Public Finance in India

Public finance
● Public finance involves overseeing a nation's income, spending, and debt using governmental and quasi-
governmental entities, strategies, and instruments.
● Components of public finance are mentioned below:

Budget
A budget is a comprehensive financial report compiled by the government outlining projected public spending and
revenue for a fiscal year.

Constitutional Provisions:
● As per Article 112 of the Indian Constitution, the annual financial plan of the Union for a year is known as the
Annual Financial Statement (AFS).

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 ● This statement details the anticipated receipts and expenditures of the Government for a Financial Year, starting
from April 1 of the ongoing year and concluding on March 31 of the subsequent year.

The Budget contains:

Budget includes the parts mentioned below:

The stages of Budget:

In Parliament, the Budget goes through six stages:
1. Presentation of Budget
2. General Discussion
3. Scrutiny by Departmental Committees
4. Voting on Demands for Grants
5. Passing an Appropriation Bill
6. The passing of Finance Bill
● The Budget Division within the Ministry of Finance's Department of Economic Affairs is the primary
authority entrusted with formulating the Budget.
● The inaugural Budget of Independent India was presented in 1947.

Objectives of Government Budget

● Resource Redistribution: Allocating resources with social and economic benefits in mind.
● Tax Incentives: Offering allowances and tax relief to encourage business investment.
● Direct Production: State intervention in production if the private sector isn ot involved.
● Reduce Income Inequality: Imposing taxes on the wealthy, directing extra funds towards the poor.
● Economic Stability: Utilizing budget policies to stabilize the economy during fluctuations.
● Management of Public Enterprises: Providing financial support and operation provisions for public welfare
industries.

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 ● Promote Economic Growth: Focusing on investing in the public sector to boost overall savings and
investment rates.
● Diminish Regional Disparities: Addressing regional inequalities through taxation, spending policies, and
support for underdeveloped areas.

Structure of Government Budget

Components of Government Budget are:

(A) Revenue Budget
(B) Capital Budget
Revenue Budget
The Revenue Budget illustrates the present income received by the government and the expenses that can be
covered by these receipts.
Revenue Receipts
Revenue receipts consist of two categories: tax revenues and non-tax revenues.
Tax revenues -Tax revenues are funds generated from taxes and various duties imposed by the central government.
This essential segment of revenue receipts includes two primary types of taxes.
A. Direct taxes – These taxes directly affect individuals (such as personal income tax) and businesses (like
corporation tax).
B. Indirect taxes - Such as excise taxes (imposed on goods manufactured within the country), customs duties
(taxes on goods entering or leaving India), and service tax.

Non-tax revenue:
The central government's non-tax revenue primarily comprises interest receipts, which stem from loans extended
by the central government and represent the largest component of such revenue.
● Earnings from dividends and profits on government investments, fees from services provided by the
government, and cash grants-in-aid received from foreign nations and international organisations are also
encompassed within this category.

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 ● Finance bill, presented alongside the Annual Financial Statement, furnishes specific information regarding the
introduction, elimination, reduction, modification, or control of taxes proposed in the Budget.
B. Revenue Expenditure
● Definition: Revenue expenditure involves government spending that does not result in acquiring financial or
physical assets.
● Purpose: It covers routine expenses for government department operations, service provisions, debt
interest payments, and grants given to states.
● Classification:
● Plan Revenue Expenditure: Associated with central plans (Five-Year Plans) and support for State and Union
Territory Plans.
● Non-Plan Expenditure: This represents a substantial portion of revenue expenditure and encompasses a wide
array of social, economic, and general services.
● Components of Non-Plan Expenditure:
● Interest Payments: Largest component encompassing market loans and reserve funds.
● Defence Services: Second-largest, given its essential national security commitment, limiting substantial
reduction possibilities.
● Subsidies, Salaries, Pensions: Other integral elements contributing to non-plan expenditure.
Subsidies are an important policy instrument which aims at increasing welfare. Apart from providing implicit
subsidies through under-pricing of public goods and services like education and health, the government also
extends subsidies explicitly on items such as exports, interest on loans, food and fertilisers.
B. The Capital Budget
The Capital Budget is an account of the assets as well as liabilities of the central government, which takes into
consideration changes in capital. It consists of capital receipts and capital expenditure of the government. This
shows the capital requirements of the government and the pattern of their financing.

