Management of Public Expenditure

High Level Committee Recommendations

The Planning Commission constituted the High Level Expert Committee (HLEC) on Efficient Management of Public expenditure under the Chairmanship of Dr. C. Rangarajan. The terms of reference were: to clearly dene the scope of public-sector Plan aligning it to changes in design and delivery systems; to suggest an action plan for abolition of the Plan and non-Plan distinction; to suggest a comprehensive framework for resource transfer to states; to examine the accountability concerns arising out of direct transfer of funds; and to examine revenue and capital expenditure classification on end-use basis.

The HLEC submitted its report in September 2011 and the main recommendations of the Committee are as follows:

A fundamental shift in the approach of public expenditure management by removing the Plan-Non Plan distinction and with budgeting linked to outputs and outcomes.

  • Introduction of a new multi-dimensional budget and accounting classification with uniform codes for central programmes, sub-programmes and schemes being implemented in the States.
  • The Central Plan Scheme Monitoring System (CPSMS) to be extended and a portal to be set up for the citizens to provide information on w of resources and their utilization.
  • The switchover to complete treasury mode from 12th Five-Year Plan for all new schemes. A suitable accounting methodology to distinguish between al expenditure and transfer to be worked out by the CGA (Controller General of Accounts) and CAG (Comptroller and Auditor General).
  • The annual budgetary component of the Plan of the Centre and States to have one-to-one relation with the Government Budget of the Centre or of a State respectively.
  • All States/UTs to include information about investment outlays of SPSEs (State Public Sector Enterprises) in their budgets as a separate annexure. The resources of the rural and urban local bodies to be included as part of the State/UT Plans.

Regular updates on Project-wise, Ministry-wise and Sector-wise information on Public Private Partnerships (PPPs) to be provided in Central and State Budgets as both annuity payments and VGF (Viability Gap Funding) pertaining to PPP projects are provided from the budgetary support. Continuation of the Revenue-Capital classification and introduction of an �adjusted revenue deficit� by adjusting the revenue deficit to the extent of grants for creating assets for better understanding and for compliance in terms of FRBMA. Capital expenditure should relate to the creation of assets and be determined by the ownership criterion.

MAT (Minimum Alternate Tax)

The concept of Minimum Alternate Tax (MAT) was introduced in the direct tax system to make sure that companies having large profits and declaring substantial dividends to shareholders but who were not contributing to the Government by way of corporate tax, by taking advantage of the various incentives and exemptions provided in the Income-tax Act, pay a fixed percentage of book pro t as minimum alternate tax. Section 115JB, inserted by the Finance Act, 2000 has cast a responsibility on the chartered accountant to certify that the book profit has been computed in accordance with the provisions of the Income-tax Act. He has also to certify the income-tax payable by the company. Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the income tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act.

There were large number of companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act was either nil or negative or insignificant. In such case, although the companies were showing book profit and declaring dividends to the shareholders, they were not paying any income tax. These companies are popularly known as Zero Tax companies. In order to bring such companies under the income tax act net, Section 115JA was introduced w.e.f. assessment year 1997-98. The Finance Act, 2000, inserted Section 115JB of the Income-tax Act, 1961, with effect from 1-4-2001 providing for levy of Minimum Alternate Tax on companies. For the assessment year 2013-14, Minimum Alternate Tax (MAT) has been fixed at 18.5per cent of book profits.

Fiscal Responsibility and Budget Management (FRBM) Act – 2003

The FRBM Act was enacted by Parliament in 2003 in order to bring the fiscal discipline. The enactment of FRBM Act marks a watershed in fiscal reforms. The Act provides an institutional framework binding the Government to pursue a prudent fiscal policy. The Act casts responsibility on the Central Government to ensure inter-generational equity in fiscal management and long-term macro-economic stability by achieving sufficient revenue surplus, removing financial impediments in the effective conduct of monetary policy and prudential debt management through limits on borrowings and deficits.

Salient Features of FRBM Act

Central Government to take appropriate measures to reduce the fiscal deficit and revenue deficit so as to eliminate revenue deficit by March31,2008 and thereafter build up adequate revenue surplus.

  • Rules to be made under the Act to specify the annual targets for reduction of fiscal deficit and revenue deficit, contingent liabilities and total liabilities.
  • The revenue deficit and fiscal deficit may exceed the targets specified in the rules only on grounds of national security or national calamity or such other exceptional grounds.
  • The Central Government shall not borrow from the Reserve Bank of India except by way of advances to meet temporary excess of cash disbursements over cash receipts.
  • Reserve Bank of India not to subscribe to the primary issues of the Central Government securities from the year 2006-07.
  • Central Government to take suitable measures to ensure greater transparency in its fiscal operations.

Central Government to lay in each financial year before both Houses of Parliament three statements, viz. Medium Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macroeconomic Framework Statement along with Annual Financial Statement and Demands for Grants.

Written by princy

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