Public Finance

Budget?
Estimated Receipt + Estimated Expenditure for
that year based on the figures of two previous
years.
Calendar Year vs Financial Year
Budget and 3 sets of figures
• Actual figures for preceding year.
• Budget and Revised Estimates for the current
year.
• Budget Estimates of the following year.
Revenue Vs Receipt
Revenue belongs to the receiver. It need not be
repaid by receiver.
If we take the individual, the salary received by
him/her is Revenue.

Receipt is a broader category which includes

revenue as well as others which has to be
repaid.
For example, loan received is also includes in
receipts.
Components of Budget
Deficits:
1. Budget Deficit
2. Fiscal Deficit
3. Revenue Deficit
4. Effective Revenue Deficit
5. Primary Deficit

Deficit Financing
Impact of tax Vs Incidence of tax
Proportional Taxation
Classification of Tax

Regressive Taxation

Progressive Taxation
 Degressive Taxation

• In this case, the rate of tax increases upto a

certain limit, after that a uniform rate is
charged.
• Thus degressive tax is a combination of
progressive and proportional taxation.
• This type of taxation is often used in case of
income tax. This is the case of income tax in
India as well.
 Direct Tax
1. Income Tax – Tax imposed on income.
2. Corporate Tax – Tax imposed on Company’s
profit.
3. Minimum Alternate Tax - MAT or Minimum
Alternate Tax is a provision in Direct tax laws to
limit tax exemptions availed by companies, so
that they pay at least a minimum amount of
corporate tax to the government. The key reason
for introduction of MAT is to ensure minimum
levels of taxation for all domestic and foreign
companies in India.
4. Capital Gains Tax - Any profit or gain that arises
from the sale of a 'capital asset' is known
'income from capital gains'. Such capital gains
are taxable in the year in which the transfer of
the capital asset takes place. This is called
capital gains tax.
 In-Direct Tax

1. Customs Duties
2. Central Excise
3. Service Tax
4. Octroi
5. Entry Tax
6. Sales Tax
7. VAT
8. GST
 Price: Rs 100
Tax: 10%

Total: Rs 110
A
110 + Profit Rs
Margin: 10

Price: Rs 120
Retailer
B
110 + Profit Margin: Rs 10
Price: Rs 120
Tax: 10% Am I
paying
Retailer Total: Rs 132 more??
B

Price: Rs 120
100 + 10 + 10
(Tax) (Profit)

Tax: 10%
Rs 132
Total: Rs 132
CASADING OF TAXES
Price: Rs 120
100 + 10 + 10
(Tax) (Profit)
GST
Tax: 10% Tax Refund

Total: Rs 132
CASADING OF TAXES
Retailer
B

Input Tax
Credit
Tax Refund of Rs 10 Profiteering
Total: Rs 132
Retailer
B
RS122
Rs 132

