Indian Fiscal System

Indian Fiscal System

Fiscal System:

It refers to the management of revenue and capital expenditure finances by the state. Hence, fiscal system includes budgetary activities of the government that is revenue raising, borrowing and spending activities.

Fiscal Policy:

Fiscal Policy refers to the use of taxation, public expenditure and the management of public debt in order to achieve certain specified objectives.

Indian Fiscal System includes or refers to the management of revenue sources and expenditure of the Central and State governments, Public debt, Deficit financing, Budget, Tax structure etc.

Sources of Revenue for Centre:

The revenue of the Central Government consists of the following elements:

1. Tax revenue

Tax revenue comes broadly from three sources—

(a) Taxes on income and expenditure

(b) Taxes on property and capital transactions and

(c) Taxes on commodities and services.

2. Non-tax revenue

Non-tax revenue, consists of—

(a) Currency, coinage and mint-

(b) Interest receipts and dividends and other non-tax revenue.

Sources of Revenue for State:

The main sources are

(a) State tax revenue,

(b) Share in central taxes,

(c) Income from social, commercial and economic service and profits of state-run enterprises.

State tax revenue includes among others, land revenue, stamp, registration and estate duty etc.

Expenditure of the Centre:

The central government makes expenditures broadly under two heads:

1. Plan expenditure and

2. Non-plan expenditure.

• Under Plan expenditure comes outlay for agriculture, rural development, irrigation and flood control, energy, industry and minerals, transport, communications, Science and Technology, environment and economic services etc.
• The major non-plan expenditures are interest payments, defence, subsidies and general services.

Expenditure of State:

Like the Union Government, the State Governments too have two broad heads of expenditure: (a) Non-Development Expenditure and (b) Development Expenditure.

• Public debt of the government of India is of two kinds-Internal and External.
• Internal debt: It comprises loans raised from the open market, compensation bonds, prize bonds etc., treasury bills issued to the RBI, commercial banks etc.
• External debt It consists of loans taken from World Bank, IMF, ADB and individual countries like USA, Japan etc.
• Deficit Financing is a fiscal tool in the hands of the government to bridge the gap between revenue receipt and revenue expenditure.

Deficits

• In a budget statement, there is a mention of four types of deficits: 1. revenue, 2. budget, 3. fiscal and 4. primary.

1. Revenue Deficit

It refers to the excess of revenue expenditure over revenue receipts. [In fact, it reflects one crucial fact: what is the government borrowing for? As an individual if you are borrowing to play the house rent, then you are in a situation of revenue deficit, i.e. whileyou are borrowing and spending, you are not creating any durable asset. This implies that there will be a repayment obligation (sometime in the future) and at the same time there is no asset creation via investment.]

Revenue Deficit = Total Revenue Expenditure – Total                                        
Revenue Receipts =   Non-plan Expenditure + Plan Expenditure - (net tax revenue + non-tax revenue)

2. Budget Deficit

Budget Deficit refers to the excess of total expenditure over total receipts. Here, total receipts include current revenue and net internal and external capital receipts of the government.    

Budget Deficit = Total Expenditure - Total Receipts = (non-plan expenditure + plan expenditure) - (Revenue Receipts + Capital Receipts)

3. Fiscal Deficit

It refers to the difference between total expenditure (revenue, capital and loans net of repayment) on one hand; and on the other hand, revenue receipts plus all those capital receipts which are not in the form of borrowings but which in the end accrue to the government.

Fiscal Deficit = Revenue Receipts (net tax revenue + non-tax revenue) + Capital Receipts (only recoveries of loans and other receipts) - Total Expenditure (plan and non-plan)

4. Primary Deficit

Primary Deficit refers to fiscal deficit minus interest payments. In other words, it points to how much the government is borrowing to pay for expenses other than interest payments. Also, it underscores another key fact: how much the government is adding to future burden (in terms of repayment) on the basis of past and present policy.

Primary Deficit = Revenue Deficit - Interest Payments

Monetised Deficit = Increment in Net RBI Credit to the Central Government.

Budget

• The Budget of the Government of India, for any year, gives a complete picture of the estimated receipts and expenditures of the Government for that year on the basis of the budget figures of the two previous years.
• Every budget, for instance, gives three sets of figures:

(a) Actual figures for preceding year,

(b) Budget and revised figures for the current year and

(c) Budget estimates for the following year.

