments.

Taxes on income, corporation tax, wealth tax, expenditure tax, service tax, customs, union excise duties etc., forms the Tax Revenue of the Govern- ment. Non – tax Revenue is through Interest receipts, dividends, income from public undertakings like railways, post and telegraph etc.

The overall borrowings or debt of the govern- ment is called as public debt. It includes domestic/ internal and external debt. Domestic borrowings or internal debt is the borrowings of the government within the country. External debt is the borrowings of the government from international organizations like the World Bank.

International Monetary Fund, Asian Develop- ment Bank etc, and governments of other countries.

TAXATION #

Taxes are the payments made by citizens of a country to the government without any quid-pro-quo. That is, payment made to the government without any immediate returns on it. ’Taxes which are borne directly by a person and cannot be transferred to oth- ers are called as direct taxes. Eg: Income tax, Wealth tax, etc. Taxes which are borne by a person initially and later transferred to others are called as indirect tax. Eg: sales tax is initially paid by the producer of a commodity and subsequently transferred to the consumer through price of the commodity. Custom duties are levied on the commodities going out or coming to India, i.e., exports and imports. Union Excise duties are inland duties levied on articles at the time of their manufacture, such as alcoholic drinks and tobacco, tobacco preparations etc.

Value Added Tax (VAT) is a tax on the value added to goods in the process of production and

distribution. It means that the VAT is imposed on the value that the business firm adds to the goods and services which it has purchased from other firms. The Indirect Taxation Enquiry Committee (L.K. Jha committee – 1976) defines VAT as “VAT in its comprehensive form is a tax on all goods and services (except export and government services), its special characteristics being that it falls on the value added at each stage from the stage of production to retail stage”.

Taxable capacity or Tax capacity represents the average or normal share of income that can be col- lected in the country. Tax capacity will depend upon the nature of the economy and the sources of gov- ernment revenue. Please Effect is the phenomenon of rising government expenditure in correspondence with the increase in the collection of tax revenues is called the “Please Effect”.

Tax Elasticity is the ratio of the percentage change in tax revenue to the percentage change in income or GDP, assuming that no discretionary changes have been made in the tax rate or tax base. It is the relevant parameter for revenue forecasting purposes. The value of the tax elasticity gives an indication to policy – makers whether the tax revenues will rise at the same pace as the national income.

Tax Elasticity and Tax Buoyancy helps to explain the overall structure of a tax system and serve as valuable analytical tools for designing tax policy. The response of tax revenues to changes in the GDP is measured by tax elasticity and tax buoy- ancy. Tax buoyancy measures the total response of

Important Factopedia #

tax revenues to changes in national income. It takes into account the effect of

• Increases in income
• Discretionary changes (i.e., tax rates and bas- es) on the revenues from a tax. It is a measure of both the soundness of the tax bases and effectiveness of past tax changes in terms of revenue collection.

Centre-State Financial Relations #

Fiscal Federalism is the financial counterpart of a federal policy. Under a federal system of government, the constitution clearly defines and spells out the spheres of the activities of the central government and those of the state governments. The constitution makes clear, the financial powers of the central government and those of the states. The Finance commission resolves the conflicts pertaining to the allocation of resources between centre and states, and also amongst the states.

Finance commission is a constitutional body. Under article 250 (i) of the Indian constitution, the President is required to constitute, within two years from the commencement of the constitution and thereafter on the expiry of every fifth year a finance commission. The finance commission

• Determines the share of the states in the cen- trally administered taxes
• Considers applications for grants-in-aid from states and report there on; and
• Considers and report on other matters re- ferred to it by the President.

Revenue, Fiscal and Primary deficit

Revenue deficit	Revenue expenditure – Revenue receipts
Effective Reve- nue deficit.	Difference between Revenue deficit and Grants for creation of capital assets.
Fiscal deficit.	Fiscal deficit = Total expenditure – (Revenue receipts+ Non-debt creating capital receipts).This indicates the total borrowing requirements of Government from all sources.Non-debt creating capital receipts are those receipts which are not borrowings and, therefore, do not give rise to debt.For example- recovery of loans and the proceeds from the sale of PSUs.
Primary deficit	Fiscal deficit – Interest payment
Budget deficit	Total Expenditure -Total Receipts

Fiscal deficit target of Centre #

For Financial year 2016-17 3.5% of GDP. For Financial year 2017-18 onwards 3% of GDP.

