FRBM Act and GST

Fiscal Responsibility and Budget Management Act, 2003 (FRBMA)

The passage of the Fiscal Responsibility and Budgetary Management Act (FRBMA) in August 2003 signalled a watershed moment in fiscal reform, as it required the government to adhere to a prudent fiscal policy through the establishment of an institutional framework.

To achieve this goal, the central government must achieve a sufficient revenue surplus, remove fiscal obstacles to monetary policy, and effectively manage debt by restricting deficits and borrowing. The central government must also ensure intergenerational equity and long-term macroeconomic stability.

Main Features of the Act

It directs the Central Government to do the following:

• Reduce fiscal deficit to no more than 3.5 percent of gross domestic product (GDP)
• Remove the revenue deficit by March 31, 2009, and then build up an adequate revenue surplus following that date
• Annual reductions in the fiscal deficit of 0.3 percent of GDP and the revenue deficit of 0.5 percent of GDP are expected (if not achieved through the tax revenue, must be achieved by reducing expenditure)
• Actual deficits may only exceed the targets set by the central government in the case of national security, natural disaster, or other exceptional circumstances as determined by the central government at its discretion
• The central government shall not borrow from the Reserve Bank of India, except in the form of advances to meet temporary excess cash disbursements over cash receipts, unless otherwise authorised by the Reserve Bank of India
• From the fiscal year 2006-07 onwards, the Reserve Bank of India is prohibited from subscribing to primary issues of central government securities
• Both Houses of Parliament should be presented with a quarterly review of the trends in receipts and expenditure in relation to the budget, as required by law
• Along with the Annual Financial Statement, the federal government is required to present three further statements to both Houses of Parliament: Fiscal Policy Statement for the Medium Term, Fiscal Policy Strategy Statement for the Medium Term, and the Macroeconomic Framework

Goods and Service Tax

• It is a single comprehensive indirect tax that will become effective on July 1, 2017
• GST is levied on the supply of goods and services from the point of manufacture or provision of service to the point of consumption
• The GST was made possible through the passage of the 101st Constitutional Amendment Act
• The amendment introduced Article 246A into the Constitution, which conferred cross-legislative authority on Parliament and state legislatures to pass legislation relating to the Goods and Services Tax imposed by the Union and the states
• Following that, the CGST Act, the UTGST Act, and the SGST Act were all enacted to implement GST

Main Features of the Act

• It is a consumption tax levied at the point of consumption, with the ability to claim Input Tax Credits throughout the supply chain
• One rate for one type of good or service is applicable throughout the country, and it is consistent across the board
• It has subsumed (or replaced) a large number of federal and state taxes and cesses, as well as local taxes and cesses. These include central taxes such as the Central Excise Duty, the Service Tax, the Central Sales Tax, and cesses such as the KKC and the SBC, among others. State taxes such as VAT/Sales Tax, Entry Tax, Luxury Tax, Octroi, Entertainment Tax, Taxes on Advertisements, Taxes on Lottery /Betting / Gambling, State Cesses on Goods, and so on are all levied by the state government
• However, with the passage of time, five petroleum products will be absorbed into the GST regime, rather than remaining exempt from it at this point in time
• GST imposes six (six) standard rates on the supply of all goods and/or services throughout the country, namely, 0 percent, 3 percent, 5 percent, 12 percent, 18 percent, and 28 percent on the supply of all goods and/or services throughout the country

Differences between Old Tax Regimes and GST

• Prior to the implementation of the GST tax regime, taxes were levied not on the value added at each stage, but on the total value of the commodity or service, with only a limited ability to claim Input Tax Credit (ITC)
• Taxes paid on intermediate goods or services were included in the total value, which amounted to cascading of taxes
• Tax is discharged at each stage of supply under GST, and the credit for tax paid at a previous stage is available for offset at the next stage of supply of goods and/or services under the same tax regime. As a result, it is effectively a value-added tax at each stage of the supply chain

Benefits of GST

• Taxation should be uniform throughout the country, and the principles of “value-added taxation” should be applied to all goods and services
• It has taken the place of a number of different types of taxes and cesses levied by the central and state/union territory governments
• The Goods and Services Tax (GST) has reduced the number of different taxes on goods and services
• The laws, procedures, and tax rates in every state and territory are the same across the country
• It has made it easier for people to move their goods and services around the country, and it has helped to create a common market
• All tax payment-related services, including registration, returns, and payments, will be made available online through a single portal, making compliance easier as a result
• Increased tax base, increased transparency in the tax system, reduced human interface between taxpayers and the government, and an increase in the ease of doing business are all benefits of this tax reform programme

Conclusion 

The Goods and Services Act is applicable to the federal government as a whole. However, fiscal responsibility legislation has already been enacted in the majority of states, allowing the government’s rule-based fiscal reform programme to be implemented on a more widespread basis. However, because this Act is intended to promote fiscal prudence, there are concerns that it will result in a reduction in welfare expenditure. Since the enactment of the FRBMA, the Indian economy has progressed to the level of a middle-income country, and much has changed both domestically and internationally