• The core of the budget is called the Annual financial statement. This is the main budget document. Under article 112 of the constitution, a statement of estimated receipts and expenditure of the Govt, of India has to be laid before the parliament in respect of every financial year or fiscal year (FY) running from April 1 to March 31 while under article 202 of the constitution a statement of estimated receipts and expenditures of the state Governments has to be laid before the house of the state legislature concerned.
• The Annual Financial Statement shows the receipts and payments of Government under the three parts in which Government accounts are kept: (a) Consolidated Fund, (b) Contingency Fund and (c) Public Account.
• All revenues received by Government, loans raised by it, and also its receipts from recoveries of loans granted by it, form the consolidated Fund. All expenditure of Government is incurred from the Consolidated Fund and no amount can be withdrawn from the Fund without authorisation from Parliament.
• Occasions may arise when Government may have to meet urgent unforeseen expenditure pending authorisation from Parliament. The Contingency Fund is an imprest placed at the disposal of the President to incur such expenditure.
• Parliamentary approval for such expenditure and for withdrawal of an equivalent amount from the Consolidated Fund is subsequently obtained and the amount spent from Contingency Fund is subsequently recouped to the Fund. According to 'India 2018', the corpus of the Fund authorised by the Parliament, at present, is Rs. 500 crore.
• Besides the normal receipts and expenditure of Government which relate to the Consolidated Fund, certain other transactions enter Government accounts, in respect of which, Government acts more as a banker, for example, transactions relating to provident funds, small savings collections and other deposits, etc. the moneys thus received are kept in the Public Account and the connected disbursements are also made therefrom Parliamentary authorisation for such payments from the Public Account is, therefore, not required.
• Under the Constitution, Budget has to distinguish expenditure on revenue account from other expenditure. Government Budget, therefore, comprises (a) Revenue Budget and (b) Capital Budget.
• The Annual Budget of the Central Government provides estimates of receipts and expenditures of the Government. The Budget consists of two parts viz 1. Revenue Budget 2. Capital Budget.

Revenue Budget: All 'current receipts' such as taxation surplus of Public enterprises, and 'expenditures' of the Government.

Capital Budget: All 'Capital receipts' and 'expenditure such as domestic and foreign loans, loan repayments, foreign aid etc.

Demands for Grants

• The estimates of expenditure from the Consolidated Fund included in the Annual Financial Statement and required to be voted by the Lok Sabha are submitted in the form of Demands for Grants in pursuance of Article 113 of the Constitution.

• The Demands for Grants are presented to the Lok Sabha along with the Annual Financial Statement.

Finance Bill

• At the time of presentation of the Annual Financial Statement before Parliament, a Finance Bill is also presented in fulfilment of the requirement of Article 110 (1) (a) of the Constitution, detailing the imposition abolition, remission, alteration or regulation of taxes proposed in the Budget. A Finance Bill is a Money Bill as defined in Article 110 of the Constitution, It is accompanied by a Memorandum explaining the provisions included in it.

Appropriation Bills

• After the Demands for Grants are voted by the Lok Sabha, Parliament's approval to the withdrawal from the Consolidated Fund of the amounts so voted and of the amount required to meet the expenditure charged on the Consolidated Fund is sought through the Appropriation Bill.
• Under Article 114(3) of the Constitution, no amount can be withdrawn from the Consolidated Fund without the enactment of such a law by Parliament.

Sources of Revenue

• In accordance with the Constitution (Eightieth Amendment) Act, 2000, which has been given retrospective effect from April 1, 1996, all taxes in the Union List, except the duties and taxes referred to in Articles 268 and 269, respective surcharge on taxes and duties referred to in Article 271 and any cess levied for specific purpose under any law made by parliament, shall be levied and collected by the Government of India and shall be distributed between the Union and the states in such manner as may be prescribed by the President on the recommendations of the Finance Commission.
• The main sources of Union Tax revenue are Customs duties, Union Excise duties, Service tax, Corporate and Income Taxes, Non-Tax revenues largely comprise interest receipts, dividends/profits, fines and miscellaneous receipts collected in the exercise of sovereign functions, regulatory charges and license fees and user charges for publicly provided goods and services.

Public Debt

Public Debt of India is classified into three categories of Union Government liabilities into internal debt, external debt and other liabilities.

• Internal debt for Government of India largely consists of fixed tenure and fixed rate government papers (dated securities and treasury bills) which are issued through auctions.
• These include market loans (dated securities), treasury bills (91, 182 and 364 days) and 14 day treasury bills (issued to state governments only), cash management bills, special securities issued to the Reserve Bank of India (RBI), Compensation and other bonds, non-negotiable and non-interest bearing rupee securities issued under market stabilization scheme with a view to reduce dependency on physical gold and reduce imports.
• External debt represents loans received from foreign governments and multilateral institutions. The Union Government does not borrow directly for international capital markets. Its foreign currency borrowing takes place from multilateral agencies and bilateral sources, and is a part of official development assistance (ODA).
• Other liabilities category, not a part of public debt, includes other interest bearing obligations of the government, such as post office saving deposits, deposits under small savings schemes, loans raised through post office cash certificates, provident funds and certain other deposits.
• The Reserve Bank manages the public debt of the Central and the State Governments and also acts as a banker to them under the provisions of the Reserve Bank of India Act, 1934 (Section 20 and 21).
• The Reserve Bank also undertakes similar functions for the State Governments by agreement with the Government of the respective State (under section 21 A).