Refund Benefits should

pass on to Consumers
 GST – Antiprofiteering Authority
• Soon after the GST was rolled out from 1 July
2017, the government had approved setting up of
the NAA for two years.
• NAA is a statutory body constituted under the
• Initially, it was set up for two years till
Central Goods and Services Tax Act, 2017 to check
2019, but was later extended till
the unfair profit-making activities by the trading
November 2021. The GST Council gave
community.
another 1-year extension till November
• The Authority’s core function is to ensure that the
30, 2022, to NAA and also decided to
benefits of the reduction in GST rates on goods or
shift the work to CCI after that.
services made by the GST Council is passed on to
• All GST anti-profiteering complaints
the ultimate consumers by way of a reduction in
would be dealt with by the Competition
prices by traders.
Commission of India (CCI) from
• NAA examines and checks such profiteering
December 1 as the extended tenure of
activities and recommends punitive actions
National Anti-profiteering Authority
including cancellation of Registration.
ends this month.
GST – Destination Based Tax
GST Compensation
• The GST regime, launched on July 1, 2017,
introduced a uniform indirect tax structure across
the country by merging various state and local-
level levies.
• Under the GST compensation Act 2017, states are
guaranteed full compensation for any revenue
loss for the first five years after the introduction
of the GST.
• For the purpose of calculating the compensation
amount in any financial year, year 2015-16 will be
assumed to be the base year, from which revenue
will be projected. The growth rate of revenue for
a state during the five-year period is assumed to
be 14% per annum.
• Any shortfall has to be compensated from the
receipts of Compensation Cess levied on luxury
goods and sin products.
SGST / CGST/ IGST
E-Way Bill
• The E-way bill, short form for electronic way bill,
is a document to be generated online under the
GST system, when goods of the value of more
than ₹50,000 are shipped inter-State or intra-
State.
• The E-way bill must be raised before the goods
are shipped and should include details of the
goods, their consignor, recipient and transporter.
• The transporter has to carry the invoice and the
copy of E-way bill as support documents for the
movement of goods.
E-Way Bill
• Though check-posts have been abolished under
GST, a consignment can be intercepted at any
point for the verification of its E-way bill, for all
inter-State and intra-State movement of goods.
• If a consignment is found without an E-way bill, a
penalty of ₹10,000 or tax sought to be evaded,
whichever is greater, can be levied.
Exceptions to e-way bill requirement
• Goods being transported by a non-motorised
conveyance;
• Goods being transported from the port, airport,
air cargo complex and land customs station to an
inland container depot or a container freight
station for clearance by Customs;
• Contraceptives, judicial and non-judicial stamp
paper, newspapers, khadi, raw silk, Indian flag,
human hair, kajal, earthen pots, cheques,
municipal waste, puja samagri, LPG, kerosene,
etc. are also outside the ambit of the e-way bill.
 GST-Composition Scheme
• The Composition scheme is an easy, low
procedure and compliance friendly tax scheme
for small and medium enterprises.
• Under the scheme, small taxpayers can get rid of
tedious GST formalities and pay GST at a fixed
rate of turnover.
• Companies opting to file only four tax returns in a
year (a normal taxpayer has to file more than 30
• Till then, it was applicable only to returns under GST), thereby reducing the tax
manufacturers whose taxable business compliance burden and cost of small firms.
turnover is up to Rs 1.5 crore. • However, a Composition scheme firm is not
• Businesses with inter-State supplies, allowed to avail input tax credit of GST.
manufacturers of ice cream, pan • In 2019, the Composition scheme was extended
masala and tobacco, and e-commerce for small service providers (turnover up to Rs 50
players cannot opt for the lakh).
composition scheme.
Rate of Tax under the scheme
• There are three rates prescribed for three
different categories of suppliers.
• An eligible Manufacturer has to pay 2% (1%
CGST and 1% SGST/ UTGST) of turnover in a state
or Union Territory, as the case may be.
• An eligible person engaged in making supplies
mentioned in clause (b) of para 6 of Schedule II of
the CGST Act (supplier of restaurant Service) has
to pay 5% (2.5% CGST and 2.5% SGST/UTGST) of
turnover in a state or Union Territory, as the case
may be.
• An eligible person engaged in any other supply
has to pay 1% (0.5% CGST and 0.5% SGST/UTGST)
of turnover in a state or Union
GST-Reverse Charge Mechanism
• Generally, the supplier of goods or services is
liable to pay GST.
• However, in specified cases like imports and
other notified supplies, the liability may be cast
on the recipient under the reverse charge
mechanism.
• Reverse Charge means the liability to pay tax is
on the recipient of supply of goods or services
instead of the supplier of such goods or services
in respect of notified categories of supply.
• Thus Reverse Charge is applicable
• When GST Council Notifies Specific Goods
and Services For Reverse Charge Levy
• Wherever a registered person procures
supplies from an unregistered supplier, he
needs to pay GST on a reverse charge basis.
GST and Formalisation of Economy
 GST Council
• Goods & Services Tax Council is a constitutional
body under Article 279A
• The GST Council is chaired by the Union Finance
Minister and other members are the Union State
Minister of Revenue or Finance and Ministers in-
charge of Finance or Taxation of all the States.
• Every decision of the Goods and Services Tax
Council shall be taken at a meeting, by a majority
of not less than three-fourths of the weighted
votes of the members present and voting, in
accordance with the following principles.
• Central Government has voting weightage of one
• Quorum: One-half of the total number third of the total votes cast, and
of Members of the Goods and Services • the votes of all the State Governments taken
Tax Council shall constitute the quorum together shall have a weightage of two-thirds of
at its meetings. the total votes cast, in that meeting.
Mandate of GST Council
The Goods and Services Tax Council shall make
recommendations to the Union and the States on—
• The goods and services that may be subjected
to, or exempted from the goods and services tax;
• Model Goods and Services Tax Laws,
• Apportionment of Goods and Services Tax levied
on supplies in the course of inter-State trade or
commerce
• The threshold limit of turnover below which
goods and services may be exempted from goods
and services tax;
• Tax rates under GST
• Any special rate or rates for a specified period, to
raise additional resources during any natural
calamity or disaster;
Mandate of GST Council
• Special provision with respect to the States of
Arunachal Pradesh, Assam, Jammu and Kashmir,
Manipur, Meghalaya, Mizoram, Nagaland,
Sikkim, Tripura, Himachal Pradesh and
Uttarakhand; and
• Any other matter relating to the goods and
services tax, as the Council may decide.
• The Goods and Services Tax Council shall
recommend the date on which the goods and
services tax be levied on petroleum crude, high
speed diesel, motor spirit (commonly known as
petrol), natural gas and aviation turbine fuel.
Methods of Taxation
Ad Valorem
Tax levied as a % of the value of the good

