Public Finance in India

Public Finance in India
Why Budget
With the emergence of Welfare State, Governments have

come to look after virtually every sphere of human life.
Government has to perform manifold functions from
maintaining law and order

protecting territories
implementation of plans for economic and social betterment
provide a variety of social services like education, health, employment
and housing to the people.
Thus, Government require adequate resources to discharge these
functions effectively.
It is not as if the Government can tax, borrow and spend

money the way it likes. Since there is a limit to the resources,
the need for proper budgeting arises to allocate scarce
resources to various Governmental activities.
Constitutional Provisions
Following provisions of the Constitution make the
Government accountable to Parliament.
Article 265 providesthat no tax shall be levied or collected except
by authority of law;
No expenditure can be incurred except with theauthorisation of
the Legislature (Article 266); and
President shall, in respect of every financial year, cause to be laid
before Parliament, Annual Financial Statement (Article 112).
The Annual Financial Statement, laid before both the

Houses of Parliament constitutes the Budget of the Union
Government.
The statement embodies the estimated receipts and
expenditure of the Government of India for the financial
year.
Along with the Annual Financial Statement

Government presents the following documents:
an Explanatory Memorandum briefly explaining the
nature of receipts and expenditure during the
current year and the next year and the reasons for
variations in the estimates for the two years,
the Books of Demands showing the provisions
Ministry-wise and a separate Demand for each
Department and service of the Ministry.
The Finance Bill which deals with the taxation
measures proposed by Government. It is
accompanied by a memorandum explaining the
provisions of the Bill and their effect on the
finances of the country.
The Appropriation Bill is intended to give authority to

Government to incur expenditure from and out of the
Consolidated Fund of India.
The Finance Bill seeking to give effect to the Governments

taxation proposals is taken up for consideration and passing
after the Appropriation Bill is passed.
The estimates of expenditure included in the Budget and

required to be voted by Lok Sabha are in the form of
Demands for Grants.
These Demands are arranged Ministry-wise and a separate

Demand for each of the major services is presented. Each
Demand contains first a statement of the total grant and then
a statement of the detailed estimate divided into items.
Budget Speech
The Budget speech ofthe Finance Minister is usually in
two parts.Part Adeals with general economic survey of
the country whilePart Brelates to taxation proposals.
General Budget was earlier being presented at 5 P.M. on
the last working day of February, but since 1999 the
General Budget is being presented at 11 A.M.
In an election year, Budget may be presented twice
first to secure Vote on Account for a few months and
later in full.
A special provision is made for "Vote on Account" by
which Government obtains the Vote of Parliament for a
sum sufficient to incur expenditure onvarious items for
a part of the year.
The Process
After the first stage of General Discussion on both Railway as
well as General Budget is over, the House is adjourned for a
fixed period. During this period, the Demands for Grants of
various Ministries/Departments are considered by concerned
Standing Committees. The demands made under Railway
Budget are also considered.
After the reports of the Standing Committees are presented to
the House, the House proceeds to the discussion and Voting on
Demands for Grants, Ministry-wise.
The time for discussion and Voting of Demands for Grants is
allocated by the Speaker in consultation with the Leader of the
House.
On the last day of the allotted days, the Speaker puts all the
outstanding Demands to the Vote of the House. This device is
popularly known as guillotine.
Budget heads
1
8
9
13
16
19
20
21
2
3
5
6
7
10
11
12
14
15
17
18
Revenue Receipts
Tax Revenue
Non-Tax Revenue
Capital receipts
Recoveries of loans
Other receipts
Borrowings and other liabilities
Total receipts (1+4)
Non-plan expenditure
On Revenue Account of which
Interest Payments
On capital account
Plan expenditure
On revenue Account
On capital account
Total expenditure (9+13)
Revenue expenditure (10+14)
Capital expenditure (12 + 15)
Revenue deficit (17-1)
Fiscal deficit (16- (1+5+6)
Primary deficit (20-11)
Receipts
Revenue Receipts
Tax revenue
Non Tax revenue
Gross Tax revenue

