Fiscal Policy
Fiscal policy refers to the use by the government of the various instruments such as PUBLIC FINANCE taxation, expenditure and borrowing to achieve the objectives of balanced economic development, full employment etc. The Budget or the annual financial statement of the government, gives expression to its fiscal policy. In accordance with Article 112 of the Indian Constitution, the President shall cause to be laid a financial statement before both the Houses of Parliament at the commencement of every financial year of the estimated receipts and expenditure of the Government of India for that year. The Central Government has:
- Revenue budget that is to say, the estimates of receipts and disbursements on Revenue Account and
- a Capital budget, which relates to receipts and disbursements on Capital Account.
The estimates of receipts on revenue account have been grouped under two broad heading viz. tax revenue and non-tax revenue. Tax revenue has been divided into:
- (a) Taxes on income,
- (b) Taxes on property and capital transactions
- (C) Taxes on commodities and services.
Non-tax revenue has been sub- divided into
- (i) Fiscal and other services
- (ii) interest receipts
- (iii) dividends and profits.
Capital Account Convertibility (CAC) Basically CAC implies freedom to convert local currency into foreign currency and vice versa, for any purpose whatsoever, without needing any permission from the government. The term “any purpose whatsoever” is important, for as of now India is convertible on the current account. This means one can import and export goods or receive or make payments for services rendered. However, investments and borrowings are restricted.
Tarapore II Committee Report
- As per the roadmap, it detailed a road five-year time frame for government towards fuller convertibility in three phases: Phase (2006-07); Phase II (2007-08 to 2008- 9); and Phase 111 (2009-to 2010-11).
- Apart from Indians being able to acquire property and financial assets, and open bank accounts anywhere in the world, Indian companies will be able to borrow a billion dollars abroad every year without taking the RBI Permission.
- Indian companies will be allowed to invest four times their net worth abroad.
- It recommended the meeting of certain indicators/targets as a concomitant to the movement in: meeting RFBM targets; imparting greater autonomy and transparency in the conduct of monetary policy; reduction in the share of Government/RBI in the capital of Public Sector banks; keeping the current account deficit to GDP ratio under 3 percent etc.
- Mutual funds and portfolio management schemes will be able to invest upto two billion dollars in overseas stocks.
Service tax - a promising source of revenue
The gradual expansion of the service tax, introduced in 1994-95 to redress the asymmetric and distortionary treatment of goods and services in the tax regime, has been a buoyant source of revenue in recent years. The number of services liable for taxation was raised from 3 in 1994-95 to 6 in 1996-97, and then gradually to 99 in 2006-07.Simultaneously, the rate of tax was raised from 8 per cent to 10 per cent in 2004-05, and further to 12.0 per cent in 2006- 07. Revenue from service tax, as the combined outcome of expanding tax net, creeping rate, and buoyant service sector growth, increased rapidly from a paltry Rs. 407 crore in 1994-95 to Rs. 14,200 crore in 2004--05.
Pension reforms in India
A modern pension system will lay sound foundations of financial portfolios through which individuals will be able to obtain income support in old age. Pension funds are natural vehicles for long-term investment. Including in equity. A modern, well-regulated pension sector, populated with professional pension fund managers, will also be a highly beneficial force in India’s financial system, and improve resource flows in the form of long-term debt and equity to sound projects, particularly in infrastructure. The pension sector can also be a major customer of insurance companies for the purpose of converting a stock of pension wealth at retirement date into a flow of monthly pensions in the form of “annuities’.
Objectives of pension reform in India
Global pension reform experience over the past 10 years has shown that “no one size fits all”. However, the two main aims of pension systems everywhere remain the same, namely;
- reducing poverty and eliminating the risk of rapidly falling living standards post-retirement
- the broader goal of protecting the elderly from economic and social crisis. India needs a pension system which is: self-sustainable; universally accessible, especially to the uncovered unorganised sector workers on a voluntary basis; lowcost. Efficient and available throughout the country; equitable and pro-labour and does not inhibit labour mobility; and well-regulated in order to protect the interests of subscribers. On August 23, 2003, Government decided to introduce a new restructured defined contribution pension system for new entrants to Central Government service, except to Armed Forces, in the first stage, replacing the existing defined benefit system. Subsequently, the New Pension System (NPS) was operationalised from January I, 2004 through a notification dated December 22.2003.
