Direct taxes, Indirect taxes, bond issuances etc.

  • 24 Jan , 2023
  • 5:11 PM
  • Efficiency of tax collection is likely to improve further.

FY 24 Budget is likely to project a growth in direct tax revenues, that is more than the forecasted nominal growth rate of GDP. The Budget is likely to forecast growth in direct tax collection in FY 24, in the range of 10.5% to 12%. Nominal GDP growth rate expectation for the year is likely to be between 10% and 11%.

Direct taxes are made up of income tax and corporate tax. Direct tax collection in FY 24 is likely to exceed the rate of nominal growth rate of GDP because of more efficient tax collection by the government. Efficiency of tax collection has improved significantly in FY 23. More people are paying taxes and filing tax returns. 

The level of corporate tax collection in the year will be affected by the impact of economic slowdown on the profitability of Indian companies. The economic situation is very likely to exacerbate in the year. This will happen both at the domestic level and at the global level. 

Both central and state governments are expected to increase their bond issuances in FY 24. Governments raise debt money by selling their bonds. These bonds are called Government Securities in India. Bond issuance of central government is likely to increase year-on-year by around 6% to Rs 16.4 trillion in FY 24. Budgetary target is likely to be set around this number. 

In the year before general elections, the central government is more likely to increase its expenditure. The government will do this to give a boost to the economy.  So actual issuance of bonds may turn out to be even higher than projections. 

Increased borrowing by governments through issuance of bonds raises interest rates in general. So it becomes more expensive for the private sector too to raise money through borrowings. Government borrowing in domestic currency is assumed to be mostly risk free. This is because the government in the worst case scenario can get more currency printed to pay off its debt obligations. The bonds issued by corporate sector is never risk free. There is always some probability that the private company or entity can default on its debt. The private entity does not have the privilege to print currency when needed. So credit risk of private bonds is always higher than that of government bonds. Therefore, the interest rate demanded on private bonds is almost always higher than that on government bonds. So if the interest rate on the government bond goes up because of increased borrowing by the central government, that on private bonds will also go up.

 Increase in interest rates by RBI coupled with the increase caused by increase in government borrowing may prove to be a double whammy for the private sector in the year.  

The Budget for FY 24 is likely to factor in a lower indirect tax collection growth for FY 24.  Indirect taxes are expected to grow year-on-year (Y-o-Y) by 7%-9% in FY 24. Budgetary target growth for indirect tax collection is likely to be in this range. 

Indirect taxes are taxes other than income and corporate taxes. These taxes include GST, customs duty, excise duty etc. One reason why indirect taxes are expected to register a slower growth is that economic conditions may deteriorate at the domestic and global level in FY 24. This will result in lower collections of custom duties.

 Custom duties are taxes imposed on exports and imports. A global economic slowdown will lower demand for India’s exports. Government imposes export duties on a number of export items. Lower exports will result in lower collection of export duties. High inflation and lower economic growth at the domestic level will lower the real income of Indians further. This will lower the demand for imported items in India. Indian Government imposes import duties on a large number of imported items. Lower import demand will result in lower collection of custom duties for the government.

Excise duty is still levied on petrol, diesel and alcohol. Other items are now covered under the GST regime. 2023 is the last year before the general elections. The General Elections will be held in 2024. Therefore, the government is more likely to cut down excise duty on petrol and diesel further. This will also lower indirect tax collection of the government.

GST collections are likely to go up further. This will happen mainly on account of improvement in efficiency of tax collection. Increased activity in some Services will also contribute to increase in GST collection.  




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Budget Gyan: Budget process from start to finish

  • 25 Jan , 2023
  • 2:44 PM
  • Most of you have seen the budget being presented by the Finance Minister on the floor of the house each year. Have you ever wondered about the amount of work and detailing that goes into the preparation of the Union Budget?

It is actually a full 6 month process that starts in August in the previous year and culminates in February next year. We will also look at some unique aspect of the Indian Budget process like the “Halwa Ceremony” and why it is done. Over to the budget process.

