What is budget?
Budget is an annual financial statement regarding public revenue and public expenditure. Budgetary policies aim at achieving the goals of fiscal policies in the short term. Apart from this we have a medium term fiscal policy as well as long term fiscal policies. 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 Government of India has to be laid before Parliament in respect of every financial year running from 1st April to 31st March. This statement shows the receipts and payments of the government under the three parts in which government accounts are kept: (1) Consolidated Fund (2) Contingency Fund and (3) Public Account.
What is the Consolidated Fund?
The Consolidated Fund of India includes revenues, which are received by the government through taxes and expenses incurred in the form of borrowings and loans. The Consolidated Fund of India includes revenues, which are received by the government through taxes and expenses incurred in the form of borrowings and loans. It represents one of the three parts of the Annual Financial Statement with the other two: the Contingency Fund and Public Account. All government expenditures are met by consolidated funds except a few made by contingency fund or public fund. The Consolidated Fund of India was created under Article 266 of the Constitution. It is also considered as the most important part of the financial statement. Similar to the Centre, every state has its own Consolidated Fund as well.
All the government revenue generated from taxes, asset sale, earnings from state-run companies, etc go into the Consolidated Fund of India. The fund gets money from:
- Revenue earned in direct taxes such as income tax, corporate tax, etc
- Revenue earned in indirect taxes such as GST
- Dividends and profits from PSUs (Public Sector Undertakings)
- Money earned through government’s general services
- Disinvestment receipts
- Debt repayments
- Loan recoveries
no money can be withdrawn from the Consolidated Fund of India, without the government securing the approval of the Parliament.
Parts of Consolidated Fund Of India
The Consolidated Fund of India is divided into five parts namely:
- Revenue account (receipts)
- Revenue account (disbursements)
- Capital account (receipts)
- Capital account (disbursements)
- Disbursements charged on the Consolidated Fund.
Charged Expenditures on Consolidated Fund of India
The disbursements charged on the Consolidated Fund or Charged Expenditures are non-votable charges. No voting takes place for the withdrawal of these expenditures from the Consolidated Fund of India. These charges have to be paid whether the Budget is passed or not.
The expenses under this category include salaries and allowances of:
- the President
- the Speaker
- the Deputy Speaker of the Lok Sabha
- Chairman and Deputy Chairman of the Rajya Sabha
- salaries and allowances of Supreme Court judges
- pensions of Supreme Court and High Court judges
Contingency Fund of India
The Contingency Fund of India is the emergency fund for the nation. Constituted under Article 267(1) of the Indian Constitution, the Contingency fund of India is used at a time when there is a crisis in the nation — a natural calamity, for instance — and money is required to deal with it. The Union government has its own contingency fund with a corpus of Rs 500 crore. In 2005, the amount of the fund was raised from Rs 5 crore to Rs 500 crore. States can also opt to have their own contingency funds.
The Ministry of Finance operates this Fund on behalf of the President of India. The contingency fund of the Union government is at the disposal of the President of India, who releases the funds on request of the Union Cabinet, which later gets an approval from Parliament. A Parliament approval is mandatory. After the emergency has been dealt with, the fund is reimbursed to its full capacity of Rs 500 crore. This required money comes from the Consolidated Fund of India.
Similarly, Contingency Fund of each State Government is established under Article 267(2) of the Constitution – this is in the nature of an imprest placed at the disposal of the Governor to enable him/her to make advances to meet urgent unforeseen expenditure, pending authorization by the State Legislature. Approval of the Legislature for such expenditure and for withdrawal of an equivalent amount from the Consolidated Fund is subsequently obtained, whereupon the advances from the Contingency Fund are recouped to the Fund. The corpus varies across states and the quantum is decided by the State legislatures.
What is the Public Account?
Under provisions of Article 266(1) of the Constitution of India, Public Account is used in relation to all the fund flows where Government is acting as a banker. Examples include Provident Funds and Small Savings. This money does not belong to government but is to be returned to the depositors. The expenditure from this fund need not be approved by the Parliament. Besides the normal receipts and expenditure of the government which relates 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, other deposits, etc. The money thus received is kept in the public account. As the money, generally speaking, does not belong to the government and has to be paid back some time or the other to the persons and authorities who deposited it, parliamentary approval for payment from the public account is not required.
What is the revenue budget?
This consists of the revenue receipts of the government (tax revenues and other revenues) and the expenditure met from these revenues. Tax revenues comprise proceeds of taxes and other duties levied by the Union. Other revenues are receipts of the government mainly consisting of interest and dividend on investments made by the government, and fees and receipts for other services rendered by the government. Revenue expenditure is expenditure for the normal running of government departments and various services, interest charges on debt incurred by government, subsidies and so on. Broadly speaking, expenditure which does not result in the creation of assets is treated as revenue expenditure. All grants given to state governments and other parties are also treated as revenue expenditure even though some of the grants may be for creation of assets.
