CHAPTER- 6

PUBLIC FINANCE
INTRODUCTION
The financial year for the Union and the State
Governments in India is from April to March. Each
financial year is, therefore, spread over two calendar
years. The period of financial year as from April to
March was introduced in India from 1867. Prior to that,
the financial year in India used to commence on 1st
May and ended on 30th April (L.K. Jha Committees
Report of the Committee On Change in Financial Year).
BUDGET SYSTEM
Although the Indian Constitution does not mention the
term Budget, it provides that the President shall in
respect of every financial year cause to be laid before
both the Houses of Parliament, the House of People
(Lok Sabha) and the Council of States (Rajya Sabha), a
statement of the estimated receipts and
expenditure of the Government for that year.
This statement known as the Annual Financial
Statement is the main fiscal or budgetary document
of the Government.
Budget is presented each year on the last
working day of February by the Finance Minister of
India in Parliament. The budget has to be passed by
the House before it can come into effect on April 1, the
start of Indias financial year.

Budget has been described in Article-112 of the

Indian Constitution as Annual Financial Statement.
Money Bill has been described in Article-110
A week before the budget is presented, the employees
of the press stay in the ministry and have no means of
communicating with the outside world.
HISTORICAL BACKGROUND
Budget System was introduced in India on 7th April,
1860.
James Wilson the first Indian Finance Member
delivered the budget speech expounding the Indian
financial policy as an integral whole for the first time.
Railway Budget was separated from General Budget
in the year 1924 on the recommendations of
Acworth Committee.
Former Finance Minister Morarji Desai presented the
budget eight times, the most by any finance minister.
The first Union budget of independent India
was presented by R. K. Shanmukham Chetty on
November 26, 1947.
In 1950-51 budget, the then Finance Minister John
Mathai announced the creation of the Planning
Commission.
C.D. Deshmukh was the first Indian Governor of RBI
to have presented the Interim Budget for the year
1951-52.
Morarji Desai was the only Finance Minister to have
had the opportunity to present two budgets on his
birthday - in 1964 and 1968.

 After Desais resignation, Indira Gandhi, the then

Prime Minister of India, took over the Ministry of
Finance to become the only woman to hold the post
of the finance minister.
R. Venkataraman was the only Finance Minister who
later became the President of India.

CONCEPTS OF BUDGET
On the budget day, the finance minister tables 14
documents. Of these, the main and most important
document is the Annual Financial Statement.
ANNUAL FINANCIAL STATEMENT
Article 112 of the constitution requires the
government to present to the Parliament a statement
of estimated receipts and expenditure in respect of
every financial year, April 1 to March 31. This
statement is the annual financial statement. The
annual financial statement is usually a white 10-page
document.
It is divided into three parts, Consolidated Fund,
Contingency Fund and Public Account. For each of
these funds, the government has to present a
statement of receipts and expenditure.
Consolidated Fund
This is the most important of all the government funds.
All revenues raised by the government, money
borrowed and receipts from loans given by the
government flow into the consolidated fund of India.

 All government expenditure is made from this fund,

except for exceptional items met from the
Contingency Fund or the Public Account.
Importantly, no money can be withdrawn from this
fund without Parliaments approval.
Contingency Fund
As the name suggests, any urgent or unforeseen
expenditure is met from this fund.
The Rs 500-crore fund is at the disposal of the
President.
Any expenditure incurred from this fund requires a
subsequent approval from Parliament.
the amount withdrawn is returned to the fund from
the consolidated fund.
Public Account
This fund is to account for flows for those
transactions where the government is merely acting
as a banker, for instance, provident funds, small
savings and so on.
These funds do not belong to the government.
They have to be paid back at some time to their
rightful owners.
Because of this nature of the fund, expenditures from
it are not required to be approved by Parliament.
REVENUE RECEIPT / EXPENDITURE
All receipts and expenditure that in general do not
entail sale or creation of assets are included under the
revenue account.
On the receipts side, taxes would be the most
important revenue receipt.

