Government Budget and the Economy

There is a constitutional requirement in India (Article 112) to present before the Parliament a statement
of estimated receipts and expenditures of the government in respect of every financial year which runs
from 1 April to 31 March. This ‘Annual Financial Statement’ constitutes the main budget document of
the government.

Government budget is the annual financial statement of estimated receipts and expenditures during a
financial year (April 1st to March 31st of the next year)
●​ In India, the budget year (also called fiscal year) begins on April 1 and ends on March 31 the
following year. Example, the fiscal year 2018-2019 is from April 1, 2018 to March 31, 2019.

Objectives/Functions of the Government Budget

The three functions of allocation, redistribution and stabilisation operate through the expenditure and
receipts of the government.
1.​ Allocation Function of Government Budget
Government provides certain goods and services which cannot be provided by the market
mechanism like national defence, roads, government administration etc. These are public
goods. They are different from private goods such as clothes, cars, food items etc. in two ways:
a.​ Public goods are non-rivalrous: The benefits of public goods are available to all and are
not only restricted to one particular consumer. For example: A public park can be used by
all, thus, the use of a public park is ‘non-rivalrous’.
b.​ Public goods are non-excludable: In case of public goods, there is no feasible way of
excluding anyone from enjoying the benefits of the good. That is why public goods are
called non-excludable.
On the other hand, private goods are rivalrous and excludable. For example, a chocolate
eaten by one person, cannot be eaten by anyone else - the consumption of chocolate is
rivalrous. Similarly, those who do not pay for private goods can be excluded from enjoying their
benefits. If a person does not buy a ticket, they will not be allowed to watch a movie at a local
cinema hall.
Collecting a fee for using public goods is difficult. So people who do not pay also use public
goods and are known as ‘free-riders’. Since consumers are not willing to pay for what they can
get for free, the government has to provide for such goods because the link between the
producer and consumer which occurs through the payment process is broken.
Public provision and public production are not the same. Public provision means that the
government provides public goods for free. Public goods may be produced by the government
or the private sector. When goods are produced directly by the government it is called public
production.

(Reallocation Function of the Government)

Government seeks to allocate resources with a view to balance the goals of all sections of the
society. For example:
a.​ Production of goods and services which are injurious to health may be discouraged
through taxation policy. To discourage the production of harmful products like cigarettes,
alcohol,etc , the government can levy heavy taxes on them.
b.​ Production of socially beneficial goods may be encouraged through subsidies. To
encourage the use of goods like handloom products, the government can give subsidies
or lower taxes on handloom products.
c.​ If the private sector does not take initiative in certain activities the government may
directly control them like water supply and sanitation etc.
d.​ The government can also influence reallocation of resources by directly producing goods
and services.

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2.​ Redistribution Function of Government Budget
(Reducing Inequalities in the distribution of income and wealth)
The total national income of the country goes to either the private sector, that is, firms and
households (known as private income) or the government (known as public income). Out of
private income, what finally reaches the households is known as personal income and the
amount that can be spent is the personal disposable income. The government sector affects the
personal disposable income of households by making transfers and collecting taxes. It is
through this that the government can change the distribution of income and bring about a
distribution that is considered ‘fair’ by society. This is the redistribution function.
The redistribution objective is achieved through:
a.​ Progressive income taxation, in which higher the income, higher is the tax rate.
b.​ Firms are taxed on a proportional basis, where the tax rate is a particular proportion of
profits.
c.​ With respect to excise taxes, necessities of life are exempted or taxed at low rates,
comforts and semi-luxuries are moderately taxed, and luxuries, tobacco and petroleum
products are taxed heavily.

3.​ Stabilisation Function of Government Budget

The government may need to correct fluctuations in income and employment. The overall level
of employment and prices in the economy depend upon the level of aggregate demand.
If the level of aggregate demand is not sufficient for full utilisation of labour and other resources
of the economy, giving rise to
deflation, the government needs
to intervene to raise the
aggregate demand by increasing
expenditure and giving tax
concessions and subsidies.