Four pillars of the Budget process

The entire budget is divided into 4 clear phases.

  1. Budget formulation, which entails preparation of estimates of expenditure and receipts for the fiscal year

  2. Budget approval by the Lok Sabha and Rajya Sabha via enactment of Finance Bill and Appropriation Bill

  3. Implementing or enforcement budget provisions including collection of receipts and making necessary disbursements

  4. Legislative review of budget implementation

Let us focus here on the Budget preparation process for Feb-22 Union Budget.

Step 1: Annual Budget Circular commences in August

The budget process starts around the previous August itself i.e. The first step is the Department of Economic Affairs, Ministry of Finance issuing the Annual Budget Circular. These are detailed instructions for various departments / ministries for preparing budget estimates. For every item under the purview of that department, the officials have to present the Budget Estimates, Actuals and the Revised Estimates for the ongoing budget year for every item of receipt and expenditure.  For example, when budget is presented on 01-Feb 2023, it will contain budget estimates for 2023-24, revised estimates for 2022-23 and actual expenditures and receipts of 2021-22.

Here the Niti Aayog (formerly called Planning Commission) has a role to play. The various ministries provide budget estimates for plan-related expenditure for the next year in consultation with the Niti Aayog. These estimates must fit into the Plan allocations for each five year bracket. 

Step 2: Reducing the Fiscal Deficit (Budget Deficit)

This is portion of outflows that cannot be funded by budget inflows. Hence the government has to rely on borrowings. Under the FRBM Act, the onus is on the Finance Minister to strive towards the reducing the fiscal deficit and bring revenue deficit to zero. The Fiscal deficit was to progressively move towards 3.5% of GDP and then to 3% of GDP. However, due to COVID, the normal FRBM path has been disrupted as India ended up with fiscal deficit of 9.4% in FY21 and 6.9% in FY22 and possibly 6.4% in FY23. This budget will put the onus on the finance minister to reduce the fiscal deficit to around 5.8% for FY24 and give a timetable to bring it to 3.5% target.

Step 3: Consolidating Budget Data and Priorities

This normally happens around January wherein the revenue-earning ministries provide estimates of revenue receipts in the current fiscal year and next fiscal year to the finance ministry. Once the total receipts are consolidated, the various budget proposals are examined by the finance minister and expenditure is prioritized in consultation with the prime minister and the Union Cabinet. 

Step 4: Inputs from key stakeholders

This is when (around the second week of January), the Finance Minister holds pre-budget consultations with various stakeholders to seek final inputs. These include various ministries, state governments, trade associations, industry associations, industry captains, stock market professionals, leading academicians, economists, bankers etc. By the end of January, the People’s Charter of Demands is readied and incorporated into the budget where acceptable and approved.

Step 5: Putting the final Budget document in place

This is the last step in the budget preparation process. Here the National Informatics Centre (NIC) helps the budget division consolidate all the tables, graphics and data into a single document. The consolidation is fully computerized. This is a stage that entails high secrecy and the budget staff normally stays there till the budget is ready. At the end of the process, the permission of the President is sought before finalizing the budget for printing.

Step 6: Budget Printing and Halwa ceremony

The printing process of the Union Budget papers is marked by the traditional “Halwa Ceremony” at North Block. In Indian tradition, it is believed that it is auspicious to eat something sweet before starting an important work. Halwa ceremony is presided over by the Finance Minister. 

However, the Union Budget 2022-23 presented by Nirmala Sitharaman on 01st February 2022 was not physically printed but it was a digital budget. That could be the trend in the coming years too.

Will the Budget impact the surging import duty levied on Gold?