On the expenditure side, anything that does not

result in creation of assets is treated as revenue
expenditure. Salaries, subsidies and interest
payments are good examples of revenue
expenditure.
CAPITAL RECEIPT / EXPENDITURE
All receipts and expenditure that liquidate or create an
asset would in general be under capital account. The
receipts from the sale would go under capital
account.
On the other hand, if the government gives
someone a loan from which it expects to receive
interest, that expenditure would go under the
capital account.
In respect of all the funds the government has to
prepare a Revenue Budget (detailing revenue
receipts and revenue expenditure) and a Capital
Budget (capital receipts and capital expenditure).
Contingency Fund is clearly not that important.
REVENUE OF CENTRAL GOVERNMENT
Receipt estimates on revenue account are divided into
two parts i.e. tax revenue and non tax revenue.
Tax revenue is divided into three parts:
(a)Tax on income and expenditure
(b)Tax on assets and capital transaction; and
(c)Tax on goods and services
Non-Tax Revenue is divided into two parts:
(a)Fiscal and other services
(b)Interest receipts, dividends and profits
TAXES ON INCOME AND EXPENDITURE

Taxes on income are of two kinds i.e. Personal Income

Tax and Corporation Tax i.e. tax on profits of
companies.
INCOME TAX
Central government imposes personal income tax on
individuals income and revenue received from this is
distributed between the Centre and the States. Income
tax is not imposed on all individuals but on those who
are prosperous. Its basis is Ability to Pay principle.
INTEREST TAX
This tax was abolished by government in 1985 but
later it was reintroduced again as non-inflationary
measure. This tax is imposed on gross interest income
of lending institutions like banks, public finance
institutions and finance companies.
CORPORATION TAX
Corporation tax is tax on income of companies. This
tax is imposed by Central Government on the profits of
small and big companies.
FRINGE BENEFIT TAX (FBT)
The taxation of perquisites - or fringe benefits provided by an employer to his employees, in addition
to the cash salary or wages paid, is fringe benefit tax
WEALTH TAX
In 1992-93 Budget , Dr. Manmohan Singh abolished
this tax on productive assets and limited it to nonproductive assets like guest house ,residential
houses ,jewellery etc.

ASSET DUTY
Earlier asset duty was imposed on the assets held by
an individual, when it was transferred to inheritors.
This tax was imposed and collected by the Centre but
the amount was transferred to States. Since
administration costs were higher than the receipts ,
V.P. Singh abolished this tax in1985 when he was
Finance Minister.
GIFT TAX
Gift Tax was introduced in 1985. This was
supplementary to the asst duty, wealth tax and
expenditure tax. This was necessary to avoid evasion
of the other three taxes. Gift tax is imposed in each
financial year on the gifts given last fiscal. Yashwant
Sinha abolished this tax in 1998-99 budget ,on the
ground that this yielded only a meager amount.
SECURITIES TRANSACTION TAX (STT)
Sale of any asset (shares, property etc) results in loss
or profit. Depending on the time the asset is held, such
profits and losses are categorised as long term or short
term capital gain/loss. In the 2004-05 budget, the
government abolished long-term capital gains tax on
shares (tax on profits made on sale of shares held for
more than a year) and replaced it with STT. It is a kind
of turnover tax where the investor has to pay a small
tax on the total consideration paid/received in a share
transaction.
BANKING CASH TRANSACTION TAX (BCTT)
Introduced in the 2005-06 budget, BCTT is a small tax
on cash withdrawal from bank exceeding a particular
amount in a single day. The basic idea is to curb the