When aggregate demand

exceeds available output under
conditions of high employment
and thus may give rise to
inflation, restrictive measures are
needed to reduce aggregate
demand by reducing government expenditure and increasing taxes.

The intervention of the government whether to expand demand or reduce it constitutes the
stabilisation function. Government budget is used to correct fluctuations (inflation or deflation) to
achieve economic stability. These fluctuations are caused due to trade or business cycles.

4.​ Managing Public Enterprises: The government manages a large number of industries in the
public sectors for the purpose of social welfare. Many of these industries are natural monopolies
where a single firm is able to produce at a cost lower than many competing firms due to
economies of scale. Examples: Railways, post offices, electricity, etc. The government budget
also makes provisions for managing such enterprises and providing them financial help.

5.​ Economic Growth: The rate of economic growth depends on the rate of savings and
investment. The budgetary policy can help in this regard by helping to mobilise resources for
investment. Thus, the government makes provisions in the budget to increase the rate of
savings and investment in the economy.

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 6.​ Reducing Regional Disparities: To encourage setting up of production units in backward
areas, the government uses its taxation and expenditure policy - reducing taxes and increasing
its expenditure.

Components of the Government Budget

Budget has two accounts- One that relates to the current financial year only is included in the revenue
account (also called revenue budget) and one that concerns the assets and liabilities of the
government into the capital account (also called capital budget). Two main components of the budget
are:
1.​ Revenue Budget - It consists of the revenue receipts of the government and the expenditure
met from these revenue receipts. Items that relate to the current financial year only are included
in the revenue account (revenue budget).
2.​ Capital Budget- It consists of capital receipts and expenditure. Items that concern the assets
and liabilities of the government into the capital account (also called capital budget).

Budget Receipts
The estimated money receipts of the government from all the sources during a given fiscal year. They
may be further classified as revenue receipts and capital receipts.
Revenue Receipt Capital Receipt

Government receipts which neither create Government receipts which either create
liabilities, nor reduce assets are called revenue liabilities (e.g. borrowing), or reduce assets (e.g.
receipts. These are current income receipts of disinvestment) are called capital receipts.
the government from all sources.

Revenue receipts are further classified Into Tax Capital receipts can be debt creating or non-debt
Revenue and Non-­tax Revenue. creating.

Revenue receipts do not lead to a claim on the Capital Receipts like loans involve a future
government. They are therefore termed obligation to return the borrowed amount with
non-redeemable. interest.

They are regular and recurring in nature. They are irregular and non-recurring in nature.

Example: Proceeds of taxes, interest and Examples: Borrowings are treated as capital
dividend on government investment, cess and receipts because they create liability of returning
other receipts for services rendered by the loans; Recovery of loan is also capital receipt as
government. it reduces government assets.

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Sources of Revenue Receipts
Tax Revenue - The sum total of receipts from taxes and other duties imposed by the government. Tax
revenue comes from Direct Taxes and Indirect Taxes
A tax is a compulsory payment made by the people and companies to the government without any
reference to any direct benefit in return.
Direct Taxes Indirect Taxes

Direct Taxes are directly paid to the government Indirect Taxes are applied on the manufacture or
by the taxpayer. sale of goods and services.

It is a tax applied on individuals and These are initially paid to the government by an
organizations directly by the government. intermediary, who then adds the amount of the
tax paid to the value of the goods / services and
passes on the total amount to the end user.

Burden cannot be transferred or shifted to Burden can be shifted to another person.

another person. Example: GST that is included in the bill of goods
Example: In case of the income tax that an and services that are procured from others. The
individual pays directly to the government, the initial tax is levied on the manufacturer or service
burden of the tax falls flatly on the individual who provider, who then shifts this tax burden to the

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 earns a taxable income and cannot shift the tax consumers by charging higher prices for the
to others. commodity by including taxes in the final price.

They help in reducing inflation They lead to inflation

They cannot be escaped or avoided. They can be escaped or avoided by not

engaging in the particular transaction. Example,
to avoid GST on dining out, we can eat at home
instead.