Fiscal deficit targets of States during 2015-20

Normal limit

3% of Gross State Domestic Product (GSDP) as per recommendations of 14th Finance Commission (FFC).

Additional

FFC, taking into account the development needs and the current macroeconomic require- ment, provided additional headroom to a maximum of 0.5% over and above the normal limit of 3% in any given year to the States that have a favourable debt-GSDP ratio and interest payments-revenue receipts ratio in the previous two years. However, the flexibility in availing the additional fiscal deficit will be available to State if there is no revenue deficit in the year in which borrowing limits are to be fixed and immediately preceding year.

Gross Domestic Savings

Meaning	Gross Domestic Saving is GDP minus final consumption expenditure. It is expressed as a percentage of GDP.
Composition	Gross Domestic Saving consists of:Household Savings (Rank 1).Private Corporate Sector Savings (Rank 2).Public Sector Savings (Rank 3).

The Balance of Payments

India’s Overall Balance of Payments #

1. Current Account
   1. Exports
   1. Imports
   1. Balance of Trade (1-2)
   1. Invisibles: (as no port entry like import-export)
      1. Services (e.g. Software services)
      1. Transfers (e.g. Remittance, Grant)
      1. Income (e.g. Investment income)
   1. Current Account Balance (3+4)

B.   Capital Account #

1. Foreign Investment
   1. Direct Investment
   1. Portfolio Investment
   1. External Assistance
   1. Commercial Borrowings
   1. Short Term Loan (e.g. Suppliers’ credit)
   1. Banking Capital
   1. Rupee Debt Service
   1. Other Capital
   1. Total Capital Account (1 to 7)

Overall balance (A+B) #

RBI releases data for BoP quarterly basis in Financial year. (e.g. April-June, July-Sept, Oct-Dec and Jan-March).

BoP Surplus and Deficit #

Current account balance represents deficit or surplus in the balance of payments.

A country that has current account deficit must finance it by selling assets or by borrowing abroad.

Thus, any current account deficit is financed by a net capital inflows.

A current account deficit implies that a country’s economy is functioning on borrowed means. A deficit may be planned for the purpose of helping an economy’s development and growth.

Deficit reduction #

Government deficit can be reduced by an increase in taxes or reduction in expenditure. In India, the government has been trying to increase tax revenue with greater reliance on direct taxes (indirect taxes are regressive in nature – they impact all income groups equally). Govt. is trying to raise money through the sale of shares in PSUs.

However, the major thrust has been towards reduction in government expenditure.

In case of a budget deficit, i.e., when Govt. cannot meet its expenses from the tax revenue. So it borrows money by selling treasury bills or government securities to RBI, which issues currency to the government in return. The government then pays for its expenses with this money. The money thus ultimately comes into the hands of the general public. If budget deficit is financed by raising money then inflation may rise.

Financial motivators #

Financial motivators are used during recession time. e.g. reduce the tax rates, increase the govt. expendi- tures. Due to financial motivators, purchasing power of people increases and therefore demand for the goods and services also increases.

Convertibility of the rupee

Means	freely permitting the conversion of rupee to other major currencies and vice versa.
Current account convertibility	India currently has full convertibility of the rupee in current accounts such as for exports and imports.
Capital account convertibility	India does not have full convertibility of the rupee for capital transactions. There are ceilings on government and corporate debt, external commer- cial borrowings and equity.

The Ministry of Finance

Five Departments	Department of Economic Affairs Department of Expenditure Department of Revenue Department of Investment and Public Asset Management (DIPAM)Department of Financial Services.
Budget is prepared by	Budget Division of Department of Economic Affairs.
Economic Survey is prepared by	Economic Division of Department of Economic Affairs.