black economy and generate a record of big cash

transactions.
CUSTOMS DUTY
Taxes imposed on imports. While revenue is an
important consideration, customs duties may also be
levied to protect the domestic industry or sector
(agriculture, for one), in retaliation against measures
by other countries etc.
UNION EXCISE DUTY
Duties imposed on goods manufactured in the country
by the Central Government, but those goods are
exempted from union excise duties, on which State
Government imposes excise duty for example Sugar,
Cotton, Textile, Tobacco, Motor Spirit, Match Box and
Cement etc.
SERVICE TAX
It is a tax on services rendered. Telephone bill, for
instance, attracts a service tax.
While on taxes, let us take a look at an important
classification: direct tax and indirect tax, which finds
wide mention in the budget.
DIRECT TAX
Traditionally, these are taxes where the burden of
falls on the person on whom it is levied. These
largely taxes on income or wealth. Income tax
corporates and individuals), FBT, STT and BCTT
direct taxes.
INDIRECT TAX

tax
are
(on
are

In the case of indirect taxes the incidence of tax is

usually not on the person who pays the tax. These are
largely taxes on expenditure and include customs,
excise and service tax.
Moving on, we come to the next important receipt item
in the revenue account which is non-tax revenue.
NON-TAX REVENUE
The most important receipts under this head are
interest payments (received on loans given by the
government to states, railways and others) and
dividends and profits received from public sector
companies.
Various services provided by the government - general
services such as police and defence, social and
community services such as medical services and
economic services such as power and railways - also
yield revenue for the government. Though Railways
are a separate department, all its receipts and
expenditures are routed through the consolidated
fund.
REVENUE DEFICIT
The excess of disbursements over receipts on
revenue account is called revenue deficit. This is
an important control indicator. All expenditure on
revenue account should ideally be met from receipts
on revenue account; the revenue deficit should be
zero. When revenue disbursement exceeds receipts,
the government would have to borrow.
CENTRAL PLAN

Central or annual plans are essentially the five year

plans broken down into five annual installments.
Through these annual plans the government achieves
the
objectives
of
the
Five-Year
Plans.
The
governments support to the central plan is
called the budget support.
Plan Expenditure
This is essentially the Budget support to the central
plan and the central assistance to state and Union
territory plans. Like all Budget heads, this is also split
into revenue and capital components.
Non-Plan Expenditure
This is largely the revenue expenditure of the
government. The biggest item of expenditure are
interest payments, subsidies, salaries, defence and
pension. The capital component of the non-plan
expenditure is relatively small with the largest
allocation going to defence.
Note: It is important to note that the entire
defence expenditure is non-plan expenditure.

We will now take up the various deficits and the

components of plan and non-plan expenditure.
FISCAL DEFICIT
The difference between total revenue and total
expenditure of the government is termed as
fiscal deficit. It is an indication of the total
borrowings needed by the government. While
calculating the total revenue, borrowings are not
included. Generally fiscal deficit takes place due to

either revenue deficit or a major hike in capital

expenditure.
PRIMARY DEFICIT
The revenue expenditure includes interest payments
on governments earlier borrowings. The primary
deficit is the fiscal deficit less interest
payments. A shrinking primary deficit would indicate
progress towards fiscal health.
The Budget document also mentions the deficit as a
percentage of the GDP.
FRBM ACT
Enacted in 2003, the Fiscal Responsibility and
Budget Management Act requires the elimination of
revenue deficit by 2008-09. This means that from
2008-09, the government will have to meet all its
revenue expenditure from its revenue receipts. Any
borrowing would then only be to meet capital
expenditure - repayment of loans, lending and fresh
investment. The Act also mandates a 3% limit on the
fiscal deficit after 2008-09.
VALUE-ADDED TAX (VAT) AND GST
A Value-Added Tax (VAT) is a form of consumption
tax.
From the perspective of the buyer, it is a tax on the
purchase price.
From that of the seller, it is a tax only on the value
added to a product, material, or service, from an
accounting point of view, by this stage of its
manufacture or distribution.

