Pillar-2: BUDGET, TAXATION, Subsidies,

Disinvestment, Deficit, Public Finance

Chapter-20 L Budget: Relevance in UPS
20.1. Fiscal policy
1. Fiscal policy is a set of govt decisions regarding taxation, expenditure, subsidies and other financial operations.
-To Boost Economic Growth: Provide income tax benefits on household savings in LIC/Mutual Fund etc. →
industries get new capital investment → factory expansion, jobs, GDP growth.
-To boost inclusive growth: Higher taxes on rich-> Use money for health, education, women, and other
social issues.
-To Boost Regionally Balanced Growth: Give tax benefits to industrialists for setting up factories in North
East, Naxal /Left-wing Extremism (LWE) & other backward areas.
-Exchange rate stability: Give tax benefits to exporter to boost exports while impose higher taxes on
imported items to reduce imports.->Current Account Deficit (CAD) controlled-> ₹ :$ Exchange rate volatility
controlled.
20.2. Budget
1. Budget is an annual financial statement containing estimated revenues and expenditures for the next financial
year. Budget is the primary tool used by Govt to implement its fiscal policy.
20.2.1. Three funds related to Budget
1. Consolidated Fund of India (Art-266):
-It is the primary fund for union govt to which all receipts are credited and all payments are debited.
-Purpose: Gathers all govt revenues, including taxes, fees, duties, loans and loan recoveries.
-Sources of Income: Income from taxes like Income tax, GST, non-tax revenues like fees royalties, loans obtained
domestically and internationally, and loan repayment money.
-Expenditure Coverage: Funds government routine expenses such as salaries, pensions, infrastructure projects,
defence, and debt servicing.
-Parliamentary approval is required to access.
2. Public account:
-Article 266(2).
-Public account: Any funds received by govt, excluding those specified in consolidated fund of India.
-Sources of Funds: Income from Provident fund, postal savings, national small savings fund, etc., received by
govt and obligated to be repaid on maturity
-No legistlative approval is required
3. Contingency Fund of India:
-Article -267
-Purpose: Created for unforeseen expenditures, emergencies
-Source of fund: It receives funds as specified by Parliamentary law, it is under President control. Funds are taken
from Consolidated fund.
-Held by Finance Secretary (IAS) in DEA
-Parliamentary Approval is “subsequently” obtained after expenditure
-Increased Funds:
->In 2021 budget reforms, amount increased to 30,000 crores.
-> 40% of this with Dept. of Expenditure and 60% with DEA.
20.2.2. Donation Funds: PMNRF v/s PM-CARES
#see table page: 346
->1962: A separate ‘National Defence Fund’ under PM to help military & paramilitary forces’ families.
20.2.3. Three documents related to Budget
- 2019: FM sitharaman , presented budget In 4-fold cloth called “Bahi-khata”.
-Term budget is not in our constitution
1. Annual Financial Statement
-Article 112
-It contains receipt and expenditure of last year and projections of next year.
-The revenue expenditure data must be shown separately from other expenditures data (e.g. capital expenditure)
-no compulsion to show railway budget and plan expenditure separately
2. Finance Bill:
-Article 265 and Article 117
-Taxes can’t be imposed without law so Finance Bill to obtain Parliament's permission to collect taxes.
-Further, Parliament can reduce or abolish a tax proposed by the Govt. but Parliament cannot increase tax
beyond what Govt has proposed in the Finance bill.
3. Appropriation Bill
-Article 114
-To obtain Parliament permission to spend money from consolidated fund of India.
- The expenditures ‘charged’ upon the Consolidated Fund of India e.g. Judges salaries. They can be discussed
but they are non-votable & automatically approved.
-The expenditure ‘made’ from CFI. E.g. ₹ ₹ for a scheme. They’re discussed and voted.
->The finance bill and appropriation bill are considered money bills, under article 110. So, RS approval is not
necessary.
PYQ->RS cannot also vote on demand for grants
->Max RS can discuss the bill for 14 days and give suggestions, these are also not binding on LS.
->Ruling Party may pack ordinary bills too in Finance bill to evade RS approval, in such case, it falls on LS
speaker to decide whether a given bill is money bill or not. Speaker decision cannot be questioned by
courts.
4. 6 stages of passing the Budget in Parliament
4.6.1. Financial Year:
-British Indian Govt started financial year 1st April to 31st March
-Shankar Acharya Committee was formed in 2016, to look up the scope to change FY.
-Before when govt used to Budget in last wrkig day of Feb. Iw would take till month of may for it to be approved.
->in such cases vote on account will be put forward to spend money from CFI for net 2 months.
-Now budget is being put forward by 1st week of Feb, so all 6 stages will be finished by last week of March. Hence
no vote of account is req.
- But in 2019 and 2024, govt demanded vote on accout to put interim budget due to elections.
4.6.2. Interim Budget
-Our constitution does not define interim budget.
-During election year or situtions where a coalition govt may fall, they put budget in regular fashion, but it
shouldnot have populist schemes in it .
-Such a budget is called interim budget.
-usually govts put interim budget in feb and put full general budget in july after elections.
4.7. Economic survey
-Usually prepared by Chief Economic Adviser (CEA) in Finance Ministry.
-no constitutional obligation to prepare it , but usually put before parliament one day before budget.
-ES will always be for the before it was tabled.
4.7.1 Chief Economic advisor (CEA)
-Under FinMin DEA.
-not a constitutional or statutory body. Has control over Indian economic service officers.