  • India Infoline News Service
  • 15 Mar , 2012
  • 5:19 PM
What will be the Kahaani of the Union Budget this year? With the entire nation in its annual speculation mode, everyone is wondering will Pranab Mukherjee deliver one that makes sense to the masses or one that appears to be just as useful as a fifth wheel.
Amidst this electric atmosphere that’s causing markets to ride a rollercoaster of its own, where is gold heading? Traders, suppliers, end consumers all present one common query to Mr. Mukherjee, “Will the Budget do anything for the surging import bill by implementing measures that discourage Gold consumption?”
Import Duties Wasted by Hoarding
There is a widespread view that gold imports are causing a strain on the country’s balance of payments. Gold imports have also been credited by the Prime Minister’s Economic Advisory Council (PMEAC) as one of the reasons behind India’s high Current Account Deficit (CAD) levels, even higher than levels during the Balance of Payments (BoP) crisis in 1991. The PMEAC is further expecting India’s CAD to climb up to 3.6% of GDP (CAD levels were at 3% during the ‘91 crisis). 
The RBI has expressed a similar concern about the increasing CAD levels in its recent macroeconomic report.
Since the demand for Gold (and Oil) is largely inelastic in nature, the rising cost of importing such commodities does impact the overall deficit levels.
An equal concern is that the billions spent towards importing gold in 2010-11 was largely unproductive because the imported gold was used for either for making jewellery, kept as gold bars and coins or would be locked up in safes. What an absolute waste! On the contrary if this hoarded gold were channeled towards investment avenues that would yield productive returns, it would add some much needed leverage to the growth of the economy.
This hoarding has actually helped investors when it mattered the most recently. Be it the crisis of 2008 or the stock market turmoil of last year. And what would investors do given the increasing uncertainty and negative real interest rate prevailing – just resort to this time tested element.
Gold Imports are actually Re-exported
The proof of the pudding lies in the eating. Take a look at some of these facts to understand the magnitude of the situation at hand.
Imports not only to blame: The imports on a year-on-year basis have remained fairly constant –  969 tonnes this year as compared to 958 tonnes a year before.  In reality, rising prices partly on account of depreciation of the rupee have added to the burdening deficit problem.
32% of India’s gold imports are actually re-exported: In recent years, India has evolved into a significant exporter of gold jewellery.  The demand for gold has increased beyond that required for domestic consumption (for jewellery and investment).
Gold imports up 40.23%: During the April-December period of the current fiscal, gold imports were valued at $28.16 billion. Gold jewellery exports were up 41.59% from $8.56 billion in the corresponding period of the last fiscal. The growth in value of gold import and export of jewellery roughly match.
Over the past three years, India’s gold jewellery exports have grown by a cumulative 88% to reach a substantial Rs 65,000 crore in 2010-11. Gold imports grew by 64% during the same period.
In 2010-11, Net Gold imports were about Rs 1,00,000 crore, comprising 5.7% of total imports and about a third of the current account deficit. Net gold imports (as opposed to simply gold imports) must be considered while assessing the impact of importing gold on the balance of payments.
Jewellery manufacturing is a skill intensive industry and India holds its own as a specialized manufacturer and exporter of world-class designs.  With the right kind of stimulus, this industry could emerge as an even bigger hub of jewellery manufacturing leading to increase in exports and employment. In the light of this, banning gold imports or increasing customs duties threaten to re-introduce loopholes like smuggling and would also prove to be counter-productive for the economy as a whole. 
Mistakes of the Past 
Mainstream economists and policymakers have always had a rather hostile approach towards gold. This approach was fueled by a perception that gold barely added to productive capacity, and was rather a reminder of the cultural and economic backwardness of the past.
From an economic standpoint, the process of gold accumulation by the private sector in India was seen as adding to the demand-supply imbalance of the foreign exchange market caused by the diversion of precious foreign exchange resources towards importing gold.  Excess demand for gold was considered as one of the main reasons for the so-called external constraint, which supposedly hindered development and technological progress.
Bending towards this earlier chain of thought, many are calling on the government to take measures to stem the rising demand for gold. Earlier this year, an increase in customs duty was brought in to check surging imports. There are suggestions to further increase tariffs to discourage imports and some extremists recommend a complete ban/restriction on gold imports.