Examples: Examples:
Personal Income Tax: Levied on and paid by Excise taxes (duties levied on goods produced
the same person according to tax brackets as within the country)
defined by the income tax department. Customs duties (taxes imposed on goods
Corporate Tax: Paid by companies and imported into and exported out of India)
corporations on their profits. Sales Tax: Paid by a shopkeeper or retailer, who
Wealth Tax: Levied on the value of property that then shifts the tax burden to customers by
a person holds. charging sales tax on goods and services.
Estate Duty: Paid by an individual in case of Entertainment Tax: Liability is on the cinema
inheritance. owners, who transfer the burden to cinemagoers.
Gift Tax: An individual receiving the taxable gift Service Tax: Charged on services rendered to
pays tax to the government. consumers, such as food bill in a restaurant
Fringe Benefit Tax: Paid by an employer that
provides fringe benefits to employees, and is
collected by the state government.
Other direct taxes like wealth tax, gift tax and
estate duty (now abolished) have never brought
in large amounts of revenue and thus have been
referred to as ‘paper taxes’.
Capital gain is the increase in a capital asset's
value and is realized when the asset is sold. The
capital gains tax is the levy on the profit from an
investment that is incurred when the investment
is sold.
Non-Tax Revenue
Receipts from sources other than taxes. Non-tax revenue of the central government mainly consists of:
●​ interest receipts on account of loans by the central government
●​ dividends and profits on investments made by the government
●​ fees and other receipts1 for services rendered by the government
●​ Cash grants-in-aid from foreign countries and international organisations are also included

Special Assessment Tax is a tax levied by a local government on private property to pay the
cost of local public improvements, such as sidewalk construction or sewage disposal, that are
of general benefit to the property taxed.

1
Fees refers to payment imposed by the government for each recurring service undertaken by the government in public interest (court fee)
License Fee is a payment charged by the government. for taking permission to conduct an activity. Ex- License fee for firearms.
Fines and Penalties: Payments imposed on law breakers. Ex: fine for jumping a red light or penalty for non-payment of tax.
Escheats: Claim of the govt. On the property of the person who dies without any legal heir/will.
Foreitures: Penalties imposed by a court for non-compliance of orders.
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Sources of Capital Receipts

All those receipts of the government which create liability or reduce financial assets are termed as
capital receipts. The government receives money by way of loans or from the sale of its assets.

Capital receipts can be debt creating or non-debt creating.

●​ Debt creating Capital Receipts - These are the capital receipts which increase liability of
the government and which government needs to repay along with interest. For example:
Net borrowing by the government at home, borrowings from the RBI, loans received from
foreign governments.

●​ Non-Debt creating Capital Receipts - Non-debt creating capital receipts are those
receipts which are not borrowings and therefore, do not give rise to debt. When the
government sells an asset, then it means that in future its earnings from that asset will
disappear. Examples are recovery of loans and the proceeds from the sale of shares of
PSUs i.e. disinvestment, as it leads to the reduction in assets of the government.

Sources:
1.​ Recovery of loans: Government gives loans to State Governments and Union Territories.
Recovery of such loans is a capital receipt as it decreases the assets of the government.
2.​ Borrowings: Borrowings are capital receipts as they create a liability. Government borrows
from:
a.​ Open Market
b.​ RBI
c.​ Foreign govts.
d.​ International institutions etc. (IMF)
3.​ Other Receipts: Capital receipts other than recovery of loans and Borrowings.
a.​ Disinvestment: Selling of a part of or all the shares of PSUs held by the govt. They
decrease the assets of the government and are thus considered capital receipts.
b.​ Small Savings: Funds raised from the public like post office deposits, NSC etc. They
increase liability and are therefore considered capital receipts. (It refers to the funds
raised from public in the form of post office deposits, Kisan Vikas Patra, NSC –
National Saving Certificate, PPF etc.)

Budget Expenditure
It refers to the estimated expenditure of the government during a given fiscal year. It is of two types-
Revenue expenditure and Capital expenditure.