4.8. Finance ministry and its departments:

4.8.1. Department of Economic Affairs (DEA):
-Fiscal policy, Preparation and presentation of Union budget including the Railway component of budget. Budget
for union territories without legislature, budget for States under president rule.
-announces the Interest rates of small saving schemes.
-Organisations under DEA:
->Financial Stablity and Developmen Council (FSDC): is neiher cosntitutinl not statutory. FM is chairman,
and such as RBI, SEBI ,IRDAI, PFRDA and chief of IBI.
->Security printing and mning corporation of India (SPMCIL): priting money
->Infrastructure Finance Secretariat (IFS)
20.8.2- FinMin: Department of Expenditure
-CGA (ICAS officer), prepares estimate of how money to be spent from CFI
-Web portals:
 ->Public Financial Management System (PFMS): for disbursing money to various Ministries and
departments at Union and State level
->Bharatkosh- Non Tax Receipts Portal (NTRP): For selling India yearbook Yojana, Kurukshetra mags etc
products and services by the government of India
->PARAS: portal for pension related accounts.
20.8.3. Department of Revenue:

20.8.4. Department of Financial Services:

1. Organisations under /related to DFS:
-Bank Board Bureau- later named FSIB, it is not a contstitutional or statutory body, Setup through gazette
notification for selection of top officials (MD, CEO, Chairman and full-time Directors) for PSBs, LIC and
other public sector financial institutions.
-National Credit Guarantee Trustee Company (NCGTC): For providing credit guarantee for loans in
Mudra, MSME loans, Stand up India, education-skill development related loans.
-NaBFIB (National bank for financing infrastructure and development)
-E-Bikray Portal: for online-auction of attached assets by public sector banks for loan default.
20.8.5. Department of Public Enterprise
-DPE looks after Government Companies/Central Public Sector Enterprises (CPSEs)’s administration,
expenditure, financial health, survey/performance monitoring etc.
-DPE gives ‘Ratna’ status to CPSE’s that are making good profits
20.8.6. National Land Monetisation Corporation (NLMC-2022)
-2022: March- It was setup
- Function: Renting/selling surplus/non-core land-assets of govt depts/govt companies etc.

20.9. Indian Audit and Accounts Department

-Headed by CAG
-One Indian Audit & Accounts Department (IAAD) One System (OIOS)

Pillar 2A1-Budget
1. Fiscal policy: A set of govt decisions regarding taxation, expenditure, subsidies and other financial problems
-govt influences savings, investment and consumption in an economy, to accomplish national goals such as
income redistribution, socio-economic welfare and other social issues.
-fiscal policy helps in:
->to fight inflation: Higher income tax-> lower disposable income-> demand curbed, to fight deflation= lower direct
and indirect tax to boost demand.
->To boost economic growth: Provide income tax benefits on household savings in LIC/Mutual fund etc. -
>Industries get new capital investment-> Factory expansion, jobs, GDP growth.
->Exchange rate stability: Give tax benefits to exporters to boost exports; while impose higher taxes on imported
items to reduce imports->Current account deficit controlled ->rupee: Dollar rate volatility controlled
2. Direct taxes