Specific Duty
Tax levied at a flat rate per unit of goods produced/
sold/ imported regardless of the value
Terms
1. CESS
2. SURCHARGE
3. Countervailing Duty
4. Anti Dumping Duty
5. Laffer Curve
6. Tax Buoyancy
7. Tax Elasticity
8. Treasury Bills
9. Ways and Means Advance
10. Fiscal Consolidation
11. Fiscal Slippage
12. Fiscal Stimulus
FRBM Act
• Reduction in fiscal deficit by 0.3 percent of
GDP each year and Revenue Deficit by 0.5
percent.
• Eliminate Revenue Deficit by March 2009.
• Deficit may exceed only on exceptional
ground as the central government may
specify
• No borrowing from RBI.
• Measures to ensure greater transparency in
fiscal operations.
• Mid term fiscal policy statement (3 year
rolling target for RD,FD, Tax to GDP ratio &
Total outstanding debt), Fiscal policy
strategy statement, the Macroeconomic
framework statement.
 FRBM Review Committee
• The five-member committee —Headed by NK
Singh was constituted in May 2016
• N.K. Singh panel submitted its report on
revising the Fiscal Targets.
• The panel, however, suggested • The government should target a fiscal deficit
"escape clause" in case of over-riding of 3 per cent of the GDP in years up to March
consideration of national security, 31, 2020, the Fiscal Responsibility and Budget
acts of war, calamities of national Management (FRBM) Committee has
proportion and collapse of agriculture recommended.
severely affecting farm output and It recommended fiscal deficit to be cut to 2.8
incomes. per cent in 2020-21 fiscal and to 2.5 per cent
• Deviation shall not exceed 0.5 of GDP by FY2023.
• Ensures that Government Debt does FRBM Review Committee
not exceed 60% • The committee was also for reducing revenue
• Central Govt Debt not exceeding deficit to GDP ratio steadily by 0.25
40% of GDP by the end of 2024-2025 percentage points each year.
• State Government Debt not
exceeding to 20% of GDP from the • Revenue deficit should be 2.05 per cent of GDP
current 21%. in current fiscal, declining to 1.8 per cent in
• Formation of Fiscal Council to the next and 1.55 per cent in 2019-20. This
advice the government should be brought down to 0.8 per cent in
• -to ensure fiscal prudence in FY2023.
accordance with the FRBM spirit
 Finance Commission
• The Finance Commission is a constitutional body
set up under Article 280 of the Constitution.
• Under Article 280, the President of India is
• Are, or have been, or are qualified to required to constitute a Finance Commission at
be appointed as Judges of a High an interval of five years or earlier.
Court; or What are the qualifications for Members?
• have special knowledge of the finances • The Finance Commission has a chairman and
and accounts of Government; or four members appointed by the President.
• have had wide experience in financial • The Chairman of the Commission is selected from
matters and in administration; among persons who have had experience in
• or have special knowledge of public affairs, and the four other members are
economics selected from among persons who-
 What are the functions of the Finance
Commission?
It is the duty of the Commission to make
recommendations to the President as to—
• The distribution of tax proceeds between the
Union and the States and the share of each state.
• The principles which should govern the grants in-
aid of the revenues of the States out of the
Consolidated Fund of India;
• The measures needed to augment the
Consolidated Fund of a State to supplement the
resources of the Panchayats in the State on the
basis of the recommendations made by the
Finance Commission of the State;
• The measures needed to augment the
Consolidated Fund of a State to supplement the
• any other matter referred to the
resources of the Municipalities in the State on the
Commission by the President in the
basis of the recommendations made by the
interests of sound finance
Finance Commission of the State;
Note:
• The government is set to start the process to set
up the Sixteenth Finance Commission, tasked
with recommending the revenue sharing formula
between the Centre and States and their
distribution among States.
• The Fifteenth Finance Commission (Chair: Mr. N.
K. Singh) was set up in November 2017 with a
mandate to make recommendations for the five-
year period from 2020-21.
• While the Constitution requires a Finance
