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PUBLIC FINANCE IN INDIA

**PUBLIC FINANCE IN INDIA**

Overview

Public finance in India comes under the purview of the Ministry of Finance
The Ministry of Finance has four departments
Department of Economic Affairs
Department of Expenditure
Department of Revenue
Department of Company Affairs
The Ministry of Finance prepares the budget for the following governments
Union Government
Union Territories
Various states, when under President’s rule


Repositories of public finance

Consolidated Fund of India
Consists of all revenue received, loans raised and money received in repayment of loans by the Union Government
All expenditure incurred by Government is incurred from the Consolidate Fund
No money can be withdrawn from this fund except under the authority of Parliament
Public Account India
Consists of all other receipts such as deposits , service funds and remittances
Usually consists of funds that don’t belong to the government, and need to be paid back
Disbursements from the Public Account do not need authorization of Parliament
Contingency Fund of India
Contains funds for meeting unforeseen needs including supplementary Demand for Grants
The Contingency Fund is placed at the disposal of the President to enable Government to meet urgent unforeseen expenditure
Funds released from the Contingency Fund are released pending authorization from Parliament

Sources of Revenue

Main sources of revenue are customs duties, excise duties, service tax, corporate and income taxes
Non-tax revenues consist of interest receipts (including interest paid by Railways), dividend and profits
For states, revenue is mainly from taxes and duties levied by the state governments, share of taxes levied by Union, and grants received from the Union
For local body finance, the primary sources are property taxes, octroi and terminal taxes



Sources of expenditure

Non-plan expenditure
Revenue expenditure: it consists of interest payments, defence revenue expenditure, subsidies, debt relief to farmers etc, and grants to states and Union Territories
Capital expenditure: include defence capital expenditure, loans to public sector enterprises, loans to state governments and UTs, and loans to foreign governments
Plan expenditure
Includes agriculture, rural development, irrigation and flood control, energy, industry, minerals, transport, communications etc


Union Budget

The Union Budget is a statement of financial position of the Union Government
The objectives of the Budget include
Coordination of resources
Economic stability
Management of public enterprises
Definition of economic policy
The first Budget was presented in 1860
The Railway Budget was separated from the General Budget in 1921. However, the Railway Budget is a part of the General Budget, just prepared and presented separately
The first Union Budget of independent India was presented by R K Shanmukham Chetty in Nov 1947
The Budget is presented on the last working day of February, and must be passed by Parliament before it can come into effect on April 1 (the start of the financial year)


Kelkar Commission

The 13th Finance Commission, with Vijay Kelkar as Chairman was constituted in Nov 2007
The Finance Commission is ordained by Article 280 of the Constitution
The main recommendations of the Kelkar Commission include
Senior citizens and widows to have exception limit on income tax of Rs 150,000
Three types of income tax slabs: up to Rs 1 lakh (no tax), Rs 1-4 lakh (20% tax), Above Rs 4 lakh (30% tax)
Abolition of dividend tax and long term capital gain
Income tax on agriculture to be withdrawn
Higher duty of 150% for specific agro products and demerit goods
Complete exemption of custom duty for life saving drugs, equipment, and defence related goods


Taxes

Direct taxes are those taxes in which the burden of tax cannot be shifted from the person on whom it has been levied. Eg: income tax, property tax
Indirect taxes are those taxes in which the burden of tax can be shifted. Eg: sales tax, excise duty, entertainment tax
Indirect taxes are the larger source of revenue for the government
The ratio of revenue from direct to indirect taxes is usually around 40:60
The largest revenue of the government comes from excise duty



Value Added Tax

By definition, VAT is a tax levied on the value added at each stage of production and distribution process. It is an ideal form of consumption taxation since the value added by a firm represents the difference between its receipts and cost of purchased inputs
Value Added Tax (VAT) is a general tax on commodities to replace sales tax, surcharge and other entry level taxes levied by the states and Union Territories
VAT is levied on sale of all taxable goods. VAT is not levied if sales of goods are not made in the course of furtherance of business
VAT is collected in stages: tax paid on purchases (input tax) is rebated against tax payable on sales (output tax). The concept of second sale or resale tax is done away with
VAT can be computed using one of three techniques
Subtraction method: tax rate is applied to the difference between the value of the output and the cost of the input
Addition method: the value added is computed by adding all payments that is payable to the factors of products (wages, interest payments etc)
Tax credit method: this entails the set off of the tax paid on inputs from tax collected on sales
India uses the tax credit method for VAT computation
Advantages of VAT include
Tax evasion becomes difficult. Businesses compelled to keep proper record of purchases and sales, and keep a trail of invoices
Avoids problem of undervaluing
Increase in revenue as tax net widens
Uniformity in tax regime avoids confusion
Permits easy and effective targeting of tax rates, as a result of which exports can be zero-rated
Parity with tax structures in other countries