2.1. Union Tax, Cess and surcharge

-any union tax: Computed on taxable income, profit, transaction. Goes to CFI->later divided b/w union and states
as per the Finance commission formula
-Surcharge: Computed on tax amount: So it is a ‘tax on tax’, this money will go to CFI. Not shared with states
using Finance Commission Formula.
->Surcharge money can be used for any purpose, usually. Except the 10% Social welfare surcharge on customs
duty of imported goods->Specifically used for social welfare schemes of union.
-Cess: Computed on [(Tax)+ surcharge(if any)]
->clear objective is mentioned. E.g.: Road and infrastructure cess, Health and Education, GST compensation cess
etc.
->By default goes to CFI, ->from there to public accounts. Sometimes there may be a separate fund inside public
accounts.
->cess is not directly shared with states, but is benefitted to them under schemes implementation

2.2. Cess: Pradhan mantri swasthya suraksha Nidhi (PMSSN)

-Govt levies 4% Health and Education cess on direct taxes like income tax, corporation tax.
-2021-March: Govt created a new ‘non-lapsable’ fund under Public Account.
-Health ministry will use this money for schemes:
->Ayushman Bharat and its sub schemes
->PMSSY
->National health mission, Health emergencies

2.3. Corporation tax

-Also called corporate income tax
-It is levied on company’s profit, under income tax act, 1961

3. Minimum Alternate Tax(MAT) and AMT

-(MAT)Levied on companies which got profits, but are showing 0 taxable income through subsidies, accounting
tricks etc.
-Modi govt reduced MAT from 18.5% to 15%
-AMT is same as MAT but for co-operative societies
3.1. Corporation tax on Startups
-Govt helps them through startup India scheme
-startups can claim 100% deduction on its profits, for 3 years out of first 10 years of registration of company.
3.2. Angel Tax on startup investment
-Budget(2024): Deleted this 30% angel tax on startups for investments received
3.3. Equalisation levy/google tax
-Govt abolished this tax in august 2024

4. Dividend distribution tax (DDT)

-Budget-2020: Abolished DDT

5. Buyback tax
- If company buys back its shares from a shareholder, then company has to pay buy back tax and the shareholder
has to pay CGT from from of buy back

6. Capital gains tax (CGT)

- owner has to pay CGT if he sells his non-agricultural land, properties, vehicles, machinery, patents, shares, TM,
bonds and other securities.
-# add table in page-367
6.1. CGT on sharemarket profit in budget-2024:
- #Add table page -368
-helps prevent over-financialisation
Note: Over reliance on financial instruments, institutions than real instruments and goods and services , which
increases volatility (loss of manufacturing industries)
-increasing tax on short-term capital gains will make investors hold stocks for longer reducing volatility and
speculation in market.
6.2. Indexation Benefits/ Cost inflation index benefit
-Indexation benefit= adjusting the profit as per changes in inflation. So person has to pay less tax on long term
capital gains.
-As of 2024, it is available only on Sovereign gold bonds and real estate properties.
->If home or real estate property is sold after 24 years of ownership then its profit is subjected to long term capital
gains
->Then indexation benefit can be availed
-> This benefit is only for properties bought before 23 july 2024
-># add table -369
6.3. Budget-2022: Profit from selling bitcoin is subjected to 30% tax and buyers has also to pay 1% TDS

7. Income tax on individuals

-James Wilson (financial member of council of India) introduced income tax in India on 24 july 1860. Hence, 24th
july is celebrated as Income Tax Day.
7.1. Switching b/w NTR vs OTR
-Salaried employees can change every year . Businessman and Freelance professional only once in lifetime
-# see tax slabs in budget 2025 with the subheadings in this chapter

8. Direct taxes: Misc. Concepts

8.1. Hindu Undivided Family (HUF)
-A Hindu, Buddhist, Jain or Sikh Family can pool their assets and form an HUF under Income Tax act.
-HUF is taxed separately from its members and helps save taxes due to certain provisions/loopholes of Income
tax act
8.2. Presumptive Taxation
-Salaried employees can easily compute their taxable income from their annual salary and pay income taxation
-It is a formula to calculate income tax for persons who face difficulty in calculating their taxation.
-Professional tax: Separate tax levied by state government on professionals who are not farmers. It cant be more
than 2,500rs per person/year.

8.3. Advance Tax

-Financial year is from 1st April to 31st march
-Advances tax mechanism requires people to pay income tax and corporate tax in advance instalments on
euqrterly basis (3-3), if their annual tax liability is 10,000rs or more.

