ECA02 — Budget and Taxation

Salaries are Revenue Expenditure — recurring payments that do not create assets or reduce liabilities. Revenue Expenditure: salaries, pensions, interest payments, subsidies. Capital Expenditure: purchase of machinery, infrastructure, building construction — creates assets.

GST (Goods and Services Tax) is an Indirect Tax — collected by sellers from buyers and paid to the government. The burden is passed on to consumers. Direct taxes (Income Tax, Corporate Tax) are paid directly by the income earner. GST is also a destination-based, multi-stage consumption tax.

Fiscal Deficit = Total Expenditure − Total Receipts (excluding borrowings). It indicates how much the government needs to borrow to finance its spending. Fiscal Deficit = Revenue Deficit + Capital Expenditure − Capital Receipts (excluding borrowings).

Revenue Deficit = Revenue Expenditure − Revenue Receipts. It shows that the government's regular income (taxes, non-tax revenue) is insufficient to cover its regular spending. A revenue deficit means the government is borrowing even for day-to-day expenses — considered fiscally unhealthy.

Direct Tax: paid directly by the person on whom it is imposed; burden cannot be shifted. Examples: Income Tax, Corporate Tax, Capital Gains Tax, Wealth Tax. Indirect Tax: burden can be shifted to others (consumers). Examples: GST, Customs Duty, Excise Duty. CBDT administers direct taxes in India.

FRBM (Fiscal Responsibility and Budget Management) Act, 2003 was enacted to bring fiscal discipline by setting targets for reducing fiscal deficit, revenue deficit, and government debt. It mandates the government to eliminate revenue deficit and reduce fiscal deficit to 3% of GDP.

Income tax collected from individuals is a Revenue Receipt — not a Capital Receipt. Capital Receipts: borrowings, disinvestment, recovery of loans (they create liabilities or reduce assets). Revenue Receipts: taxes, non-tax revenue — do not affect the government's asset-liability position.

GST was implemented in India on 1 July 2017 under the One Nation One Tax initiative. It subsumed 17 central and state indirect taxes including Central Excise Duty, Service Tax, VAT, and CST. GST operates under a dual structure: Central GST (CGST) + State GST (SGST) + Integrated GST (IGST).

Primary Deficit = Fiscal Deficit − Interest Payments. It shows the extent of borrowing needed to finance current expenditure excluding interest payments on past debt. A zero primary deficit means current borrowings are only to service old debt — a significant milestone in fiscal consolidation.

Ad Valorem Tax = tax calculated as a percentage of the value of goods or services. Examples: GST (5%, 12%, 18%, 28% of value), Customs Duty (% of import value), Stamp Duty. Contrast with Specific Tax = fixed amount per unit regardless of value (e.g., excise on cigarettes per stick).

Progressive Tax: tax rate increases as the taxable base (income/wealth) increases. India's Income Tax slabs are progressive. Proportional Tax = same % for all (flat tax). Regressive Tax = higher burden on lower incomes (e.g., GST on necessities). Income Tax = most important direct progressive tax in India.

The Union Budget is presented by the Finance Minister in the Lok Sabha, usually on 1 February (since 2017; earlier it was the last day of February). The budget contains the Annual Financial Statement, demands for grants, and the Finance Bill. Article 112 of the Constitution mandates its presentation.

Article 112 of the Indian Constitution requires the President to cause to be laid before Parliament an Annual Financial Statement (the Union Budget) for every financial year. Article 280 = Finance Commission; Article 360 = Financial Emergency; Article 108 = Joint Sitting of Parliament.

Subsidies (food, fertilizer, fuel, export subsidies) are Revenue Expenditure — they are recurring payments that do not create assets. They represent a reduction in the price of goods/services below market rate. India's major subsidies: food (₹2 lakh crore+), fertilizer, petroleum.

Article 266(1) of the Constitution establishes the Consolidated Fund of India — all revenues, loans, and repayments received by the Government of India go into this fund, and all expenditures are made from it. The Contingency Fund (Article 267) is for unforeseen expenditures.

Disinvestment = the government selling its equity stake (ownership shares) in Public Sector Undertakings (PSUs) to private investors. It is a Capital Receipt. Proceeds are used to reduce fiscal deficit or fund capital expenditure. Strategic disinvestment = government reduces its stake below 51% (loses majority control).

The GST Council is chaired by the Union Finance Minister. Members include the Finance Ministers of all states and UTs with legislatures. The Council determines GST rates, exemptions, thresholds, and administrative procedures. Decisions are taken by three-fourth majority.

The Finance Commission is constituted by the President of India every five years (Article 280) to recommend the distribution of tax revenues between the Centre and States, and between states themselves (horizontal and vertical devolution). The 15th Finance Commission covered 2021–26; the 16th is being set up.

Income Tax is levied and collected by the Central Government and shared with states as per the Finance Commission's formula. Stamp Duty and Land Revenue = State subjects (Article 246); Property Tax = levied by local bodies. Under GST, central and state shares are defined separately.

IGST (Integrated GST) is levied on inter-state transactions (transactions between two different states) and imports. It is collected by the Central Government and then apportioned between Centre and the destination state. CGST + SGST apply to intra-state transactions. Exports are zero-rated under GST.