Direct & Indirect Taxes
Taxes are compulsory levies on individuals and business entities in a country. Direct taxes are the one that fall directly on individuals and corporations. For example, income tax, corporate tax etc. Indirect taxes are imposed on goods and services. They are paid by consumers when they buy goods and services. These include excise duty, customs duty etc.
The constitution defines “Goods and Services Tax” as any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption. “Goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. “Services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged
These are levies charged when goods are imported into, or exported from, the country, and they are paid by the importer or exporter. Usually, these are also passed on to the consumer.
This is the tax paid by corporations or firms on the incomes they earn.
Minimum Alternative Tax (MAT)
The Minimum Alternative is a minimum tax that a company must pay, even if it is under zero tax limits.
What is the capital budget?
This consists of capital receipts and payments. It also incorporates transactions in the public account. Capital receipts are loans raised by the government from the public which are called market loans, borrowings by the government from the Reserve Bank and other parties through sale of treasury bills, loans received from foreign bodies and governments, and recoveries of loans granted by the central government to state and union territory governments and other parties. Capital payments consist of capital expenditure on acquisition of assets like land, buildings, machinery, and equipment, as also investments in shares, loans and advances granted by the central government to state and union territory governments, government companies, corporations and other parties.
By disinvestment we mean the sale of shares of public sector undertakings by the Government. The shares of government companies held by the Government are earning assets at the disposal of the Government. If these shares are sold to get cash, then earning assets are converted into cash, so it is referred to as disinvestment.
What are demands for grants?
It is the form in which estimates of expenditure included in the annual financial statement and required to be voted upon in the Lok Sabha are submitted. Generally, one demand for grant is presented in respect of each ministry or department. However, for large ministries and departments, more than one demand is presented.
What is Excess Grants?
If the total expenditure under a Grant exceeds the provision allowed through its original Grant and Supplementary Grant, then, the excess requires regularization by obtaining the Excess Grant from the Parliament under Article 115 of the Constitution of India. It will have to go though the whole process as in the case of the Annual Budget, i.e. through presentation of Demands for Grants and passing of Appropriation Bills
What is the finance bill?
Finance Bill refers to the bill produced immediately after the presentation of the Union Budget detailing the Imposition, abolition, alteration or regulation of taxes proposed in the Budget. The proposals of the government for levy of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by Parliament are submitted to Parliament through this bill.
What are 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 the amount to meet the expenditure charged on the consolidated fund, is sought through the Appropriation Bill.
What is Vote on Account?
The Vote on Account is a grant made in advance by the parliament, in respect of the estimated expenditure for a part of new financial year, pending the completion of procedure relating to the voting on the Demand for Grants and the passing of the Appropriation Act.
Amount of money allocated in the Budget to any ministry or scheme for the coming financial year.
Revised Estimates are mid-year review of possible expenditure, taking into account the rest of expenditure, New Services and New instrument of Services etc. Revised Estimates are not voted by the Parliament, and hence by itself do not provide any authority for expenditure. Any additional projections made in the Revised Estimates need to be authorized for expenditure through the Parliament’s approval or by Re-appropriation order.
Re-appropriations allow the Government to re-appropriate provisions from one sub-head to another within the same Grant. Re-appropriation provisions may be sanctioned by a competent authority at any time before the close of the financial year to which such grant or appropriation relates. The Comptroller & Auditor General and the Public Accounts Committee reviews these re- appropriations and comments on them for taking corrective actions.
From the fiscal year 2006-07, every Ministry presents a preliminary Outcome Budget to the Ministry of Finance, which is responsible for compiling them. The Outcome Budget is a progress card on what various Ministries and Departments have done with the outlays in the previous annual budget. It measures the development outcomes of all Government programs and whether the money has been spent for the purpose it was sanctioned including the outcome of the fund usage.
Different types of Deficits
When the government’s non-borrowed receipts fall short of its entire expenditure, it has to borrow money from the public to meet the shortfall. The excess of total expenditure over total non-borrowed receipts is called the fiscal deficit.
Revenue Deficit – The difference between revenue expenditure and revenue receipt is known as revenue deficit. It shows the shortfall of government’s current receipts over current expenditure.
Primary Deficit – The primary deficit is the fiscal deficit minus interest payments. It tells how much of the Government’s borrowings are going towards meeting expenses other than interest payments.
It is the government actions with respect to aggregate levels of revenue and spending. Fiscal policy is implemented though the budget and is the primary means by which the government can influence the economy.
This comprises actions taken by the central bank (i.e. RBI) to regulate the level of money or liquidity in the economy, or change the interest rates.
Parliament, unfortunately, has very limited time for scrutinising the expenditure demands of all the Ministries. So, once the prescribed period for the discussion on Demands for Grants is over, the Speaker of Lok Sabha puts all the outstanding Demands for Grants, Whether discussed or not, to the vote of the House. This process is popularly known as ‘Guillotine’.
Motions for reduction to various Demands for Grants are made in the Form of Cut Motions seeking to reduce the sums sought by Government on grounds of economy or difference of opinion on matters of policy or just in order to voice a grievance.