INDIAN ECONOMY

PUBLIC FINANCE IN INDIA

Overview

• Public finance in India comes under the purview of the Ministry of Finance
• The Ministry of Finance has four departments
  • Department of Economic Affairs
  • Department of Expenditure
  • Department of Revenue
  • Department of Company Affairs
• The Ministry of Finance prepares the budget for the following governments
  • Union Government
  • Union Territories
  • Various states, when under President’s rule

Keywords: India, ias, upsc, civil service, study material, general studies, Indian economy

Repositories of public finance

1. Consolidated Fund of India
   1. Consists of all revenue received, loans raised and money received in repayment of loans by the Union Government
   2. All expenditure incurred by Government is incurred from the Consolidate Fund
   3. No money can be withdrawn from this fund except under the authority of Parliament
2. Public Account India
   1. Consists of all other receipts such as deposits , service funds and remittances
   2. Usually consists of funds that don’t belong to the government, and need to be paid back
   3. Disbursements from the Public Account do not need authorization of Parliament
3. Contingency Fund of India
   1. Contains funds for meeting unforeseen needs including supplementary Demand for Grants
   2. The Contingency Fund is placed at the disposal of the President to enable Government to meet urgent unforeseen expenditure
   3. Funds released from the Contingency Fund are released pending authorization from Parliament

Keywords: India, ias, upsc, civil service, study material, general studies, Indian economy

Sources of Revenue

• Main sources of revenue are customs duties, excise duties, service tax, corporate and income taxes
• Non-tax revenues consist of interest receipts (including interest paid by Railways), dividend and profits
• For states, revenue is mainly from taxes and duties levied by the state governments, share of taxes levied by Union, and grants received from the Union
• For local body finance, the primary sources are property taxes, octroi and terminal taxes

Keywords: India, ias, upsc, civil service, study material, general studies, Indian economy

Sources of expenditure

1. Non-plan expenditure
   1. Revenue expenditure: it consists of interest payments, defence revenue expenditure, subsidies, debt relief to farmers etc, and grants to states and Union Territories
   2. Capital expenditure: include defence capital expenditure, loans to public sector enterprises, loans to state governments and UTs, and loans to foreign governments
2. Plan expenditure
   1. Includes agriculture, rural development, irrigation and flood control, energy, industry, minerals, transport, communications etc

Keywords: India, ias, upsc, civil service, study material, general studies, Indian economy

Union Budget

• The Union Budget is a statement of financial position of the Union Government
• The objectives of the Budget include
  • Coordination of resources
  • Economic stability
  • Management of public enterprises
  • Definition of economic policy
• The first Budget was presented in 1860
• The Railway Budget was separated from the General Budget in 1921. However, the Railway Budget is a part of the General Budget, just prepared and presented separately
• The first Union Budget of independent India was presented by R K Shanmukham Chetty in Nov 1947
• The Budget is presented on the last working day of February, and must be passed by Parliament before it can come into effect on April 1 (the start of the financial year)

Keywords: India, ias, upsc, civil service, study material, general studies, Indian economy

Kelkar Commission

• The 13^th Finance Commission, with Vijay Kelkar as Chairman was constituted in Nov 2007
• The Finance Commission is ordained by Article 280 of the Constitution
• The main recommendations of the Kelkar Commission include
  • Senior citizens and widows to have exception limit on income tax of Rs 150,000
  • Three types of income tax slabs: up to Rs 1 lakh (no tax), Rs 1-4 lakh (20% tax), Above Rs 4 lakh (30% tax)
  • Abolition of dividend tax and long term capital gain
  • Income tax on agriculture to be withdrawn
  • Higher duty of 150% for specific agro products and demerit goods
  • Complete exemption of custom duty for life saving drugs, equipment, and defence related goods

Keywords: India, ias, upsc, civil service, study material, general studies, Indian economy

Taxes

• Direct taxes are those taxes in which the burden of tax cannot be shifted from the person on whom it has been levied. Eg: income tax, property tax
• Indirect taxes are those taxes in which the burden of tax can be shifted. Eg: sales tax, excise duty, entertainment tax
  
• Indirect taxes are the larger source of revenue for the government
  
• The ratio of revenue from direct to indirect taxes is usually around 40:60
  
• The largest revenue of the government comes from excise duty

Keywords: India, ias, upsc, civil service, study material, general studies, Indian economy

Value Added Tax

• By definition, VAT is a tax levied on the value added at each stage of production and distribution process. It is an ideal form of consumption taxation since the value added by a firm represents the difference between its receipts and cost of purchased inputs
• Value Added Tax (VAT) is a general tax on commodities to replace sales tax, surcharge and other entry level taxes levied by the states and Union Territories
• VAT is levied on sale of all taxable goods. VAT is not levied if sales of goods are not made in the course of furtherance of business
• VAT is collected in stages: tax paid on purchases (input tax) is rebated against tax payable on sales (output tax). The concept of second sale or resale tax is done away with
• VAT can be computed using one of three techniques
  • Subtraction method: tax rate is applied to the difference between the value of the output and the cost of the input
  • Addition method: the value added is computed by adding all payments that is payable to the factors of products (wages, interest payments etc)
  • Tax credit method: this entails the set off of the tax paid on inputs from tax collected on sales
• India uses the tax credit method for VAT computation
• Advantages of VAT include
  • Tax evasion becomes difficult. Businesses compelled to keep proper record of purchases and sales, and keep a trail of invoices
  • Avoids problem of undervaluing
  • Increase in revenue as tax net widens
  • Uniformity in tax regime avoids confusion
  • Permits easy and effective targeting of tax rates, as a result of which exports can be zero-rated
  • Parity with tax structures in other countries