Key to Budget Documents – Budget 2017-2018

Budget documents: The Budget documents presented to Parliament comprise, besides the Finance Minister’s Budget Speech, the following:

1. Annual Financial Statement (AFS).
2. Demands for Grants (DG).
3. Appropriation Bill.
4. Finance Bill.
5. Memorandum Explaining the Provisions in the Finance Bill.
6. Macro-economic framework Statement.
7. Fiscal Policy Strategy Statement.
8. Medium Term Fiscal Policy Statement.
9. Medium Term Expenditure Framework Statement.
10. Expenditure Profile.
11. Expenditure Budget.
12. Receipts Budget.
13. Budget at a glance.
14. Highlights of Budget-Key features.
15. Outcome Budget.

Applicable provisions

The documents shown at Serial A, B, C and D are mandated by Article 112, 113, 114(3) and 110(a) of the Constitution of India respectively. Documents at Serial F, G, H and I are presented as per the provisions of the Fiscal Responsibility and Budget Management Act, 2003. Other documents are in the nature of explanatory statements supporting the man- dated documents.

Brief description of the Budget documents #

Budget/Annual Financial Statement (AFS) (Article 112 of the Constitution)

When budget is presented	On such date as fixed by President.
Where presented	Before both the house of parliament.
Responsibility of budget	Presentation President.
Details of AFS	It shows: Estimated receipts and expenditure of the Government of India for 2017-18.Budgeted and revised estimates for 2016-17.Actual expenditure for the year 2015-16.
Three parts	The receipts and disbursements are shown under three parts in which Government Accounts are kept viz.,Consolidated Fund,Contingency Fund andPublic Account.
Separation    of                   Revenue expenditure	Annual Financial Statement distinguishes revenue expenditure from other expenditure. The Revenue and the Capital sections together, therefore make the Union Budget.

Consolidated Fund of India (Article 266 of the Constitution)

Revenue

All revenues received by Government, loans raised by it, and also receipts from recoveries of loans granted by it form the Consolidated Fund.

Expenditure	All expenditure of Government is incurred from the Consolidated Fund of India.
Withdrawal	No amount can be drawn from the Consolidated Fund without authorization from Parliament.

Contingency Fund of India (Article 267 of the Constitution)

Nature	It is an imprest placed at the disposal of the President of India.
Corpus	Rs.500 crore.
Purpose	Rs.500 crore Purpose to facilitate Government to meet urgent unforeseen expenditure pending authorization from Parliament.
Post facto Approval	Post facto approval is obtained from Parliamentary for such unforeseen expenditure.
Recoupment	After such post-facto approval, an equivalent amount is drawn from the Consolidated Fund to recoup the Contingency Fund.

Public Account

Which     type               of money kept in PA	Moneys held by Government in trust are kept in the Public Account. For example: Provident Funds, Small Savings collections, income of Government set apart for expenditure on specific objects such as road development, primary education, other Reserve/Special Funds etc.
No need of Parlia- mentary authoriza- tion	Public Account funds do not belong to the Government and have to be finally paid back to the persons and authorities who deposited them, do not require Parliamentary authorization for withdrawals.

Demands for Grants (Article 113)

Expenditure from the Consoli- dated Fund in the form of DG	Estimated expenditure from the Consolidated Fund of India included in the Annual Financial Statement are submitted in the form of Demands for Grants.
Lok sabha voting	Demands for Grants are presented to the Lok Sabha along with the Annual Financial Statement and required to be voted by the Lok- Sabha.
One Demand for each Ministry	Generally, one Demand for Grant is presented in respect of each Ministry or Department. However, more than one Demand may be presented for a Ministry or Department depending on the nature of expenditure.
Demand for Union Territories	In regard to Union Territories without Legislature, a separate Demand is presented for each of the Union Territories.

Appropriation Bill Article 114(3) #

Under Article 114(3) of the Constitution, no amount can be withdrawn from the Consolidated Fund without the enactment of such a law by Parliament.

After the Demands for Grants are voted by the Lok Sabha, Parliament’s approval to the withdrawal from the Consolidated Fund is sought through the Appropriation Bill.

