COMPONENTS OF GOVERNMENT BUDGET
Components of government budget refer to the structure of the government budget. It shows the various sources by which the government generates its receipts and areas where the government has to incur expenditure to attain its welfare and profit maximization objective. There are two types of government budgets. They are as follows:[COMPONENTS OF GOVERNMENT BUDGET]
- REVENUE BUDGET: It deals with revenue aspects of the government budget. It shows revenue receipts and revenue expenditure.
- CAPITAL BUDGET: It deals with the capital aspects of the government budget. It shows capital receipts and capital expenditure of the government budget.
Q. Differentiate between capital budget and revenue budget. (3 mark)
Budget receipt refers to the estimated money receipt of the government from all the sources during the fiscal year. They can be further classified into the following:
- REVENUE RECEIPT: It refers to those receipts which neither create any liability nor cause any reduction in the assets of the government.
- CAPITAL RECEIPT: It refers to those receipts which either create liability or cause a reduction in the assets of the government.
SOURCES OF REVENUE RECEIPT
The sources of revenue receipt are as follows:
- TAX RECEIPTS: It refers to sum total of receipts from taxes and other duties imposed by the government.
TAX REFERS TO COMPULSORY PAYMENTS MADE BY THE PEOPLE AND COMPANIES TO THE GOVERNMENT WITHOUT ANY DIRECT BENEFITS IN RETURN.
- NON-TAX RECEIPTS: It refers to receipts of the government from all the sources other than those of tax receipt. Government has to give specific services against such revenue.
TYPES OF TAX REVENUE: Taxes can be further classified as follows:
It refers to those taxes where the tax burden is borne by the same person to whom it is levied upon. In other words, a direct tax is paid directly to the government authority that is imposing the tax.
- In India Central Board of Direct Taxes (CBDT) which is governed by the Department of Revenue is responsible for the administration of direct taxes.
- Imposed on individuals and companies.
- Liability to pay tax and the actual burden of tax lies on the same.
- Directly affects disposable income (Y-T) and purchasing power.
- Used as an instrument to change the aggregate demand level of the economy.
- Example: income tax (paid by individuals on their income), corporate tax (paid by companies on annual profit), capital gain tax (paid on profits earned from the sale of the property), securities transaction tax (paid on stock trading), wealth tax (it is not applicable from the financial Year 2015-16)
An indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). An indirect tax is one that can be shifted by the taxpayer to someone else. An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products.COMPONENTS OF GOVERNMENT BUDGET
- Imposed on goods and services.
- Liability to pay tax can be shifted.
- Example: GST (goods and services tax), customs duty (paid on imported goods), excise duty (paid by manufacturers), value-added tax (VAT paid on value addition of goods from one stage to the other), sales tax (paid on the sale of goods), etc.
- INDIRECT TAX CAN BE AVOIDED BY NOT ENTERING INTO THOSE TRANSACTIONS WHICH CALL FOR SUCH TAXES.
DIFFERENCE BETWEEN DIRECT AND INDIRECT TAX
SOURCES OF NON TAX RECEIPTS
- COMMERCIAL REVENUE:
- PROFIT: It is the revenue received by the government by selling goods and services produced by government agencies. Profit of public sector undertaking (like railways, Bharat Heavy Electronic ltd, Steel Authority Of India ltd, etc.)
- INTEREST: Government gives loan to state government, union territory, private enterprises, and the general public and earn interest receipt from these loans. It also includes dividends on the investment made by the government.
2. ADMINISTRATIVE REVENUE:
- FEES: It refers to the payment made to the government for the services that are rendered to the citizen. For example registration fees, import fees, school fees in government schools, etc.
- LICENSE FEE: It is the payment charged by the government to grant permission for something. For example, the license fee paid for keeping a gun, driving license, voting card, etc.
- FINES AND PENALTIES: It refers to those payments which are imposed for an infringement of law for example CHALLAN ON BREAKING TRAFFIC RULES
- ESCHEATS: It refers to the claim of the government on the wealth of a person who dies without leaving a will.
- GIFTS AND GRANTS: Government receives financial help in the form of grants, gifts from foreign governments, and international organizations (WHO, World Bank, IMF, UNO, etc.) such grants and gifts are received during crises.
- FORFEITURES: These are in the form of penalties that are imposed by the court for non-compliance or non-fulfillment of orders of courts.
- SPECIAL ASSESSMENT: Sometimes government undertakes development activities by which the value of nearby property appreciate which will leads to an increase in wealth. So it is the payment made by the owner of these properties whose value has been appreciated.
THE PROPERTY RATE OF DWARKA IS RISING DUE TO THE ESTABLISHMENT OF 2 MALLS.
