#Budget 2014 tutorial: 5 concepts you must know

For those of us who don't know the difference between customs and excise, or MODVAT and CENVAT, here are 5 terms which should be the first step to understanding the Budget.

1. GDP: By World bank's definition, GDP at purchaser's prices is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. According to reports, El Nino may affect India's GDP. 

India's GDP: 

2. Fiscal Deficit: Fiscal deficit, by definition is the gap between the revenue and expenditure of the government. This revenue does not consider the government debt as the borrowings occur to ride over the deficit. Also, the government debt actually represents the deficits accumulated by the government over many years. The Fiscal Responsibility and Budget Management Act was passed by the Indian parliament in 2003. The main aim of this Act is to remove revenue deficit of the government which is the result of the actual net receipts of the government fall below the expected receipts. So it is not like an actual loss of revenue to the government. The FRBM Act binds the government to fix fiscal and revenue deficit targets for itself and try and stick to those targets. So not just ideologically but even legally, the government is bound to regulate its deficit numbers.Well known liberal economist and a close adviser of the Modi government Arvind Panagariya told Reuters, "In an economy where you are trying to push up the growth rate, a fiscal deficit of 4.5 percent (of GDP) is fine." This comes against the target of 4.1 percent that Chidamabarm had set for himself had UIPA been in power till the end of this financial year. But Panagariya says that target is unrealistic. He rather suggested that the government must push up its capital expenditure from 1.76% of GDP to 2%. For him the fiscal deficit figure need not be sacrosanct if the government can spend wisely in investment and infrastructure rather than just consumption expenditure.

3. Income Tax Exemption:  The Government announces every year the tax slabs and the rates of taxation. There is nothing that says the government cannot change taxation rules mid-year but governments have kept themselves away from changing what it announces in the Budget. Chidambaram had kept the slabs and rates untouched in 2013-14 except for offering a small relief to tax payers in the income bracket between Rs 2 lakh to Rs 5 lakh.

Jaitley is expected to raise the minimum tax bracket which currently is at Rs 2 lakh for ordinary citizens and Rs 2.5 lakh for senior citizens. Keeping inflation and increasing pressure on household finances in mind, Jaitley might move up these brackets to provide relief to more tax payers. The government gives you tax exemption over and above the basic exemption limits if you invest it in employee provident fund, public provdient fund, education loan, house rent etc. The ordinary citizen who sees half of his salary going away on the first day of the month to pay off home or education loans, rent, insurances etc, wants greater relief from taxation. The limit of exemption upto Rs 1 lakh was fed almost a decade back and it is time the government thinks of changing it. The government also provides other exemptions like medical (Rs 800 per month) or travel allowances (rs 15,00 per year). However, it is difficult to manage the expenditure with rising fuel and healthcare costs. It is expected the government will increase the exemption thresholds commensurate with the expenditures. The limit on exemption over home loan interest which stands at Rs 1.5 lakh for the year also might go up: so keep a tab.

4. Disinvestment: One of the major challenges of the government is revenue collection. Tax collection is low, and raising the rates looks difficult. For the individuals it will mean less cash for an economy that already has high inflation, for the corporate it will act as a disincentive to generate better growth. So the government goes for disinvestment which means it will sell away government shares in public sector units or other assets as it chooses to. 

Moneycontrol reports, "We expect average annual disinvestment requirement over the next three years at Rs 600bn, ex PSU banks (vs interim budget target of Rs519bn). Given that average mobilization has been 57% of the target in the past 4 years, the targeted amount could be much higher."

5. Retrospective Taxation: This was brought in with a amendment in taxation laws by Manmohan Singh's government inorder to tax foreign compaines after the deal had been sealed. This was done as many companies used tax havens for tax evasion and government had no way to track the evaders. In current budget, the government may repeal the law in order to improve investor confidence.