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Budget documents classify total expenditure into plan expenditure which relates to central Plans (the
Five-Year Plans) and central assistance for State and Union Territory plans. Non-plan expenditure
(component of revenue expenditure) covers a vast range of general, economic and social services of
the government. Non-Plan expenditure is used to cover all expenditure of the Government not included
in the Plan. The Plan and Non-Plan expenditure classification helps in determining the pattern of
central assistance on plan schemes to state governments, and union territories.

This classification has been criticized as it has led to an increasing tendency to start new
schemes/projects neglecting maintenance of existing capacity and service levels. It has also led to the
misperception that non-plan expenditure is inherently wasteful, adversely affecting resource allocation
to social sectors like education and health where salary comprises an important element.

Budget expenditure is also classified as developmental and non-developmental classification indicates

how much government expenditure is spent on social and community services and economic services
as against general services.

Expenditure on maintaining the assets created in previous Plans is also treated as Non-plan
expenditure. Similarly, expenditure on continuing services and activities at levels already reached in a
Plan period is classified as Non-plan expenditure in the next Plan period.

Revenue Expenditure
They neither create an asset, nor reduce any liability of the government.
Within revenue expenditure, a distinction is made between plan and non-plan. The main items of
non-plan expenditure are:
●​ Interest payments: Interest payments on market loans, external loans and from various reserve
funds constitute the single largest component of non-plan revenue expenditure.
●​ Defence services: Defence expenditure, is committed expenditure in the sense that given the
national security concerns, there exists little scope for drastic reduction.
●​ Subsidies: Subsidies are an important policy instrument which aim at increasing welfare. Apart
from providing implicit subsidies through under-pricing of public goods and services like
education and health, the government also extends subsidies explicitly on items such as
exports, interest on loans, food and fertilisers.
●​ Salaries and pensions.
Revenue expenditure Capital expenditure

They neither create an asset, nor reduce any They create an asset or cause a reduction in
liability of the government. liabilities of the government. Example:
Construction of Metro (creation of an asset) and
repayment of borrowings (reduction in liabilities)

Recurring in nature. Includes expenditure on the Non recurring in nature.

government's everyday function.

It is incurred for the normal running of the Incurred for acquisition of assets and
government departments and provision of granting/giving of loans and advances.
various services.

Examples: Salary paid to government Examples: Repayment of borrowings (decrease in

employees, pension, interest, subsidies, grants liabilities); expenditure on acquisition of capital
to state govts and other parties (even though assets,etc. Purchase of defence, construction of
some of the grants may be meant for creation of government schools, expenditure on building a
assets). bridge. (Increase in assets)

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Capital Expenditure
There are expenditures of the government which result in creation of physical or financial assets or
reduction in financial liabilities. This includes:
●​ Expenditure on the acquisition of land, building, machinery, equipment
●​ Investment in shares
●​ Loans and advances by the central government to state and union territory governments, PSUs
and other parties.
●​ Repayment of loans

Capital expenditure is also categorised as plan and non-plan in the budget documents.

The budget is not merely a statement of receipts and expenditures. Since Independence, with the
launching of the Five-Year Plans, it has also become a significant national policy statement. The
budget, it has been argued, reflects and shapes, and is, in turn, shaped by the country’s economic life.

Along with the budget, three policy statements are mandated by the Fiscal Responsibility and Budget
Management Act, 2003 (FRBMA):

1.​ Medium-term Fiscal Policy Statement

○​ Sets financial targets for the next 3 years.
○​ Checks if government income (revenue receipts) is enough to cover regular spending
(revenue expenditure).
○​ Looks at how wisely borrowed money is being used.​

2.​ Fiscal Policy Strategy Statement

○​ Explains the government’s financial goals and priorities.
○​ Reviews current financial policies.
○​ Justifies any changes or exceptions to the usual fiscal rules.​

3.​ Macroeconomic Framework Statement

○​ Reviews the overall health of the economy.
○​ Focuses on GDP growth, government budget balance, and international trade balance.