Corporation tax
Income tax
Other taxes and duties (wealth tax,
estate duty)
Customs
Union excise duty
Service tax
Taxes of U.T.
Interest receipts
Dividends and profits of government
enterprises
External grants
Other non tax receipts
Receipts of U.T.
Income Tax
Personal income tax is levied on individuals by the
Central Government. The budget provides the income
tax to be charged for different slabs. For example,
budget slab for 2012-13 were
Income slab
Tax rate
Rs. 0- 2 lakhs
Nil
Rs. 2-5 lakhs
10%
Rs. 5-10 lakhs
20%
Rs. 10 lakhs
30%
Various deduction are allowed from income before

calculating the taxable income up to the extent of 1lakh.
These deductions include interest paid on housing loan,
medical insurance, interest on loan for higher education,
specified expenditure for disabled dependents, medical
expenses.
Capital Receipts
Non debt receipts
Debt Receipts
Recoveries of loans and advances

Miscellaneous capital receipts
Market loans
Short term borrowings
External assistance
Securities issued against small
savings
State provident funds
Other receipts like provident fund
The central government adopted a

new classification of plan and nonplan expenditure from 1987-88.
Expenditure
Non Plan
Expenditure
Revenue
Expenditure
Interest payments
Defense revenue expenditure
Subsidies, debt relief to farmers,
Grants to states and U.T.
Pensions
Police
Economics services (agriculture, industry,
power, transport, communication, science
and technology)
Other general services (organs of state, tax
collection, external affairs)
Social services (Education, health,
broadcasting)
Postal deficit
Expenditures of U.T.
Expenditure
Non Plan
Expenditure
Capital
Expenditure
Defense capital expenditure

Loans to public enterprises
Loans to states and U.T.
Loans to foreign governments
Expenditure
Plan Expenditure
Revenue
Expenditure to be
financed from
revenue receipts
Central plan such as agriculture, rural,

development, irrigation and flood control,
energy, industry and minerals,
transportation, communications, S&T,
environment, social services
Central assistance for state and U.T. plans
U.T. Plans
Capital Expenditure
to be financed from
capital receipts
Central plan; capital expenditure on

economic development, social and
community development, defense and
general services
Central assistance for state and U.T. plans
U.T. Plans
Negative list e.g. health care, veterinary, art and culture, UN

services, hotels with less than 1000 per day tariff. (39)
Centre and State

Under Article 270 of the Constitution, as amended from 1st
April,1996 by the Constitution (80th Amendment ) Act, 2000,
a prescribed percentage of net proceeds of all Central and UT
taxes is to be assigned to States on the basis of
recommendations of Finance Commission.
The Twelfth Finance Commission had recommended that 30.5
per cent of the net proceeds of Central taxes be assigned to
States for the five year period commencing 2005-06.
The Thirteenth Finance Commission has recommended that 32
per cent of the net proceeds of Central taxes be assigned to
States for the five year period commencing 2010-11.

Public Finance in India

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Public Finance in India

With the emergence of Welfare State, Governments have

maintaining law and order

It is not as if the Government can tax, borrow and spend

The Annual Financial Statement, laid before both the

Along with the Annual Financial Statement

The Appropriation Bill is intended to give authority to

The Finance Bill seeking to give effect to the Governments

The estimates of expenditure included in the Budget and

These Demands are arranged Ministry-wise and a separate

Non Tax revenue

Gross Tax revenue

Rs. 2-5 lakhs

Rs. 5-10 lakhs

Various deduction are allowed from income before

Recoveries of loans and advances

The central government adopted a

Defense capital expenditure

Central plan such as agriculture, rural,

Central plan; capital expenditure on

Central assistance for state and U.T. plans

Negative list e.g. health care, veterinary, art and culture, UN

Centre and State

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