Finance Bill #

At the time of presentation of the Annual Financial Statement before Parliament, a Finance Bill is also presented detailing the imposition, abolition, remission, alteration or regulation of taxes proposed in the Budget.

Vote on account

Vote on Account	The whole process of the Budget requires a sufficiently long time.The Lok Sabha is, therefore, empowered to make any grant in advance in respect of the estimated expenditure for a part of the new financial year pending completion of the procedure of the voting on the Demands.This is termed as ‘Vote on Account’.
Purpose	The purpose of the ‘Vote on Account’ is to keep the Government functioning, pending voting of ‘final supply’.
Vote on Account not required in the financial year 2017-18.	Because the Budget presentation is advanced to the first of February, 2017.

Outcome Budget #

From the fiscal year 2006-07, every Ministry presents a preliminary Outcome Budget to the Ministry of Finance, which is responsible for compiling them.

The Outcome Budget is a progress card on what various Ministries and Departments have done with the outlays in the previous annual budget.

It measures the development outcomes of all Government programs and whether the money has been spent for the purpose it was sanctioned including the outcome of the fund usage.

Guillotine #

Parliament, unfortunately, has very limited time for scrutinizing the expenditure demands of all the Ministries.

So, once the prescribed period for the discussion on Demands for Grants is over, the Speaker of Lok Sabha puts all the outstanding Demands for Grants, whether discussed or not, to the vote of the House.

This process is popularly known as ‘Guillotine’.

Cut Motions #

Motions for reduction to various Demands for Grants are made in the form of Cut Motions seeking to reduce the sums sought by Government on grounds of economy or difference of opinion on matters of policy or just in order to voice a grievance.

Revenue Budget

Definition	The Revenue Budget consists of the revenue receipts of the Government and the expenditure met from these revenues.
Revenue receipts	Tax revenues: taxes and other duties levied by the Union Non Tax rev- enues: interest and dividend on investments by the Govt, fees and other receipts for services rendered by the Govt.
Revenue expenditure	Expenditure which does not result in creation of assets for the Govt, is treated as revenue expenditure like normal running of Governmentdepart- ments and for rendering of various services, making interest payments on debt, meeting subsidies, grants in aid, etc.
Grants to the State Govern- ments/Union Territories	All grants given to the State Governments/Union Territories and other parties are also treated as revenue expenditure even though some of the grants may be used for creation of capital assets.

Effective     Revenue                  Deficit (ERD)

Revenue Deficit – Grants for Creation of Capital Assets.

Capital Budget

Definition	Capital receipts and capital payments together constitute the Capital Budget.
Capital receipts	Loans raised by the Govt from the public (termed as market loans), Borrowings by the Govt from the RBI and other parties through the sale of Treasury Bills, Loans received from foreign Govts and bodies, Disinvestment receipts and Recoveries of loans from State/Union Territory Govts and other parties.
Capital payments	Acquisition of assets like land, buildings, machinery, equipment etc.Investments in shares, etc., andLoans and advances granted to the State/Union Territory Govts, Govt companies, Corporations and other parties.

Economic Survey

Issued by	RBI is vested with the responsibility of Economic Division of Department of Eco- nomic Affairs, Ministry of Finance.
About ES	It highlights the economic trends in the country and facilitates a better appreciation of the mobilization of resources and their allocation in the Budget.It reviews the developments in the Indian economy over the previous 12 months, summarizes the performance on major development programmes, and highlights the policy initiatives of the government and the prospects of the economy in the short to medium term.
Where presented	The Economic Survey is presented to both houses of Parliament in advance of the Union Budget.In 2017, Economic survey presented on 31-01-2017 and Union Budget on 01-02-2017.

Fiscal Consolidation

Meaning	Fiscal Consolidation refers to the policies undertaken by Govt. to reduce fiscal deficits.
Focus	Focus Increase tax base and cut the non-productive expenditure.