The 2005-06 Indian Budget introduced a statement highlighting the gender sensitivities of the
budgetary allocations.

Types of Budgets
Balanced Budget Surplus Budget Deficit Budget

Government budget is said If estimated government If estimated government

to be balanced if estimated receipts are more than receipts are less than
government receipts are estimated government estimated government
equal to estimated expenditure, then the budget expenditure, then the budget
government expenditure. may be turned/called a is termed as a deficit budget.
surplus budget.
Estimated revenue = Estimated revenue > Estimated revenue <
estimated expenditure. estimated expenditure estimated expenditure

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Types of deficit
1.​ Budget Deficit is the difference between total expenditure and total revenue (revenue receipts
+ capital receipts). From the 1997-98 budget, the practice of showing budget deficits has been
discontinued in India.
Budget Deficit = Total expenditure - total revenue
​ ​ ​ = Total expenditure - (revenue receipts + capital receipts)
​
2.​ Revenue Deficit is the excess of revenue expenditure over revenue receipts during a given
fiscal year.
Revenue Deficit = Revenue Expenditure - Revenue Receipt

​ Important to remember:
●​ The revenue deficit includes only such transactions that affect the current income and
expenditure of the government.
●​ A revenue deficit leads to lower growth and reduces welfare. Explain.
○​ Revenue deficit implies that the government is dissaving and is using up the
savings of the other sectors of the economy to finance its consumption
expenditure.
○​ Thus, the government will have to borrow to finance its investment and
consumption requirements.
○​ This will lead to a build up of stock of debt and interest liabilities and force the
government to cut expenditure.
○​ Since a major part of revenue expenditure is committed expenditure, it cannot be
reduced.
○​ Thus, the government reduces productive capital expenditure or welfare
expenditure. This would mean lower growth and adverse welfare implications.

Measures to reduce Revenue Deficit

1.​ Reduce expenditure to avoid unnecessary/ unproductive expenditure
2.​ Increase revenue: Increase receipts from various tax revenue/ non tax revenue.

3.​ Fiscal Deficit is the difference between the government’s total expenditure and its total receipts
excluding borrowing.

Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital
receipts)

Non-debt creating capital receipts are those receipts which are not borrowings and, therefore,
do not give rise to debt. Examples are recovery of loans and the proceeds from the sale of
PSUs. The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total
borrowing requirements of the government from all sources.

From the financing side:

Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from
abroad

​ Net borrowing at home includes that directly borrowed from the public through debt instruments
(for example, the various small savings schemes) and indirectly from commercial banks through
Statutory Liquidity Ratio (SLR).

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 The gross fiscal deficit is a key variable in judging the financial health of the public sector and
the stability of the economy. From the way gross fiscal deficit is measured as given above, it can
be seen that revenue deficit is a part of fiscal deficit. Thus, high revenue deficit in fiscal deficit
indicates that a large part of borrowing is being used to meet its consumption expenditure needs
rather than investment.

Fiscal Deficit = Revenue Deficit + Capital Expenditure - non-debt creating capital receipts

Total Expenditure − Total receipts excluding borrowings

Total Expenditure − Revenue Receipts − Capital Receipts less

borrowings
*Capital receipts less borrowings = non debt creating capital receipts

Revenue Expenditure − Revenue Receipts + (Capital Expenditure −

Gross Fiscal Capital Receipts less borrowings)
Deficit/
Fiscal Deficit = Revenue Deficit + Capital Expenditure − Capital Receipts less
borrowings

Total Borrowings (Borrowings and other Liabilities) = Net borrowing at

home2 + Borrowing from RBI + Borrowing from abroad

Budget Deficit + Borrowings and other liabilities/Debt creating capital

receipts

Example: In a government budget, borrowing and other liabilities are ₹20000, Revenue receipts are
₹70000, Non debt capital receipts are ₹5000. What will be total expenditure? [Ans: ₹95K]

✶ Safe level of fiscal deficit is considered to be 5% of GDP.

