GST & FRBM Act

The Goods and Services Tax (GST) and the Fiscal Responsibility and Budget Management (FRBM) Act are two landmark reforms in India's fiscal framework. GST unified India's indirect tax structure, while the FRBM Act established fiscal discipline in government spending. For JAIIB candidates, these topics are critical as they directly impact banking operations, government borrowing, monetary policy transmission, and the broader economic environment.

Fiscal Policy is the use of government spending and revenue collection to influence the economy. It refers to the overall effect of the budget outcome on economic activity.

Taxes affect the economy through multiple channels:

• Disposable income: Taxes directly affect people's income, influencing expenditure, consumption, and standard of living
• Savings and investment: Taxes affect savings of individuals, families, and firms, which in turn affect investment, output, and per capita income
• Prices: Taxes alter production costs, which affect incentives and economic activity

Primary Objectives:

• Promoting economic growth
• Maintaining price stability

Additional Objectives:

• Mobilising resources
• Promoting allocative efficiency
• Reducing inequality in income and wealth
• Promoting private sector investment

The Fiscal Responsibility and Budget Management Act was enacted in 2003, based on the recommendations of the Dr. E.A.S. Sharma Committee (January 2000), which recommended draft legislation on fiscal responsibility.

1. Achieve long-term macro-economic stability while generating budget surpluses
2. Introduce prudential debt management
3. Introduce transparent fiscal management systems
4. Remove fiscal impediments and provide a medium-term framework for budgetary implementation
5. Reduce dependence on borrowings and reduce fiscal deficit in a phased manner

The Government appointed a high-level committee to review the FRBM Act. Key recommendations:

Fiscal Council roles:

1. Preparing multi-year fiscal forecasts
2. Recommending changes to fiscal strategy
3. Improving quality of fiscal data
4. Advising on conditions to deviate from targets
5. Advising corrective action for non-compliance

Permissible deviation circumstances:

1. National security, war, national calamities, collapse of agriculture
2. Structural reforms with fiscal implications
3. Decline in real output growth of at least 3% below the average of the previous four quarters

• India provided 3 stimulus packages totalling Rs. 1.86 lakh crore (3.5% of GDP)
• RBI injected Rs. 5.6 lakh crore (~9% of GDP) in domestic and external liquidity
• Economy recovered but at the expense of a larger fiscal deficit beyond the FRBM limit
• The fiscal stimulus was never phased out, and the current account deficit increased

• Goods and Services Tax (GST)
• Insolvency and Bankruptcy Code (IBC)
• Corporate tax cuts
• Demonetisation
• Average annual growth between 2008-09 and 2019-20: 6.5% (base year 2011-12 prices)
• In 2019-20, economy expanded by only 4.0%

GST is India's most significant indirect tax reform, unifying multiple central and state taxes into a single nationwide tax.

• One Nation, One Tax: GST subsumed multiple indirect taxes including excise duty, service tax, VAT, CST, and various cesses
• A lease transaction is a deemed sale under the law and GST is levied on lease rentals
• GST has simplified the indirect tax structure and reduced cascading of taxes

• Improved tax compliance and widened the tax base
• Reduced logistics costs by eliminating state-border checkpoints
• Facilitated seamless movement of goods across states
• Improved ease of doing business
• Enhanced transparency in taxation

Revenue Receipts:

• Tax Revenue: Corporation tax, Income tax, Customs, Union Excise Duties, Service Tax, Taxes of UTs
• Net Tax Revenue = Gross Tax Revenue - NCCD transferred to National Calamity Contingency Fund - States' share
• Non-Tax Revenue: Interest receipts, Dividend and profits, External grants, Other non-tax revenue

Capital Receipts:

• Non-debt receipts: Recovery of loans and advances, Miscellaneous capital receipts
• Debt receipts: Market loans, Short-term borrowings, External assistance (net), Securities issued against small savings, State provident funds

Non-Plan Expenditure (Revenue):

• Interest payments and prepayment premium
• Defence, Subsidies, Grants to states/UTs, Pension, Police
• Economic services (agriculture, industry, power, transport, technology)
• Social services (education, health, broadcasting)

Non-Plan Expenditure (Capital):

• Defence, Loans to public enterprises, Loans to states/UTs

Plan Expenditure:

• Revenue Expenditure (Central Plan + Central Assistance for States/UTs)
• Capital Expenditure (Central Plan + Central Assistance for States/UTs)

1. FRBM Act enacted in 2003 based on Dr. E.A.S. Sharma Committee (2000) recommendations
2. FRBM targets: Fiscal deficit at 3% of GDP; guarantee ceiling at 0.5% of GDP
3. FRBM prohibits Centre from borrowing from RBI — bans deficit financing through money creation
4. N.K. Singh Committee (2017): Debt-to-GDP target of 60% (Centre 40%, States 20%) by 2023
5. Proposed autonomous Fiscal Council to oversee fiscal targets
6. Maximum deviation allowed: 0.5% of GDP per year under specific conditions
7. 2008 crisis response: Rs. 1.86 lakh crore fiscal stimulus (3.5% of GDP) + RBI injected Rs. 5.6 lakh crore
8. GST unified multiple indirect taxes into One Nation, One Tax
9. GST is levied on lease rentals (deemed sale under law)
10. Revenue Deficit = Revenue Expenditure - Revenue Receipts
11. Gross Fiscal Deficit = Total Expenditure - Revenue Receipts - Non-debt Receipts
12. Effective Revenue Deficit = Revenue Deficit - Grants for Capital Assets
13. Pre-COVID average growth (2008-09 to 2019-20): 6.5% at 2011-12 prices