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Finance Minister Nirmala Sitharaman will present her eighth consecutive Budget today (February 1) at 11 am, potentially revising income tax rates to ease the middle class’s burden. This marks the Modi government’s first full-year budget in its third term, set against geopolitical uncertainties and the slowest economic growth in four years. Before delving into the details of the budget, here are five essential terms that UPSC and other competitive exam candidates should be familiar with.
It is called the Annual Financial Statement, which is a statement of accounts of the Government. Article 112 (for the central government) and Article 202 (for the state government) provides for the annual financial statement to be laid before the respective legislatures. Since the Budget reflects the Government’s vision and its policies to come in future, it becomes one of the most important annual events for the Indian Polity.
Simply put, a Budget is a process or an exercise through which the government informs Parliament (and by extension, the entire country) about the state of its finances. Transparency about three key areas are expected in a budget: income, expenditure, and borrowing.
Further, Udit Misra writes, “since a Budget typically comes at the end of one financial year and the start of another, it tells the citizens not only how much money the government raised last year, where did it spend it, and how much did it have to borrow to meet the gap but also gives an estimate about what it expects to earn in the next financial year (in the present case, the current financial year), how much and where it plans to spend it, and how much would it likely have to borrow to bridge the gap.”
The Budget division comes under the Department of Economic Affairs of Finance Ministry of Government of India. The budget is caused to be presented before both the houses of the Parliament by the President. It is presented by the Finance Minister. The Budget speech consists of two parts. Part A consists of overview of the economy and highlights the concerns and priorities of the government- flagship schemes and major programmes . Part B of the speech deals with tax proposals in the Budget.
Along with Budget Speech and Annual Financial Statements, the following documents are submitted: Demands for Grants, Finance Bill, Statement mandated under FRBM Act, Expenditure Budget, Receipt Budget, Statement of Revenue forgone, Expenditure Profile, Budget at a Glance, Memorandum Explaining the Provisions of Finance Bill and Outcome Budget.
For Your Information: The Railway Budget was separated from the General Budget in 1924 based on the Acworth Committee’s (1920-21) recommendation. It was merged with the General Budget in 2017-18 on the recommendation of the Bibek Debroy Committee.
The General Budget contains estimated receipts and expenditure for one year usually. The three funds which are important in this regard are:
Consolidated Fund of India: All revenues received, loans raised and all money received by the Government in repayment of loans are credited to the Consolidated Fund of India and all expenditures of the Government are incurred from this fund. Money can be spent through this fund only if appropriated by the Parliament. The consolidated Fund has further been divided into ‘Revenue’ and ‘Capital’ divisions. It has been defined in Article 266 (1) of the Constitution.
Public Account of India: It is established under Article 266(2) of the Constitution. All public money received, except those included in the Consolidated Fund of India, is held in this account. It primarily consists of funds raised through small savings schemes, provident fund schemes, and similar sources. The government acts merely as a custodian and is obligated to repay the amounts either on the maturity date or whenever claimed by the rightful individuals.
Contingency Fund of India: It is established under Article 267 of the Constitution to address unforeseen expenditures. It is maintained at the disposal of the President of India, allowing for immediate disbursement of funds when necessary. The expenditure incurred can be met promptly, with parliamentary approval obtained retrospectively.
There are two types of receipts:
Revenue Receipts: These are receipts that do not need to be repaid to the payee by the government and include income generated from government assets. Essentially, these are one-way transactions. Revenue receipts primarily consist of tax revenues, non-tax revenues, and other non-tax receipts.
Capital Receipts: These receipts involve two-way transactions. Once disbursed, the money either generates regular income or is recovered when an asset created from the disbursed funds is disposed of. Capital receipts arise from the disposal of permanent assets, the recovery of loans extended to others, and the raising of new loans by the government. They are further classified into two categories: Debt Capital Receipts (such as borrowings and other liabilities) and Non-Debt Capital Receipts.
Public expenditures can be classified into two categories:
1. Revenue Expenditure: This refers to expenses incurred to meet the day-to-day operational and administrative needs of the government, which do not generate revenue in the future. It is a one-way expenditure, meaning once the government spends the amount, it cannot be recovered.
2. Capital Expenditure: This includes expenses that create permanent assets and generate periodic income. It also covers loans provided to state governments and local bodies. Capital expenditure is considered a two-way payment since the money spent can be recovered either through periodic income or by selling the created asset.
The gap between the receipts and expenditure is called deficit. So, it is a shortage of money for expenditure. Here are some deficits you must know.
Budget Deficit = Total Expenditure – Total Receipts
Revenue Deficit = Revenue Expenditure – Revenue Receipts
Effective Revenue Deficit = Revenue Deficit – Grant in aid for creation of capital assets
Fiscal Deficit = Total Expenditure – Total Receipts except Borrowing and Other liabilities
Primary Deficit = Fiscal Deficit – Interest Payment
Monetised Deficit = Borrowings from RBI + Draw down balance of government from RBI
Tax is a mandatory payment made by an economic entity to the government, without any guarantee of receiving a specific or direct return from the government in exchange.
The broad areas of taxes are: Tax on income and expenditure ( Tax on Personal Income, Corporate income, GST etc.), tax on commodities and tax on property and property transaction.
There are two types of taxes:
1. Direct taxes: The Central Board of Direct Taxes (CBDT) is responsible for administering various direct taxes. It consists of Income tax, Corporate tax, Securities transaction tax etc. The direct taxes are directly paid to the government by individuals and corporate entities.
2. Indirect taxes: An indirect tax is applied to the consumption of goods and services. The government collects this tax from the sellers and retailers of these products and services, who then pass the cost on to the buyers. When you buy a product or service, you not only pay for the item itself but also the tax. In this way, you are indirectly paying the tax to the government. Sales tax, Custom duty, GST are examples of Indirect taxes.
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