Capital Receipts
Market Borrowings: Loans obtained from the public by the government.
● Borrowing from Financial Institutions: Funding is sourced through the Reserve Bank, commercial banks,
and other financial entities by issuing treasury bills.
● Foreign Loans: Financial support received from foreign governments and international organisations.
● Loan Recoveries: Returning funds from loans provided by the central government.
● Other Components:
● Small Savings: Contributions from savings schemes like Post-Office Accounts and National Savings
Certificates.
● Provident Funds: Fund accumulations.
● Net Sale of PSU Shares: Revenue from selling shares in Public Sector Undertakings.

Capital Expenditure
This includes expenditure on the acquisition of land, building, machinery, equipment, investment in shares, and
loans and advances by the central government to state and union territory governments, PSUs and other parties.
Capital expenditure is also categorized as plan and non-plan in the budget documents.

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 Plan capital expenditure
Plan capital expenditure, like its revenue counterpart, relates to central plan and central assistance for state and
union territory plans.
Non-plan capital expenditure
Non- plan capital expenditure covers various general, social and economic services provided by the government.

Deficit of Budget
Meaning of Deficit budget- When a government spends more than it collects by way of revenue, it incurs a budget
deficit. There are various measures that capture government deficit and they have their own implications for the
economy.
Types of Deficit Budget
Revenue Deficit Budget:
● It signifies the excess of the government's revenue expenditure over revenue receipts, calculated as

Revenue deficit = Revenue expenditure – Revenue receipts.

● This deficit encompasses transactions affecting the current income and expenditure of the government.
Fiscal Deficit:
● It represents the variance between the government’s total expenditure and its receipts, excluding borrowing
● Non-debt-creating capital receipts are non-borrowing receipts, like loan recoveries and proceeds from PSU
sales.

Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts)

Primary Deficit:
● This deficit equals the fiscal deficit minus interest payments.
● Net interest liabilities comprise interest payments minus government interest receipts on net domestic lending.

Gross primary deficit = Gross fiscal deficit – net interest liabilities.

Key Takeaways of the Budget 2023:

● Proposed alterations in the income tax regime involve potential adjustments in rebate limits and tax slabs.
● There's a proposed 33% surge in capital investment outlay, reaching Rs 10 lakh crore, marking the most
substantial increment in the past decade.
● Changes in customs duties include reductions for certain imported inputs used in mobile phone manufacturing
and shrimp feed, whereas duties have been increased for products such as cigarettes, gold articles, and
compounded rubber, among others.
● Furthermore, the allocation for the railways' capital outlay has hit an all-time high, reaching Rs 2.40 lakh crore.

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Taxation System in India
● Taxation refers to the compulsory financial obligations imposed by a governing body, typically a government,
on its citizens, residents, corporations, or companies. It serves as a method for redistributing income.
● The Swaran Singh Committee proposed the inclusion of the Duty to Pay taxes in the Fundamental Duty under
Article 51A. However, this recommendation was not incorporated. Consequently, the Duty to Pay taxes is not
recognized as a Fundamental Duty.

Features Of A Good Taxation System

● Equity:
○ Horizontal Equity: Similar situations warranting identical tax payments.
○ Vertical Equity: Higher earners paying more taxes.
● Efficiency:
○ Resource gathering through taxes should impose minimal burden on taxpayers.
● Simplicity:
○ Tax structure, computation, filing, and payment should be straightforward.
○ Enhances compliance and bolsters government revenue.
● Flexibility:
○ Adaptability to changing societal needs and economic circumstances.
● Transparency:
○ Clear presentation of individual tax assessments, total collections, and expenditure on public goods.
○ Promotes accountability and clarity in resource allocation.