 VAT helps avoid cascading of taxes as a product

passes through different stages of production/value
addition.
The tax is based on the difference between the
value of the output and the value of the inputs used
to produce it.
The aim is to tax a firm only for the value added by it
to the inputs it is using for manufacturing its output
and not the entire input cost.
The Goods and Service Tax (GST) is a Value
Added Tax (VAT) to be implemented in India, from
April 2016. GST stands for Goods and Services Tax,
and is proposed to be a comprehensive indirect tax
levy on manufacture, sale and consumption of goods
as well as services at the national level.
CESS
This is an additional levy on the basic tax
liability. Governments resort to cesses for meeting
specific expenditure.
SURCHARGE
As the name suggests, this is an additional charge
or tax. A surcharge of 10% on a tax rate of 30%
effectively raises the combined tax burden to 33%. In
the case of individuals earning a taxable salary of
more than Rs 10 lakh a surcharge of 10% is levied on
income in excess of Rs 10 lakh.
14TH FINANCE COMMISSION

The Finance Commission is constituted by the

President under article 280 of the Constitution, mainly
to give its recommendations on distribution of tax
revenues between the Union and the States and
amongst the States themselves.
Chairman of the Fourteenth Finance Commission
is Dr. Y.V.Reddy (Former Governor Reserve Bank of
India)
14th Finance Commission recommendations:
1. (i)
the distribution between the union and states of
the net proceeds of taxes which are to be, or may be,
divided between them under Chapter I, Part XII of the
Constitution and the allocation between the states of
the respective shares of such proceeds;
(ii) the principles which should govern the grants-in-aid
of the revenues of the states out of the Consolidated
Fund of India and the sums to be paid to the states
which are in need of assistance by way of grants-in-aid
of their revenues under article 275 of the Constitution
for purposes other than those specified in the provisos
to clause (1) of that article; and
(iii) measures needed to augment the Consolidated Fund
of a state to supplement the resources of the
panchayats and municipalities in the state on the basis
of the recommendations made by the Finance
Commission of the state.
2. The Commission has been mandated to review the
state of finances, deficit, and debt levels of the union
and states and suggest measures for maintaining a
stable and sustainable fiscal environment consistent
with equitable growth including suggestions to amend
the FRBMAs currently in force. The Commission has
been asked to consider and recommend incentives and

disincentives for states for observing the obligations

laid down in the FRBMAs.
3. The Commission is to review the present arrangements
as regards financing of Disaster Management with
reference to the funds constituted under the Disaster
Management Act 2005(53 of 2005) and make
appropriate recommendations thereon.
4. The Commission is to indicate the basis on which it has
arrived at its findings and make available the statewise estimates of receipts and expenditure.
DIRECT TAX CODE
The Direct Tax Code Bill, 2010 introduced in
Parliament, seeks to consolidate and amend the laws
relating to all direct taxes, that is income-tax, dividend
distribution tax and wealth tax so as to establish an
economically efficient, effective, and equitable direct
tax system which will facilitate voluntary compliance
and help increase the tax to GDP ratio.
ZERO BASED BUDGETING (ZBB)
Zero Based Budgeting (ZBB) is an alternative approach
that is sometimes used particularly in government and
not for profit sectors of the economy. Under zero based
budgeting managers are required to justify all
budgeted expenditures, not just changes in the budget
from the previous year. The base line is zero rather
than last year's budget.
Outcome Budget

The Outcome Budget will be a progress card on what

various Ministries And Departments have done with
the outlay announced in the annual budget.
It is a performance measurement tool that helps in
better service delivery; decision-making; evaluating
programme performance and results; communicating
programme
goals;
and
improving
programme
effectiveness.
Gender Budgeting
Gender Budgeting has become an integral part of the
development policy as it needs a special focused
attention, for the reason that the women are
oppressed from womb to tomb. Gender budgeting is
an important instrument to tackle the growing violence
against women.
HIGHLIGHTS OF UNION BUDGET 2014-15
Finance Minister Arun Jaitley presented the Union Budget
2014-15.
Here are sector-wise highlights:
TAXATION
Abolition of Wealth Tax.
Additional 2% surcharge for the super rich with income
of over Rs. 1 crore.
Rate of corporate tax to be reduced to 25% over next
four years.
No change in tax slabs.
Total exemption of up to Rs. 4,44,200 can be achieved.
100% exemption for contribution to Swachch Bharat,
apart from CSR.

