PUBLIC FINANCE Samir K Mahajan, M.Sc. Ph.D
SOME BASIC CONCEPTS Public Finance: Public Finance is a subject that is concerned with the income and expenditure of public authorities. Government Budget: A government budget is a statement of estimated income and expenditure of public authorities. It is a future programme and is framed generally for a year. Budget Receipts Revenue Receipts Capital Receipts Expenditure Revenue Expenditure Capital Expenditure
SOME BASIC CONCEPTS A government budget is traditionally presented with two components such as: Revenue Budget and Capital Budget. Revenue budget consists of revenue receipts and expenditure met form such receipts. The capital budget consists of capital receipts and its payment. Government Budget Revenue Budget Capital Budget Revenue Receipts Capital Receipts Revenue Expenditure Capital Expenditure
Budget Receipts: Classification of Government Receipts. The receipts of the public authorities are broadly classified into revenue receipts and non-revenue receipts. Budget Receipts Revenue Receipts Tax Revenue Capital or Non-Revenue Receipts Borrowings Non-Tax Revenue Recoveries of Loans Other Non-Revenue Receipts
REVENUE RECEIPTS contd. REVENUE RECEIPTS Revenue receipts are those receipts which do not create a liability or lead to reduction in assts. These receipts are routine, ordinary and usual in nature. Revenue receipts includes tax-revenue and non-tax revenues. Taxes can be classified as direct tax and indirect tax. DIRECT TAX: Direct taxes are levied on income, property and expenditure. Direct Taxes are those taxes the burden of which cannot be shifted to others. In case of direct tax, the impact and incidence fall on the same person. INDIRECT TAXES: INDIRECT taxes are imposed on goods and services. These taxes are those the burden of which can be ultimately shifted to some other persons. In case of indirect tax, the impact and incidence fall on different persons. Non-tax revenues of public authorities are obtained from non-tax sources.
REVENUE RECEIPTS contd.. SUMMARY OF TAXES SHARING BETWEEN UNION AND STATES in India (Since Independence to 30 th June 2017) q Taxes levied, collected and appropriated by Union q Taxes imposed, collected by Union but shared with States q Taxes imposed, collected by Union Government but assigned to States q Taxes imposed by Union but collected and appropriated by States q Taxes imposed, collected and appropriated by States Corporate tax, custom duties, property tax etc Income tax other than agriculture income tax, union excise duties on tobacco and other goods except liquor and narcotics etc. Estate duties in respect of property other than agricultural land, taxes on railways fares and freights etc Stamp duties, registration fees ect Sales tax, entertainment tax, toll tax Land revenue, agricultural income tax, profession tax. Exercise duties on liquor and narcotics etc.
REVENUE RECEIPTS contd.. THE CASE OF GST The Goods and Services Tax (GST) has revolutionized the Indian taxation system. The GST Act was passed in the Lok Sabha on 29th March, 2017, and came into effect from 1st July, 2017. GST is an indirect tax REGIME on the supply of goods and services. GST Law has replaced many indirect tax laws that previously existed in India. GST is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition. GST avoids this cascading (double taxation) effect as tax is calculated only on the value added at each transfer of ownership. axation There are 3 applicable taxes under GST: CGST, SGST & IGST. CGST: Collected by the Central Government on an intra-state sale (Eg: Within Karnataka) SGST: Collected by the State Government on an intra-state sale (Eg: Within Karnataka) IGST: Collected by the Central Government for inter-state sale (Eg: Karnataka to Tamil Nadu)rolum GST does not apply to petroleum product.
. REVENUE RECEIPTS contd. SUMMARY OF TAXES SHARING BETWEEN UNION AND STATES in India (Since 1 July 2017) afer introdcution of GST e q Taxes levied, collected and appropriated by Union q Taxes imposed, collected by Union but shared with States q Taxes imposed, collected by Union Government but assigned to States q Taxes imposed by Union but collected and appropriated by States q Taxes imposed, collected and appropriated by States q Taxes imposed by central government collected states in case of intra-state sale, and union case of intra-state and inter-state sale. Revenue will be shared equally between the Centre and the State in case of intra-state sale. The Union will share the revenue collected under inter-state sale with state based on the destination of goods. Corporate tax, property tax etc Income tax other than agriculture income tax, Estate duties in respect of property other than agricultural land, taxes on railways fares and freights etc Stamp duties, registration fees ect Land revenue, agricultural income tax, profession tax. Taxes imposed on goods and services included within the GST basket.