✶ Can there be a fiscal deficit without a revenue deficit?
YES!
Fiscal deficit = Revenue Deficit + Capital Expenditure − Capital Revenue less borrowings.
(a)​ So, if there is a deficit in the capital budget.
(b)​ And, a surplus in the revenue budget but less than the deficit in the capital budget, i.e., the surplus in
the revenue budget is not enough to cover the capital budget deficit

Sources of Financing Fiscal Deficit

a.​ Borrowings from internal sources ( public, commercial banks, etc) or external sources ( foreign
governments, international organisations, etc).
b.​ Deficit financing: Government borrows from RBI against its securities and RBI issues new
currency (leads to inflation so should be avoided) for this purpose.

Fiscal Deficit Revenue Deficit

Shows the excess of total Shows the excess of revenue expenditure
expenditure over total receipts over revenue receipts.
excluding borrowings.

2
Net borrowing at home includes that directly borrowed from the public through debt instruments (for example, the
various small savings schemes) and indirectly from commercial banks through Statutory Liquidity Ratio (SLR).
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 Measures the total borrowing Points to the inability of the government to
requirements of the government. meet its regular and recurring expenditure.

4.​ Primary Deficit:

We must note that the borrowing requirement of the government includes interest obligations on
accumulated debt. The goal of measuring primary deficit is to focus on present fiscal
imbalances. To obtain an estimate of borrowing on account of current expenditures exceeding
revenues, we need to calculate what has been called the primary deficit. It is simply the fiscal
deficit minus the interest payments
Gross primary deficit = Gross fiscal deficit – Net interest liabilities

Net interest liabilities consist of interest payments minus interest receipts by the government on
net domestic lending.

* Primary deficit reflects the extent to which interest commitments have compelled the government to
borrow in the current period.

Implications of a Primary Deficit

1.​ It shows how much of the government's borrowings will be able to meet expenses other than
interest payments.
2.​ Difference between primary deficit and fiscal deficit shows the interest payments on past
borrowings . Thus, a low or zero primary deficit implies that interest commitments have forced
the government to borrow.
3.​ Primary deficit is the cause of fiscal deficit. Since interest is high, the government should repay
loans as soon as possible.
* While a fiscal deficit shows total borrowing requirements of the government including interest , the
primary deficit indicates the total borrowing requirements of the government excluding interest.

Ways of Financing Deficit

1.​ Monetary expansion (deficit financing)
The government borrows an amount equal to the deficit from the central bank through the sale
of treasury bills. The central bank purchases treasury bills by issuing new currency. This money
is used by the government to finance its deficits.
2.​ Borrowing from the public through market loans.

Added 12th May 2025 from NCERT: Debt (Pg78-80)

Q1: What are the main sources of government debt?

Taxation
Borrowing
Printing money

Q2: How do budgetary deficits contribute to government debt?

Deficits (yearly shortfalls) add to the stock of debt.
Continuous borrowing leads to increasing interest payments, creating a debt spiral.

Q3: How does government borrowing impact future generations?

It transfers the cost of reduced consumption to future generations.
Future taxes reduce disposable income and national savings.
Crowds out private investment, reducing capital formation.

Q4: What is the traditional view of government debt?

Consumers may not account for future tax burdens, leading to overconsumption today.
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Q5: What is the Ricardian Equivalence?
It argues that rational consumers increase current savings in anticipation of future taxes, fully offsetting
the impact of government borrowing.

Q6: Why is domestic debt considered less burdensome than foreign debt?
Domestic debt remains within the economy, while foreign debt requires external payments, leading to a
drain on national resources.

Q7: How can budget deficits cause inflation?

They can be inflationary if they boost demand beyond the economy’s productive capacity.
However, if there are unutilized resources, increased government spending can raise output without
raising prices.

Q8: What is the crowding out effect in the context of government borrowing?
Government borrowing can reduce funds available for private investment if it competes for a limited
pool of savings.
However, increased government spending can raise incomes, potentially increasing overall savings.

Q9: How can government debt be beneficial in the long term?