Goods and Service Tax (GST)

Road map	The idea of moving towards the GST was first mooted in the Budget for 2006- 07.101st Constitution Amendment Act coming into force on 8th September, 2016 and notification of the GST Council on 15th September – the road to GST rollout is clear.Government is keen on introducing GST-the biggest indirect tax reform, with effect from 01 April 2017.
New deadline for GST	After missing April deadline, now GST to be implemented from July 1.
Biggest challenges	to train the indirect tax officials of both Centre and State, as well as the trade on the concepts, processes and procedures of GST.National Academy of Customs, Excise & Narcotics (NACEN), the apex training institution for capacity building in indirect taxation under the Central Board of Excise and Customs, has been mandated to impart training on GST to Central and State Government officers.
What is GST	It is a destination based tax on consumption of goods and services.It is proposed to be levied at all stages right from manufacture up to final consumption with credit of taxes paid at previous stages available as setoff.In a nutshell, only value addition will be taxed and burden of tax is to be borne by the final consumer.

Concept of destination based tax on consump- tion.	The tax would accrue to the taxing authority which has jurisdiction over the place of consumption which is also termed as place of supply.
Existing taxes are pro- posed to be subsumed under GST	The GST would replace the following taxes: taxes currently levied and collected by the Centre: Excise & Custom duty Service TaxCentral Surcharges and Cesses related to supply of goods and services State taxes that would be subsumed under the GST are: State VAT. Central Sales Tax Luxury Tax Entry Tax (all forms) Entertainment and Amusement Tax (except when levied by the local bodies) Taxes on advertisements Purchase TaxTaxes on lotteries, betting and gambling State Surcharges and Cesses related to supply of goods and services.
Exclusion	Taxes on entertainments and amusements to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or a District Council shall not be subsumed under GST.The local bodies of States could continue to levy such taxes.
GST Council	The GST Council shall make recommendations to the Union and States on the taxes, cesses and surcharges levied by the Centre, the States and the local bodies which may be subsumed in the GST.
Applicability of GST	The GST shall be levied on all goods and services except alcoholic liquor for human consumption.
Status of Petroleum & Petroleum products	Petroleum & petroleum products would be subject to GST. However, it has been decided that five products, viz. petroleum crude, motor spirit (petrol), high speed diesel, natural gas and aviation turbine fuel would be kept out of the purview of GST in the initial years of implementation.
Status of Tobacco and Tobacco products.	Tobacco and tobacco products would be subject to GST. In addition, the Centre would have the power to levy Central Excise duty on these products.
Power to make law.	Parliament will have power to make laws with respect to GST imposed by the Union (CGST) and the State Legislatures will have power to make laws with respect to GST imposed by the States (SGST).
Type of GST	It would be a dual GST with the Centre and States simultaneously levying it on a common tax base.The GST to be levied by the Centre on intra-State supply of goods and / or services would be called the Central GST (CGST) and that to be levied by the States would be called the State GST (SGST).Similarly Integrated GST (IGST) will be levied and administered by Centre on every inter-state supply of goods and services.
Why    is           Dual           GST required	India is a federal country where both the Centre and the States have been assigned the powers to levy and collect taxes through appropriate legislation.A dual GST will, therefore, be in keeping with the Constitutional requirement of fiscal federalism.