REVENUE RECEIPTS contd. TAX REVENUE Tax revenues may be further classified into direct and indirect. q DIRECT TAX: Direct taxes are levied on income, property and expenditure. Direct Taxes are those taxes the burden of which cannot be shifted to others. In case of direct tax, the impact and incidence fall on the same person. Some Direct taxes are as follows: o Corporate Tax: Corporate taxes are imposed on income of companies and business corporations. Corporation taxes are levied, collected and retained with central government. o Income Tax: Income taxes are taxes imposed on income (earned by individuals) from salaries, business, profession, property and some other sources. Income taxes except agricultural income tax are levied and collected by central government, and shared with the states. o Wealth tax: Wealth tax are levied on wealth accumulated by individuals in the form of land, buildings, gold, credit instruments, cash etc. Wealth taxes are levied, collected and retained with union or central government.
DIRECT TAX contd. REVENUE RECEIPTS contd. o Estate duties: Estate duties are levied on the property or wealth when passed to other Individual(s) following the death of property owners. Estate duties are levied and collected by central governments but are retained with the states government. o Agricultural income tax: Agricultural income taxes are levied on agricultural income. In India, these are levied, collected and retained by the sates government. o Profession tax: Profession taxes are levied on income of professionals such as doctors, chartered accountants, artists, etc. Professions tax are levied by the states governments. o Land revenue: Land revenues are levied on the land owned. Land revenues are levied by state governments on land owned by landowners. o Stamps and registration fees: Stamps fees are levied in case of agreements, contracts, sales and purchases deeds. Registration fees are charged on registration of properties such as land, buildings, etc. These taxes are levied by the Union government, but charged by the state governments. Revenue is also received from licence fees, road tax etc.
REVENUE RECEIPTS contd q INDIRECT TAXES: INDIRECT TAXES: INDIRECT taxes are imposed on goods and services. These taxes are those the burden of which can be ultimately shifted to some other persons. In case of indirect tax, the impact and incidence fall on different persons. Some of the Indirect taxes are: o Excise duties: Taxes levied on production of certain commodities are excise duties. In India, excise duties are levied by Central government on commodities except liquors and narcotics. Proceeds from union excise duties are shared with the states by central government. State governments imposes excise duties on liquor and narcotics. o Customs duties: Custom duties are levied on imports and exports of goods. Custom duties are levied, collected and retained with central governments. o Sales tax: Sales taxes are charged on the sales made by the traders. Sales tax are the most important source revenue for the state governments. o Entertainment tax: Entertainment are levied on all types of paid entertainment activities. Entertainment tax is levied by state government.
REVENUE RECEIPTS contd NON-TAX REVENUE Non-tax revenues of public authorities are obtained from non-tax sources. Non tax revenue includes: o Earnings from currency and coinage o Interest received from loans advanced to state governments, local bodies and other parties o Commercial revenues (such as profits and dividends from public sector enterprises) o Administrative revenues from administrative services such as: public services commissions, police, jails, agriculture and allied services, industry and minerals, water and power department, public works, education, forestry, minerals and so on. o Service financing receipts (such as fees and fine, licensees, permits etc. ) o grants and gifts such as external grants from foreign countries
CAPITAL RECEIPTS OR NON-REVENUE RECEIPTS Receipts creating liability or reduction in assets are called capital receipts. Capital receipts are casual an irregular in nature. Capital receipts of central Government includes o Borrowings internal (such as internal loans from RBI; market by selling treasury bills; public issue of bonds, Certificates etc) and external (such as external loans from foreign governments, international agencies like IMF, World Bank ) etc. o Recoveries of loans and advances extended to state governments, union territories, local bodies another parties o Receipts from disinvestment (disinvestment means selling wholly or partially equity share of public enterprises held by government ) o Other receipts such as receipts from small savings of public such as Post Office Savings Bank Deposits, Post office Time Deposits and such other schemes Recurring Deposits, National Savings Certificates etc. The major part of such collection goes to state government.