Commission to be set up every five years, the
15th FC’s mandate was extended by a year till
2025-26, breaking the cycle.
• In late 2019, the Commission was asked to give a
standalone report for 2020-21 and another
report for an extended five-year period till 2025-
26
Income distance:
• It is the distance of a state’s income from the
state with the highest income.
• Income of a state has been computed as Key recommendations in the report for
average per capita GSDP during the three- 2021-26 include:
year period between 2016- 17 and 2018-19. Share of states in central taxes
• A state with lower per capita income will • The share of states in the central taxes
have a higher share to maintain equity for the 2021-26 period is recommended
among states to be 41%, same as that for 2020-21.
Demographic performance: • This is less than the 42% share
• The Commission used 2011 population data recommended by the 14th Finance
for its recommendations. Commission for 2015-20 period.
• The demographic performance criterion has • The adjustment of 1% is to provide for
been used to reward efforts made by states the newly formed union territories of
in controlling their population. Jammu and Kashmir, and Ladakh from
• States with a lower fertility ratio will be the resources of the centre.
scored higher on this criterion
Grants Key recommendations in the report for
• Over the 2021-26 period, the following grants 2021-26 include:
will be provided from the centre’s resources. Forest and ecology:
Revenue deficit grants • This criterion has been arrived at by
• 17 states will receive grants worth Rs 2.9 lakh calculating the share of the dense forest
crore to eliminate revenue deficit. of each state in the total dense forest of
all the states.
Sector-specific grants
• Sector specific grants of Rs 1.3 lakh crore will Tax and fiscal efforts:
be given to states for eight sectors: • This criterion has been used to reward
• health, (ii) school education, (iii) higher states with higher tax collection
education, (iv) implementation of agricultural efficiency.
reforms, (v) maintenance of PMGSY roads, (vi) • It is measured as the ratio of the average
judiciary, (vii) statistics, and (viii) aspirational per capita own tax revenue and the
districts and blocks. A portion of these grants average per capita state GDP during the
will be performance-linked. three years between 2016-17 and 2018-
19.
Grants to local bodies: Key recommendations in the report for 2021-26
• The total grants to local bodies will be include:
Rs 4.36 lakh crore (a portion of grants State-specific grants:
to be performance-linked) including: (i) • The Commission recommended states pecific
Rs 2.4 lakh crore for rural local bodies, grants of Rs 49,599 crore.
(ii) Rs 1.2 lakh crore for urban local • These will be given in the areas of: (i) social
bodies, and (iii) Rs 70,051 crore for needs, (ii) administrative governance and
health grants through local infrastructure, (iii) water and sanitation, (iv)
governments. preservation of culture and historical
• Grants to local bodies (other than monuments, (v) high-cost physical infrastructure,
health grants) will be distributed and (vi) tourism.
among states based on population
and area, with 90% and 10%
weightage, respectively.
Key recommendations in the report for 2021-26
include:
Disaster risk management:
• The Commission recommended retaining the
existing cost-sharing patterns between the
centre and states for disaster management
funds.
• The cost-sharing pattern between centre and
states is: (i) 90:10 for north-eastern and
Himalayan states, and (ii) 75:25 for all other
states.
 Key recommendations in the report for 2021-26
include:
Fiscal roadmap
• The Commission observed that the Fiscal deficit and debt levels:
recommended path for fiscal deficit for • The Commission suggested that the centre bring
the centre and states will result in a down the fiscal deficit to 4% of GDP by 2025-26.
reduction of total liabilities of: (i) the • For states, it recommended the fiscal deficit limit
centre from 62.9% of GDP in 2020-21 to (as % of GSDP) of: (i) 4% in 2021-22, (ii) 3.5% in
56.6% in 2025- 26, and (ii) the states on 2022- 23, and (iii) 3% during 2023-26.
aggregate from 33.1% of GDP in 2020- • Extra annual borrowing worth 0.5% of GSDP will