Before embarking on such ill conceived notions, one should remember that historically, while the authorities have pursued policies to de-emphasize gold and to suppress demand for gold, the balance sheet of households showed more gold on the asset side.
In the past, there have been various restrictive policies like the ban on gold imports, the Gold Control Act, which prohibited the ownership of gold partly /completely, ban on forward trading, etc, but all in vain. Even the gold bond schemes met with little success each time they were introduced.
The Committee on Capital Account Convertibility (CCAC) put forward some precise and action-oriented recommendations on the liberalisation of the gold market. The CCAC stressed that it was essential to liberalise the policy on gold while simultaneously taking steps to develop a transparent and well-regulated market in gold, which would be integrated with other financial markets. In its view, the main ingredients of the change in the policy on gold should be:
Removal of restrictions on import and exports of gold,
Development of gold-related financial instruments,
Development of markets for physical and financial gold,
Encouragement of banks and non-banks to participate in the gold market.
The CCAC suggested mobilization of private sector gold for external adjustment and to remove external constraints.
There have been half-hearted attempts towards development of the gold market. Removal of tariffs and freeing the market are the prerequisites for this development. There were some efforts made in this direction and now it seems that we’re at a U-turn scenario.
Even considering that the recent change in customs duty apart from doubling the duty but making it “ad valorem”, is leading to various market discrepancies. The customs duty is paid at the time of imports whereas the consumption can happen at a later date. This leads to a discrepancy in the prevailing prices and the import price as the amount of duty prevailing currently would have undergone a change due to change in price.  Therefore, to avoid such market discrepancies, the government should adopt a fixed rate structure rather than an ad valorem rate.
Will the budget fall prey to all the noise?
We don’t know. Not as yet atleast.
But, restrictive steps such as those mentioned above could probably hurt the economy in the long run, and are not in line with the optimism of the India growth story.
According to recent reports, the All India Gems & Jewellery Trade Federation (GJF) was quoted as demanding the restoration of specified duty to support the domestic industry at the rate of Rs 40 per gram of gold.  We believe that they refer to the jewellery industry. They have also suggested a 0.2% on every transaction of exchange traded gold fund (ETF) be imposed, as most of the ballooning imports of the yellow metal are going for the purpose.
Let’s get the facts straight. India’s consumption has been above 900 tonnes for the last two years whereas the Gold ETF industry which has been into existence for nearly 5 years now has a total holding just above 30 tonnes. The gold ETF industry has just started but the other stakeholders seem to be worried as the market is showing an inclination to move towards efficiency.
One needs to remember that the government is looking at channelizing the physical gold savings into the mainstream. However, an easier way to do so would be if these holdings were not in physical but rather in demat form. This would enable easy transfer and could also settle transactions by payment of gold, thereby getting gold into circulation. This is best done though instruments like Gold ETFs which the government should be looking to encourage.  Added incentives and lowered taxation could encourage investments through this route.
It would be ideal if jewellers would consider gold ETFs as a complementary product. They should participate and aid in the development of the market. The starting point could be acting as market makers for gold ETFs and extending to sell jewelry in lieu of gold ETF units – that would be perfect, but then again, it’s just wishful thinking (for now).
Making some sense…
The government and the Reserve Bank of India (RBI) need to focus intensely on how to channel atleast a part of the huge savings in gold into more productive use rather than look for ways that aim at discouraging consumption. Gold ETFS have been a stepping stone towards bringing physical gold into mainstream investments through demat form. The RBI could also look at permitting a deeper paper gold market with a wider array of instruments to convenience institutional and other investors.
But we will never know till Mr.Mukherjee’s speech on Friday, March 16, 2012.
A hopeful nation awaits with bated breath.
Mr. Chirag Mehta, Fund Manager (Commodities), Quantum Asset Management Company Private Limited


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  • 25 January, 2023 |
  • 2:40 PM

Most of you have seen the budget being presented by the Finance Minister on the floor of the house each year. Have you ever wondered about the amount of work and detailing that goes into the preparation of the Union Budget?

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