Budget Expenditure : Classification of Government Expenditure. The receipts of the public authorities are broadly classified into revenue Expenditure and non-revenue Expenditure. Budgetary Expenditure Revenue Expenditure Capital Expenditure Development Expenditure Development Expenditure Non-Development Expenditure Non-Development Expenditure
PUBLIC EXPENDITURE Public Expenditures refer to expenses of public authorities i.e. the central, state and local governments. Budget Public expenditures are classified as Revenue expenditures and Capital expenditures. qrevenue Expenditure: Revenue expenditure are the expenditure incurred for the normal functioning of the government departments and provisions for various services including salaries, pensions of employees, interests charged on debt of the government, grants and subsidies given by government etc. Revenue expenditures do not create assets. Revenue expenditures includes expenditures on o Administrative and general Services o Social and Community Services o Economics services such as agriculture, industry, trade etc o Maintenance of roads, railways etc o Collection of taxes o Interest payment o Subsidies and Transfer to local bodies o Defence and internal securities
PUBLIC EXPENDITURE contd. qcapital Expenditures: Capital expenditures are the expenditure incurred on acquisition of assets such as land, building, machineries, equipments, investment in shares, loans and advances given to state governments, union territories, corporations etc. o Public Works o Construction of power generation plant o Construction of roadways and railways o Flood control works o Capital Project on agriculture Irrigation canals o Power projects o Repayment of loans o loans advances by government o Administration
PUBLIC EXPENDITURE contd. DEVELOPMENT AND NON-DEVELOPMENT EXPENDITURE Budget also depicts its expenditure in terms of development and non-development heads. qdevelopment expenditures: Development expenditures are those which directly help economic and social development. They may be either in revenue or capital account. Development expenditure includes o Expenditure on economic services such as Agriculture, Industry, Transport, Communication, Power, Minerals etc o Expenditure on social ad community services such as Medical and public health, Education, Housing and sanitations, social and welfare programme
PUBLIC EXPENDITURE contd. DEVELOPMENT AND NON-DEVELOPMENT EXPENDITURE contd. qnon-development expenditure: Non-development expenditures are those expenditures which are incurred to run the government functionary and indirectly help development. Non-development Expenditure may be either in revenue or capital account. o Defence o Administrations o Police o Tax collection o Interest on public debt o Subsidies o External affairs o Repayment of loans
STRUCTURE OF GOVERNMENT BUDGET TYPES OF GOVERNMENT BUDGET qsurplus budget: Excess of estimated revenue of the government over its anticipated expenditure is known as surplus budget. qbalanced budget: when estimated revenue of the government over is equal to its anticipated expenditure, it is known as balanced budget. qdeficit budget : When estimated government expenditure exceeds its estimated revenue, it is known as deficit budget.
STRUCTURE OF GOVERNMENT BUDGET contd. TYPE OF BUDGETARY DEFICIT qrevenue deficit: Excess of estimated revenue expenditure of government over its estimated revenue is known as deficit budget. Revenue deficits = total revenue expenditure - total revenue receipts q Fiscal deficit: Excess of all estimated expenditure of government over its estimated receipts of the year on both revenue account and capital account except borrowings during any year is termed as fiscal deficit. Fiscal deficits reflects the total borrowing requirement of the government. Fiscal Deficit = Total Budgetary expenditure (Revenue receipts + capital receipts excluding borrowings ) = (Revenue Expenditure + Capital Expenditure ) Revenue receipts recoveries of loans receipts from disinvestment
STRUCTURE OF GOVERNMENT BUDGET contd. TYPE OF BUDGETARY DEFICIT q Primary Deficits: Primary deficits is fiscal deficits less interest payments Primary Deficits = Fiscal deficits interest payment