21 to 32.5% by 2025-26. be allowed to states during first four years
• It recommended forming a (2021- 25) upon undertaking power sector
highpowered inter-governmental group reforms including: (i) reduction in operational
to: (i) review the Fiscal Responsibility losses, (ii) reduction in revenue gap, (iii) reduction
and Budget Management Act (FRBM), in payment of cash subsidy by adopting direct
(ii) recommend a new FRBM framework benefit transfer, and (iv) reduction in tariff
for centre as well as states, and oversee subsidy as a percentage of revenue.
its implementation.
 Key recommendations in the report for 2021-26
include:
Financial management practices:
• A comprehensive framework for public financial
management should be developed.
• An independent Fiscal Council should be
established with powers to assess records from
the centre as well as states.
• The Council will only have an advisory role.
• The centre as well as states should not resort to
off-budget financing or any other non-
transparent means of financing for any
GST: expenditure.
• GST rate structure should be • States may form an independent debt
rationalised by merging the rates of management cell to manage their borrowing
12% and 18%. States need to step up programmes efficiently.
field efforts for expanding the GST base
and for ensuring compliance.
Other recommendations
Health:
• Primary healthcare expenditure should be two-
thirds of the total health expenditure.
• All India Medical and Health Service should be
established.
Funding of defence and internal security:
• A dedicated non-lapsable fund called the
Modernisation Fund for Defence and Internal
Security (MFDIS) will be constituted to primarily
bridge the gap between budgetary
requirements and allocation for capital outlay in
defence and internal security.
There has been a persistent deficit budget year
after year. Which of the following actions can be
taken by the government to reduce the deficit?
1. Reducing revenue expenditure
2. Introducing new welfare schemes
3. Rationalizing subsidies
4. Expanding industries
Select the correct answer using the code given
below.
(a) 1 and 3 only
(b) 2 and 3 only
(c) 1 only
(d) 1,2,3 and 4
Which of the following is/are included in the
capital budget of the Government of India?
1. Expenditure on acquisition of assets like roads,
buildings, machinery, etc.
2. Loans received from foreign governments
3. Loans and advances granted to the States and
Union Territories
Select the correct answer using the code given
below.
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
 What is/are the most likely advantages of
implementing 'Goods and Services Tax (GST)'?
1. It will replace multiple taxes collected by
multiple authorities and will thus create a single
Select the correct answer using the
market in India.
code given below:
(a) 1 only 2. It will drastically reduce the 'Current Account
Deficit' of India and will enable it to increase its
(b) 2 and 3 only foreign exchange reserves.
(c) 1 and 3 only 3. It will enormously increase the growth and size
(d) 1, 2 and 3 of economy of India and will enable it to overtake
China in the near future.
 Consider the following statements
1. The Fiscal Responsibility and Budget
Management (FRBM) Review Committee Report
has recommended a debt to GDP ratio of 60%
for the general (combined) government by 2023,
comprising 40% for the Central Government and
Which of the statements given above 20% for the State Governments.
is/are correct?
2. The Central Government has domestic liabilities
of 21% of GDP as compared to that of war of
(a) 1 only
GDP of the State Governments.
(b) 2 and 3 only
(c) 1 and 3 only 3. As per the Constitution of India, it is mandatory
(d) 1, 2 and 3 for a State to take the Central Government’s
consent for raising any loan if the former owes
any outstanding liabilities to the latter.
Consider the following statements:
1. The Reserve Bank of India manages and
services Government of India Securities but not
any State Government Securities.
2. Treasury bills are issued by the Government of
India and there are no treasury bills issued by the
State Governments.
3. Treasury bills offer are issued at a discount from
the par value.
Which of the statements given above is/are
correct?
(a) 1 and 2 only
(b) 3 Only
(c) 2 and 3 only
(d) 1, 2 and 3