SOURCES OF CAPITAL RECEIPTS
- BORROWINGS: government can borrow money to meet the financial requirement for the country from the general public or the Reserve Bank of India. This is the internal borrowing of government. The government may borrow from foreign governments and international institutions. This is external borrowing of government.
THE CONTRIBUTION OF FILM STARS LIKE AKSHAY KUMAR AND SALMAN KHAN FOR RECOVERY FROM COVD19 IS INTERNAL BORROWING OF GOVERNMENT AND FINANCIAL HELP FROM IMF AND WORLD BANK IS EXTERNAL BORROWING OF GOVERNMENT.COMPONENTS OF GOVERNMENT BUDGET
- RECOVERY OF LOAN: loans offered to others are assets of the government. It includes loans granted to union territory government, state government.
- DISINVESTMENT: It refers to the act of selling a part of the whole of shares of a selected public sector undertaking held by the government. They have termed capital receipts as they reduce the assets of the government.
- SMALL SAVINGS: It refers to funds raise from the public in the form of post office deposit, national saving certificate. They are treated as capital receipts as they lead to an increase in liability.
QUESTIONS [Components of Government Budget]
- Distinguish between direct tax and indirect tax. (4 marks)
- Distinguish between revenue receipt and capital receipt. Give two components of each. (6 marks )
- It is not only difficult but impossible to tax all those who should be taxed in India. Why? (3 marks)
- ______ is the capital receipt of the government. (1 mark)
- Which of the following is not a revenue receipt? (1 mark)
- Recovery of loan
- Foreign grants
- Profits of public enterprises
- Wealth tax
- By giving reasons classify the following into revenue receipts and capital receipts:
- Recovery of loan
- Profit of public sector undertakings
- Borrowings from the international momentary Fund(IMF)
- Sale of assets
- Foreign donation
- Dividend paid to the government by the state bank of India
- Sales of shares of a public sector undertaking ( PSU) to a private company
- Financial help from a multinational corporation for victims in flood-affected areas.
- Interest received on loans
- _____ is a tax whose impact and incidence fall on the same person. (1 mark)
- Which of the following is a combination of direct taxes? (1 mark)
- Excise duty and wealth tax
- Service tax and income tax
- Excise duty and service tax
- Wealth tax and income tax
- Which of the following sources of receipts in the government budget increases its liabilities? (1mark)
- Direct taxes
- Recovery of loans
- Dividend from public sector undertakings
- Which one of the following is an indirect tax? (1 marks)
- Profit tax
- Wealth tax
- Custom duty
- Gift tax
- How will the goods and services tax be a comprehensive indirect tax? (3 marks )
- How is the GST going to be administered?
- How is tax revenue different from administrative revenue?
Budget expenditure refers to the estimated expenditure of the government during a given fiscal year. The budget expenditure can be broadly classified as follows:
- REVENUE EXPENDITURE: It refers to expenditure which neither creates any assets nor causes a reduction in liabilities of the government. It is recurring in nature. For example, payment of salaries, pension, interest, expenditure on administrative services, defense services, health services, grants to states, etc.
- CAPITAL EXPENDITURE: It refers to expenditure which either creates assets or causes a reduction in liabilities of the government. It is non-recurring in nature. For example, loans to states and union territories, expenditure on roads, purchase of machinery.
QUESTIONS [Components Of Government Budget]
- Distinguish between revenue expenditure and capital expenditure. (4 marks)
- Give reason and classify the following into revenue expenditure and capital expenditure (6 marks )
- Loan of IMF repaid
- Expenditure on the construction of flyover
- Grants are given to the state government
- Expenditure of collection of taxes
- Expenditure on pension
TYPES OF BUDGET
- BALANCED BUDGET: The budget is said to be balanced when estimated government expenditure is equal to estimated government receipts.
- SURPLUS BUDGET: The budget is said to be surplus when estimated receipts are of the government are more than estimated expenditure.
- DEFICIT BUDGET: The budget is said to be deficit when the estimated expenditure of the government is more than the estimated receipt. DEVELOPING NATIONS ADOPT DEFICIT BUDGET AS MAJORITY OF POPULATION IS BELOW POVERTY LINE SO GOVERNMENT DOES MORE EXPENDITURE ON SOCIAL WELFARE.
- In India majority of the population is below the poverty line due to inequality in income and wealth. How can the budget be helpful to solving this problem? (4 marks)
- If you are the finance minister of India and want to set up the budget which one would you like to adopt in case of deficient demand? ( 3 marks )
- There has been a consistent rise in the price of fruits and vegetables in Delhi for sometimes which measures of the budget will you support to reduce the price of the commodities? ( 3 marks )