 Service tax increased to14 per cent.

AGRICULTURE
Rs. 25,000 crore for Rural Infrastructure Development
Bank.
Rs. 5,300 crore to support Micro Irrigation Programme.
Farmers credit - target of 8.5 lakh crore.
INFRASTRUCTURE
Rs. 70,000 crores to Infrastructure sector.
Tax-free bonds for projects in rail road and irrigation
PPP model for infrastructure development to be
revitalised and govt. to bear majority of the risk.
Atal Innovation Mission to be established to draw on
expertise of entrepreneurs, and researchers to foster
scientific innovations; allocation of Rs. 150 crore.
Govt. proposes to set up 5 ultra mega power projects,
each of 4000MW.
EDUCATION
AIIMS in Jammu and Kashmir, Punjab, Tamil Nadu,
Himachal Pradesh, Bihar and Assam.
IIT in Karnataka; Indian School of Mines in Dhanbad to
be upgraded to IIT.
PG institute of Horticulture in Amritsar.
Kerala to have University of Disability Studies
Centre of film production, animation and gaming to
come up in Arunachal Pradesh.
IIM for Jammu and Kashmir and Andhra Pradesh.
DEFENCE
Allocation of Rs. 2,46,726 crore; an increase of 9.87
per cent over last year.

 Focus on Make in India for quick manufacturing of

Defence equipment.
WELFARE SCHEMES
GST and JAM trinity (Jan Dhan Yojana, Aadhaar and
Mobile) to improve quality of life and to pass benefits
to common man.
Six crore toilets across the country under the Swachh
Bharat Abhiyan.
MUDRA bank will refinance micro finance orgs. to
encourage first generation SC/ST entrepreneurs.
Housing for all by 2020.
Upgradation 80,000 secondary schools.
DBT will be further be expanded from 1 crore to 10.3
crore.
For the Atal Pension Yojana, govt. will contribute 50%
of the premium limited to Rs. 1,000 a year.
New scheme for physical aids and assisted living
devices for people aged over 80 .
Govt. to use Rs. 9,000 crore unclaimed funds in
PPF/EPF for Senior Citizens Fund.
Rs. 5,000 crore additional allocation for MGNREGA.
Govt. to create universal social security system for all
Indians.
RENEWABLE ENERGY
Rs. 75 crore for electric cars production.
Renewable energy target for 2022: 100K MW in solar;
60K MW in wind; 10K MW in biomass and 5K MW in
small hydro
TOURISM

 Develpoment schemes for churches and convents in

old Goa; Hampi, Elephanta caves, Forests of Rajasthan,
Leh palace, Varanasi , Jallianwala Bagh, Qutb Shahi
tombs at Hyderabad to be under the new toursim
scheme.
Visa on Arrival for 150 countries.
GOLD
Sovereign Gold Bond, as an alternative to purchasing
metal gold.
New scheme for depositors of gold to earn interest and
jewellers to obtain loans on their metal accounts.
To develop an Indian gold voin, which will carry the
Ashok Chakra on its face, to reduce the demand for
foreign coins and recycle the gold available in the
country.
FINANCIAL SECTOR
Forward Markets Commission to be merged with the
Securities and Exchange Board of India
NBFCs registered with the RBI and having asset size of
Rs 500 crore and above to be considered as financial
institution under Sarfaesi Act, 2002, enabling them to
fund SME and mid-corporate businesses
Permanent Establishment norms to be modified to that
mere presence of offshore fund managers in the
country does not lead to adverse tax consequences.