Benefits	The GST will create a common Indian market, improve tax compliance and governance, and boost investment and growth.
Who will decide rates for levy of GST?	The CGST and SGST would be levied at rates to be jointly decided by the Centre and States. The rates would be notified on the recommendations of the GST Council.
GST Council	A GST Council would be constituted comprising the Union Finance Minister (who will be the Chairman of the Council), the Minister of State (Revenue) and the State Finance/Taxation Ministers.
Decisions be taken by GST Council	Every decision of the GST Council shall be taken at a meeting by a majority of not less than 3/4th of the weighted votes of the Members present and voting. The vote of the Central Government shall have a weightage of 1/3rd of the votes cast and the votes of all the State Governments taken together shall have a weightage of 2/3rd of the total votes cast in that meeting.One half of the total number of members of the GST Council shall constitute the quorum at its meetings.
Who is liable to pay GST	Tax is payable by the taxable person on the supply of goods and/or services. Tax payers with an aggregate turnover in a financial year up to [Rs.20 lakhs] would be exempt from tax. (Rs. 10 lakhs for Special Category States e.g. North east states).
Imports	Imports of Goods and Services will be treated as inter-state supplies and IGST will be levied on import of goods and services into the country.The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Exports will be treated as zero rated supplies.No tax will be payable on exports of goods or services, however credit of input tax credit will be available and same will be available as refund to the exporters.
GSTN	GSTN stands for Goods and Service Tax Network (GSTN).A Special Purpose Vehicle called the GSTN has been set up to cater to the needs of GST.The GSTN shall provide a shared IT infrastructure and services to Central and State Governments, tax payers and other stakeholders for implementation of GST.
Compensation to states	CG has assured state govts of compensation for any revenue loss due to intro- duction of GST for a period of five years.
GST rate	Bands of rates of goods under GST shall be 5%, 12%, 18% and 28%.In addition, there would be a category of exempt goods.Further, a cess would be levied on certain goods such as luxury cars, aerated drinks, pan masala and tobacco products, over and above the rate of 28% for payment of compensation to the States.
Upper cap on GST rate	The GST Council has decided to keep the upper cap higher at 40% (20% CGST and 20% SGST) so that in future in case of need to hike tax rate, there is no need to approach Parliament for a nod and the GST Council can raise it.

Methods of taxation

Regressive tax system	If tax rate is gradually reduced due to increase in income.
Proportional tax system	When tax rate remain constant.
Progressive tax system	If tax rate is gradually increased due to increase in income (India).

Minimum Alternative Tax (MAT)

Objective of lev- ying MAT	At times it happens that a company has generated income during the year, but by taking the advantage of various provisions of Income-tax Law (like exemptions, deductions, depreciation, etc.), it has reduced its tax liability or has not paid any tax at all.The objective of introduction of MAT is to bring into the tax net “zero tax companies” which in spite of having earned substantial book profits and having paid handsome dividends, do not pay any tax due to various tax concessions and incentives provided under the Income-tax Law.
MAT calculation	MAT is calculated at 18.5% (plus surcharge and cess as applicable) on the book profit (i.e. profit shown in the profit and loss account).
Tax liability	As per the concept of MAT, the tax liability of a company will be higher of the following Normal tax liability (as per applicable tax provisions) or MAT.
MAT credit	If in any year the company pays liability as per MAT, then it is entitled to claim credit of MAT paid over and above the normal tax liability in the subsequent year(s). The credit can be adjusted in the year in which the liability of the company as per the normal provisions is more than the MAT liability.however, the MAT credit can be carried forward only for a period of 15 years after which it will lapse.
Applicability of MAT on foreign companies	MAT provisions shall not be applicable to a foreign company if —The foreign company is a resident of a country having DTAA with India and such foreign company does not have a permanent establishment in India, or the foreign company is a resident of a country which does not have a DTAA with India and such foreign company is not required to seek registration under section 592 of the Companies Act 1956 or section 380 of the Companies Act 2013.

Alternate Minimum Tax (AMT) #

MAT applies to companies and AMT applies to a person other than a company Rate of AMT, AMT is levied @ 18.5% (plus surcharge and cess as applicable) of adjusted total income.

Direct Tax

Meaning	When a person bears the burden as well as makes payment to the government.
Examples	Corporation taxIncome taxInterest taxExpenditure taxWealth taxGift taxEstate DutyLand revenueAgriculture taxHotel receipts tax

Indirect Tax

Meaning

When a seller collects the tax from the buyer first and then pays the same to the government.In other words, it is the buyer who indirectly pays sales tax to the government.

Examples	Customs duties: These are taxes on imports and exports.Union excise duties: These are taxes on manufacturing goods imposed by the Union government.Service tax: It is a tax on rendering of services.Sales tax: It is a tax on sales.State excise duty.Stamp & Registration fees.Entertainment tax.Taxes on Vehicles, Goods & Passengers, Electricity, Purchase of sugarcane.
Taxes imposed by State Govt.	VAT, Taxes on Land and Buildings, Agriculture income, Mineral rights, Liquors, sale of Electricity, Tolls, Stamp duty, Entertainment tax, Professional tax, Vehicle tax etc.