Public Finance: Budget, Taxation, Deficits and Fiscal Federalism
Government budget, tax system, fiscal deficits and centre-state finance
Government Budget: Meaning, Objectives and Components
The Basics
A government budget is a yearly statement of the government's expected income and planned spending. It is presented to Parliament before a new financial year begins. In India this document is called the Annual Financial Statement, and Article 112 of the Constitution requires it to be laid before Parliament every year. The same requirement applies to each state government under its own constitutional provision. The word 'budget' comes from the French word for a leather bag, because such financial statements were once literally carried in a bag and opened before the legislature.
The Revenue Budget shows the government's income and spending for one year. It covers money that comes in and goes out often. This does not change what the government owns or owes.
The Capital Budget is the part of the budget for capital items. Capital items change what the government owns or owes. If money creates a new asset, it is capital. If money creates or repays a debt, it is capital too. Loan recovery also counts as capital.
Until 2017, Indian government spending was classified in two separate ways. One way was revenue versus capital expenditure. This depended on whether spending created an asset. The other way split spending into Plan expenditure and Non-Plan expenditure, based on whether it was tied to the Five Year Plans.
A tax is money the government collects from people and firms. It funds public spending, like roads and schools. There are two types of tax. The test is simple. Can the payer pass the tax to someone else?
Direct tax reform changes income tax and corporate tax rules. The aim is to collect more revenue fairly. It should not discourage people from earning or investing. India's direct tax collection has long been low for the size of its economy. Taxing income fairly is central to a just tax system.
India's old tax system taxed goods many times. A factory paid excise duty to the central government. Excise duty is a tax on making goods. A trader then paid sales tax on the same goods. Sales tax is a tax charged by states on sales. The sales tax was charged on a price that already had excise duty. So tax was charged on tax. This is called the cascading effect. It means taxes pile on taxes. The final price for buyers goes up.
The Goods and Services Tax (GST) is a tax on the sale of goods and services. It is a destination-based tax. This means the tax money goes to the state where goods are finally used, not where they are made. For example, a shirt made in one state but sold in another sends GST revenue to the selling state. GST replaced more than a dozen separate central and state taxes with one tax.
A good tax is not just a way to collect money. It is judged by fixed principles. These principles help a tax raise revenue fairly, without harming the economy.
Black Money, Tax Compliance and Demonetisation Linkage
The Basics
Black money is income hidden from tax authorities. It is usually paid in cash, so it cannot be traced. Example: if someone gives Rupees 10 lakh in cash with no bank record, it is black money.
International Tax Avoidance: BEPS, Tax Inversion and Indirect Transfers
The Basics
Multinational companies earn profit in many countries. Each country wants tax on profit made there. But companies use legal tricks to move profit to low-tax countries. So the country where business happens gets less tax. This whole pattern is called international tax avoidance.
Fiscal policy is the government's policy on taxing and spending. Government uses taxes and spending to affect the whole economy. This idea grew important after the Great Depression of the 1930s. The Great Depression was a long period of very low output and jobs. The economist John Maynard Keynes showed that taxes and spending can change total demand.
Budget Deficits: Revenue, Fiscal and Primary Deficit
The Basics
A government budget is almost never balanced. The government decides what it must spend first. Then it arranges receipts to fund that spending. So a gap between spending and income is normal, not a one-off accident. Economists use different deficit measures to answer different questions, such as how much money is needed and how risky the borrowing is.
The Fiscal Responsibility and Budget Management Act, 2003 is a law. It forces the government to control deficits and debt. It sets fixed legal targets, instead of leaving this to political choice.
Public debt is simply the total amount the government owes. It has two parts. Internal debt is money borrowed from lenders inside the country, in rupees. External debt is money borrowed from foreign governments, institutions or markets, often in foreign currency. Together, all the liabilities of the central and state governments make up public debt.
The Finance Commission decides how much central tax money goes to states. It also decides how states share that money among themselves. Article 280 of the Constitution sets up this body. The President appoints it every five years. It has one chairman and four other members.
Fiscal federalism is the system that decides how money and spending duties are divided between different levels of government. In India this means deciding how much revenue the Union government collects, how much goes to states, and who spends on what.