Methods Of Taxation
● Progressive Tax: The tax rate increases as income rises. For instance, Income Tax follows this structure.
● Regressive Tax: Applied uniformly, this tax imposes a higher percentage burden on low-income earners
compared to high-income earners as the taxed amount increases. An example is Sales Tax.
● Proportional Tax: Every individual is subject to the same percentage of tax, irrespective of their income level.
● Retrospective Taxation: This approach enables a country to implement taxation rules on specific products,
items, services, or deals and charge companies for a period preceding the enactment of the law. Nations use
this method to rectify discrepancies in their tax policies that previously allowed companies to exploit loopholes.

Types Of Taxation
Direct Tax
Direct tax is a type of tax where the incidence and impact of taxation fall on the same entity.
Incidence = Impact.
e.g.- Income Tax, Corporation Tax.
Indirect Tax
Where the incidence and impact of taxation do not fall on the same entity. Taxes that can be shifted from one
individual to another like sales tax, entertainment tax, and excise duty. Incidence is not Equal to Impact.

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Types Of Direct Tax
Direct Taxes Union Govt. State Govt.

On Income ● Corporation Tax (6.81 in RS lakh crores) ● Agriculture tax,

● Minimum Alternative Tax (MAT) ● Professional tax
● Dividend Distribution tax, Capital Gains
tax.

On Assets ● Securities Transaction Tax, ● Land Revenue,

● Commodities Transaction Tax ● Stamp/Registration duty.
● Property tax in urban areas.

On Expenditure ● Fringe Benefit Tax,

● Gift Tax

Types Of Indirect Taxes

Ad Valorem Tax It is based on the value of the transaction or the property. E.g. VAT.

VAT VAT is an indirect tax having a multi-point tax collection- imposed and collected at
different points of value addition chain. It has a cascading effect.

Excise Tax On goods produced or manufactured in the country.

Customs Duty On goods imported and exported out of the country.

Goods and Services Tax

The initiation of the GST Bill in India commenced in 2014 under the title of The Constitution (122nd Amendment)
Bill. After receiving approval in 2016, the Rajya Sabha renamed it as The Constitution (101st Amendment) Act,
2016. Its key provisions included:
● Central GST encompassing Excise duty and service tax, among others.
● State GST encompassing VAT, luxury tax, and similar levies.
● Integrated GST designed for regulating inter-state trade. IGST functions not as a tax but as a mechanism for
coordinating state and union taxes.
Article 246A grants states the authority to levy taxes on goods and services.
Reforms Brought About by GST
● The establishment of a unified national market: This involves consolidating numerous Central and State
taxes into a single tax system.
● Addressing the cascading effect: GST significantly addressed the issue of double taxation, reducing its
negative impact and facilitating the development of a unified national market.
● Lessening the tax burden: Consumers benefit from a notable decrease in the overall tax load on goods.

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 ● Enhancing the competitiveness of Indian products: The introduction of GST is enhancing the
competitiveness of Indian goods both domestically and internationally. Fully offsetting input taxes achieve this
throughout the entire production value chain.
● Easier to administer: Because of the transparent and self-policing character of GST, it would be easier to
administer.

Current GST slab in 2023-24

Tax Rates Products
0% Milk, Eggs, Education Services, Curd, Health Services, Lassi, Children’s Drawing &
Colouring Books, Unpacked Foodgrains, Unbranded Atta, Unpacked Paneer, Unbranded
Maida, Gur, Unbranded Natural Honey, Fresh Vegetables, Palmyra Jaggery, Salt
5% Sugar, Tea, Edible Oils, Domestic LPG, Roasted Coffee Beans, PDS Kerosene, Cashew
Nuts, Footwear (< Rs.500), Milk Food for Babies, Apparel (< Rs.1000), Fabric, Coir Mats,
Matting & Floor Covering, Spices, Agarbatti, Sweets, Life-saving drugs, Coffee (except
instant)
12% Butter, Ghee, Processed food, Almonds, Fruit Juice, Fruits, Nuts, Pickles, Chutney, Jam,
Jelly, Packed Coconut Water
18% Hair Oil, Toothpaste, Industrial Intermediaries, Soap, Ice-cream, Pasta, Toiletries, Corn
Flakes, Soups, Computers, Printers
28% Small cars (+1% or 3% cess), Luxury & sin items like BMWs, cigarettes and aerated drinks
(+15% cess), High-end motorcycles (+15% cess)