Debt used for productive investments (e.g., infrastructure) can boost future output and offset the debt
burden if returns exceed interest costs.

Q10: What are some common strategies to reduce government deficits?

Increasing Taxes: Shift towards direct taxes to reduce regressive impacts.
Reducing Expenditure: Better planning and efficiency in government programs.
Disinvestment: Sale of public sector shares to raise funds.
Targeted Transfers:** Direct cash transfers, which are more cost-effective than subsidies.

Q11: What measures are used to maintain fiscal discipline?

Governments often impose spending limits (e.g., FRBMA in India) to control deficits.
Deficits naturally expand in recessions due to lower tax revenues and contracts in booms.

GST: One Nation, One Tax, One Market

Goods and Service Tax (GST) is the single comprehensive indirect tax, operational from 1 July 2017,
on supply of goods and services, right from the manufacturer/ service provider to the consumer.

Features:
1.​ It is a destination based consumption tax with facility of Input Tax Credit in the supply chain.
2.​ It is applicable throughout the country with one rate for one type of goods/service.
3.​ It is a tax on value addition at each stage of supply.
4.​ It aims to establish parity in taxation across the country, and extend principles of ‘value- added
taxation’ to all goods and services.
5.​ It has amalgamated a large number of Central and State taxes and cesses.
6.​ It has replaced a large number of taxes on goods and services levied on production/ sale of
goods or provision of service.

As there were a number of intermediate goods/services, which were manufactured/provided in the

economy, the pre GST tax regime imposed taxes not on the value added at each stage but on the total
value of the commodity/service with minimal facility of utilisation of Input Tax Credit (ITC). The total
value included taxes paid on intermediate goods/services. This amounted to cascading of tax.

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Under GST, the tax is discharged (refunded) at every stage of supply and the credit of tax paid at the
previous stage is available for set off at the next stage of supply of goods and/or services. It is thus
effectively a tax on value addition at each stage of supply.

GST has replaced various types of taxes/cesses, levied by the Central and State/UT Governments.
Some of the major taxes that were levied by the Centre were Central Excise Duty, Service Tax, Central
Sales Tax, Cesses like KKC and SBC. The major State taxes were VAT/Sales Tax, Entry Tax, Luxury
Tax, Octroi, Entertainment Tax, Taxes on Advertisements, Taxes on Lottery /Betting/ Gambling, State
Cesses on goods etc. These have been subsumed in GST.
Five petroleum products have been kept out of GST for the time being but with passage of time, they
will get subsumed in GST. State Governments will continue to levy VAT on alcoholic liquor for human
consumption. Tobacco and tobacco products will attract both GST and Central Excise Duty.

Under GST, there are 6 (six) standard rates applied i.e. 0%, 3%,5%, 12%,18% and 28% on supply of
all goods and/or services across the country.

GST is the biggest tax reform in the country since independence and was rolled out on the midnight of
30 June/1 July, 2017 during a special midnight session of the Parliament. The 101th Constitution
Amendment Act received assent of the President of India on 8 September, 2016. The amendment
introduced Article 246A in the Constitution, empowering Parliament and Legislatures of States to make
laws with reference to Goods and Service Tax imposed by the Union and the States. Thereafter CGST
Act, UTGST Act and SGST Acts were enacted for GST. GST has simplified the multiplicity of taxes on
goods and services. The laws, procedures and rates of taxes across the country are standardised.

Benefits of GST
1.​ It has facilitated the freedom of movement of goods and services and created a common market
in the country.
2.​ It is aimed at reducing the cost of business operations and the cascading effect of various taxes
on consumers.
3.​ It has reduced the overall cost of production which will make Indian products/services more
competitive in the domestic and international markets.
4.​ It will also result in higher economic growth as GDP is expected to rise by about 2%.
5.​ Compliance will also be easier as all tax payment related services like registration, returns,
payments are available online through a common portal www.gst.gov.in.
6.​ It has expanded the tax base, introduced higher transparency in the taxation system, reduced
human interface between Taxpayer and Government and is furthering ease of doing business.

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