The main features of the New Pension System:
- It is based on defined contribution. New entrants to Central Government service contribute 10 per cent of their salary and dearness allowance (DA), which is matched by the Central Government (Tier-I).
- Once the NPS architecture is fully in place, employees will have the option of a voluntary (Tier-II) withdrawable account in the absence of the facility of General Provident Fund (GPF). Government will make no contribution to this account.
- Employees will normally exit the system at or after the age of 60 years. At the time of exit, it is mandatory for them to invest 40 per cent of the pension wealth to purchase an annuity to provide for lifetime pension of the employee and his dependent parents and spouse. Remaining 60 per cent of pension wealth will be paid to the employee in lump sum at the time of exit. Individuals would have the flexibility to leave the pension system prior to age 60. However, in this case, mandatory annuitisation would be 80 per cent of the pension wealth.
- The new system will have a central record keeping and accounting infrastructure and several fund managers to offer investment options with varying proportions of investment in fixed-income instruments and equity.
- The new system will also have a market mechanism (without any contingent liability) through which certain investment protection guarantees would be offered for the different schemes.
Public Debt
By India’s public debt we mean the internal and external debt of the Government of India. The most comprehensive definition of public debt would include the indebtedness of all the three levels of government and all public enterprises, to the domestic private sector and to the external sector. Borrowing from RBI is equivalent to printing (base) money. It enables the Government to obtain resources without incurring liability to repay loan or pay interest. Borrowing from RBI does not in effect entail any liability to repay, but interest is paid on the government debt held by it. Much of this interest is not re-routed to the Government of India, but is spent in various ways by RBI as allocation of its profits. We, therefore, reckon the liabilities of Government of India to RBI as part of public debt and including the interest on it as part of the interest on public debt.
In the case of Government of India, the internal debts are:
- Market loans defined as loans with a maturity of one year or longer at the time of issue.
- Treasury bills are a major source of short term funds for the Government to bridge the Gap between revenue and expenditure with the increasing demand for funds for Investment under the plans, the Government of India has resorted to heavy borrowing Through the issue of T-bills, a major part of which is held by the RBI.
- Special securities which comprises securities issued to International Financial Institutions And is inclusive of such items as market loans in course of repayment, special bearer bonds.
- Small savings which are a source of borrowing for the Government are of special Significance particularly in growth seeking, inflation-sensitive economy like India. It is the Safest form of governmental borrowing as it taps the genuine savings of the people and Provides the government with much needed support.
Value Added Tax
Value Added Tax is a multi-point destination based system of taxation, with tax being levied on value addition at each stage of transaction in the production/distribution chain. VAT is a multistage sales tax with credit for taxes paid on business purchases.
Salient features of VAT
Uniform schedule of rates of VAT for all states. This would make the tax system simple and uniform and prevent unhealthy tax competition among states.
The provision of input tax credit would help in preventing cascading effect of tax.
The provision of self-assessment by dealers would reduce harassment. Small traders with turnover up to Rs 5 lakhs would be exempt from the provision of VAT.
The zero-rating of exports would increase the competitiveness of Indian exports. Sale tax/VAT is basically a stage subject, the control Government is playing the role of a facilitation for successful. Implementation of this significant reform measure. The empowered committee of state finance ministers, constituted by the ministry of Finance, Government of India has came up with a white paper on state-level value added tax on January 17.
White Paper on State-level VAT
- Introduction of VAT would help avoid cascading nature of sales tax. Present multiple rates and taxes can converge into a few rates and a single VAT. Transparency in the system of tax administration through simple self-assessments and departmental audit. Rationalisation of taxes to result in lower tax burden and higher tax revenues.
- State VAT to have two basic rates of 4 per cent and 12.5 per cent and to cover 550 commodities. About 270 commodities will be under 4 per cent rate.
- 46 items, comprising of natural and unprocessed products in unorganized sector, items legally barred from location and items having social implications are exempt from VAT Gold and silver ornaments subject to a special VAT rate of 1 per cent and other commodities to attract a general VAT rate of 12.5 percent.
