Pariksha SaathiLesson 5 of 10 · Indian Economy
Union Budget, Deficits, Taxes, GST and the Finance Commission
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The budget in the Constitution
The word budget does not appear in the Constitution; Article 112 calls it the Annual Financial Statement, the estimated receipts and expenditure of the Government of India for a financial year (1 April to 31 March). Article 265 says no tax can be levied or collected except by authority of law. Article 266 creates the Consolidated Fund of India and the Public Account, and Article 267 the Contingency Fund. Expenditure charged on the Consolidated Fund is discussed but not voted; other spending is voted as demands for grants and then authorised by the Appropriation Bill (Article 114). James Wilson presented the first budget in India in 1860, and R.K. Shanmukham Chetty the first budget of independent India on 26 November 1947. From 2017 the budget has been presented on 1 February, and the separate Railway Budget, presented since 1924, was merged into it.
Revenue and capital budget
The revenue budget has revenue receipts, which neither create a liability nor reduce assets (tax revenue, and non-tax revenue such as interest, dividends and profits of public enterprises, fees and fines), and revenue expenditure, which creates no assets (salaries, pensions, interest payments, subsidies and grants to states). The capital budget has capital receipts, which either create a liability or reduce assets (market borrowings, recovery of loans and disinvestment proceeds), and capital expenditure, which creates assets or reduces liabilities (roads, railways, machinery, loans to states and repayment of debt).
Deficits
Revenue deficit = revenue expenditure - revenue receipts; it shows the government borrowing to meet day-to-day expenses. Effective revenue deficit is the revenue deficit minus grants given for creating capital assets. Fiscal deficit = total expenditure - (revenue receipts + non-debt capital receipts); it equals the government's total borrowing requirement for the year and is the most watched measure. Primary deficit = fiscal deficit - interest payments; a primary deficit of zero means the government is borrowing only to pay interest. The part of a deficit financed by borrowing from the central bank is called the monetised deficit.
Direct and indirect taxes
A direct tax is paid by the person on whom it is imposed and cannot be shifted, such as income tax and corporation tax, so its impact and incidence fall on the same person. An indirect tax is collected from one person but passed on to the buyer, such as GST and customs duty. A progressive tax takes a higher rate as income rises, a proportional tax the same rate, and a regressive tax a larger share of a poor person's income; indirect taxes tend to be regressive.
GST
The Goods and Services Tax came through the Constitution (101st Amendment) Act 2016 and began on 1 July 2017. It is a destination-based tax on the supply of goods and services that replaced many central and state taxes, such as central excise, service tax, VAT and entry tax, and it gives credit for tax paid on inputs so that tax is not charged on tax. Article 246A gives Parliament and the state legislatures power to make GST laws; Article 269A provides for Integrated GST (IGST) on inter-state supplies, while intra-state supplies carry Central GST plus State or Union Territory GST. The GST Council under Article 279A is chaired by the Union Finance Minister and includes a Union Minister of State for Finance and a minister from each state; the Centre's vote carries one-third weight and the states together two-thirds, and decisions need three-fourths of the weighted votes. Alcohol for human consumption is outside GST, and five petroleum products stay outside until the Council decides otherwise. The Council sets and revises the rate slabs, keeping essentials exempt or lowest and luxury and sin goods highest; GST began with four main slabs of 5, 12, 18 and 28 per cent, a structure later revised.
Finance Commission
Article 280 requires the President to set up a Finance Commission every fifth year or earlier, with a chairman and four other members whose qualifications are laid down by the Finance Commission (Miscellaneous Provisions) Act 1951. It recommends how the net proceeds of shareable central taxes are divided between the Centre and the states (vertical devolution) and among the states (horizontal devolution), the principles for grants-in-aid to states under Article 275, and measures to support panchayats and municipalities based on State Finance Commission reports. Its recommendations are advisory. The First Finance Commission (1951) was chaired by K.C. Neogy.
The FRBM Act 2003
The Fiscal Responsibility and Budget Management Act 2003, in force from July 2004, binds the Union government to fiscal discipline. It originally aimed to eliminate the revenue deficit and bring the fiscal deficit down to 3 per cent of GDP, and it requires fiscal policy statements, such as the Medium-term Fiscal Policy Statement, the Fiscal Policy Strategy Statement and the Macro-economic Framework Statement, to be laid with the budget. Its deadlines have been changed several times by amendment, and the N.K. Singh Committee (2017) recommended making government debt the main anchor of fiscal policy.
Key facts
- Article 112: Annual Financial Statement (Budget); 114: Appropriation Bill; 265: no tax without authority of law; 266: Consolidated Fund and Public Account; 267: Contingency Fund.
- Charged expenditure (President's emoluments, Supreme Court judges' salaries) is discussed but not voted by Parliament.
- First budget in India: James Wilson, 1860; first of independent India: R.K. Shanmukham Chetty, 26 November 1947; Railway Budget merged and 1 February date from 2017.
- Revenue deficit = revenue expenditure - revenue receipts; fiscal deficit = total expenditure - (revenue receipts + non-debt capital receipts); primary deficit = fiscal deficit - interest payments.
- Capital receipts create a liability or reduce assets: borrowings, recovery of loans, disinvestment.
- Direct taxes (cannot be shifted): income tax, corporation tax; indirect taxes (passed on to buyers): GST, customs duty.
- GST: 101st Amendment Act 2016; launched 1 July 2017; Articles 246A, 269A (IGST) and 279A (GST Council chaired by the Union Finance Minister).
- GST Council voting: Centre one-third weight, states two-thirds, decisions by three-fourths of weighted votes; alcohol for human consumption is outside GST.
- Finance Commission: Article 280, every 5 years, chairman + 4 members, vertical and horizontal devolution of taxes; first chaired by K.C. Neogy (1951).
- FRBM Act 2003 (in force July 2004): original goals - no revenue deficit and a fiscal deficit of 3 per cent of GDP; N.K. Singh Committee 2017: debt as the anchor.
Quick revision
Budget = Annual Financial Statement, Art 112; Art 114 Appropriation Bill, 265 no tax without law, 266 Consolidated Fund, 267 Contingency Fund; revenue vs capital (capital receipts create liability or reduce assets); fiscal deficit = borrowing; primary = fiscal - interest; GST: 101st Amendment 2016, from 1 July 2017, Council Art 279A (Centre 1/3, states 2/3, 3/4 majority); Finance Commission Art 280, every 5 years, first K.C. Neogy; FRBM Act 2003.