9. TDS and TCS

-They are imposed to reduce oppurtunities of tax evasion/black money.
-TDS: Buyer of goods/ Service/ investment before making payment to seller/investor.
->This mainly to prevent income recipients from evading tax on income. Here Employing institutions cut TDS while
issuing salary itself by linking PAN of recipient. Some TDS rules below:
->2% TDS if total cash withdrawn during a finnacial year exceed 1 crore from a single user-account in bank or
post-office. To encourage digital payments.
->1% TDS on Bitcoin and other Virtual Digital Assets (VDA)’s transfer/trade.
-TCS: Seller of Goods/service. E.g.: Luxury car showroom owner, foreign currency seller
->Seller is required to collect extra TCS from Rockstar (Buyer) and deposit to IT-dept. Buyer has to file tax return
to claim TCS amount back.
10.Tax Refund:
- A person is eligible to receive income tax refund from IT-dept if has paid more tax than he is liable for.
-GST refund can also be claimed by an entrepreneur from GSTN webportal.

11. Misc. Direct Taxes- Financial Transaction Taxes

-Also called Tobin tax/Robin hood tax
- It is a small tax every time currency is converted into another currency.
-It will discourage flight of capital from one country to another->Stabilize the economy, currency exchange and
share market.
-In india foreign currency conversion is subjected to GST(indirect tax).
11.1.STT and CTT
-Securities Transaction Tax (STT) is levied on sale and purchase of shares, ETF-units and other securities.
-Commodities transaction tax (DTT): Levied on non-agricultural commodities traded at commodities-exchanges.
-They are levied by Central board of Direct taxes.

Pillar-2A2- Indirect Taxes and GST

-Indirect Taxes fall under ambit of Finance Ministry->Department of revenue->Central Board of Indirect taxes and
Customs (CBIC)
1. Indirect Taxes: Types
-#add table page-380
1.1.Burden of Indirect tax – Forward vs backward shifting
-If govt increases price of a commodity then:
a) Forwards shifting: Company (manufacturer) of the commodity might increases its price to keep profit margin
same.
b) backward shifting: Or it may reduce salaries of its employees or other background things to prevent losing
customers.
-Incase of essential medicines/goods, forward shifting is more likely

2. Indirect Tax : characteristics

-Regressive, in nature, because its the same for everyone (rich and poor), so poor may pay large portion of their
income
-Elastic : Small increase can bring large revenue, though elasticity is les than direct taxes.
-Can reduce harmful procut consumptin by imposig more taxes.
-Indirect taxes-product becomes expensive, there is uncertainty on the revenue to govt

3. Pigouvian Tax
-An externality is a positive or negative consequence of an economic activity experienced by unrelated 3rd
parties.
-Such negative externalities are have special taxes on them.
-India has high level of taxes on petroleum, tobacco and alcoholic products
-Sin Tax is same concept as Pigovian tax
3.2. Customs duty on imported lab chemicals is put at 10%, but for industrial grade ethanol import tax is 150% as
it is misused for making alcohol.
3.3. Cess and Surcharge on Excise and Customs
-10% social welfare surcharge on Customs duty on imported goods
->Budget-2021, SWS is removed on gold and silver, as agriculture Infrastrutucre and development cess is on
gold-silver.
-Health cess= 5% health cess on (customs duty+Surcharge) on imported medical devices
->This cess is used for ayushman bharat schemes.
-Agriculture Infrastructure and Development cess
->This cess is applicable on Excise duty on petrol, ([email protected]/litre) and diesel (cess @4rs/litre)
->Also on customs duty on gold-silver, alcoholic beverages, edible oils, etc.
3.4. Petrol and diesel
-India put 135% taxes on petrol and 116% tax on diesel
-Instead of present Excise VAT system if highest GST slab of 28% is put that would make govt loose 4rs lakh cr,
so its not possible
3.5. Special and additional Excise duty on petroleum profits is not shared with states by Union govt.
3.6. #add full

next 24.4.3-439

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Chapter -27
->Extra-budgetary resource (EBR) or ‘Off-budget resources’ are loans taken by public sector undertakings and
Government organizations.
->Ricardian Equivalence: If govt borrows more money, then at the time of maturity govt has to pay more principal
and interest, so taxes on people may be increased, so they may save more money as precaution
->When central bank prints more money to pay for government's loans called → “Monetizing the Deficit”
 It can result in hyperinflation and ↓↓ the purchasing power of currency
->Decrease in sovereign rating, causes investors to lose faith in investing in Indian GSecs, this causes them to
pull out funds or sell existing Gsecs, rupee gets weaker, inflation rises
->Interest Rate Growth Rate Differential (IRGD): It is the difference between (loan) interest rate (paid by Govt to
investors) and GDP growth rate in an economy.
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