SCERT

12TH ECONOMY Learn from the Experienced

CHAPTER-9
Fiscal Economics

Introduction
1. The term fiscal economics is a new term but the old and popular term of this
subject is Public Finance
2. Financing of the state activities and discuss the financial operations of the
Government treasury
3. It is concerned with the revenue and expenditure of the public authorities
4. The term fiscal is derived from Greek word basket which symbolise public purse
Subject matter/ scope of public finance
It includes five major divisions
Public Revenue/Public Expenditure/Public Debt /Financial Administration/Fiscal Policy
Public revenue
1. With the methods of raising public revenue such as tax and non-tax, the principles
of taxation, rates of taxation, impact, incidents and the shifting of taxes and their
effects
Public debt
1. It deals with the methods of raising loans from internal and external sources
2. the burden, the effects and redemption of public debt
Public expenditure
1. Fundamental principles that govern the government expenditure, effects of public
expenditure and control of public expenditure

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Financial administration
1. The different aspects of public budget
2. The budget is the annual financial statement of the government
3. The various objectives and steps in preparing a public budget
4. Passing or sanctioning, allocation evaluation and auditing fall within this category
Fiscal policy
1. Taxes subsidies, public debt and public expenditure are the instruments of fiscal
policy
Public finance and private Finance
1. Public Finance deals with the study of income, expenditure, borrowing and the
financial administration of the government
2. Private Finance is the study about income, expenditure, borrowing and financial
administration of individual or private companies
Similarities in public and private financial administration
Rationality
1. Both public and private Finance are based on rationality
2. Maximization of welfare and least cost factor combination underlie both
Limit to borrowing
1. Both have to apply restraint with regard to borrowing
2. The government also cannot live beyond its means
3. There is a limit of deficit financing by the state

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Resource utilisation
1. Both the private and public sector have limited resources at their disposal
2. So both attempt to make optimum use of resources
Administration
1. The effectiveness of both in public sector and private sector depends on the
administrative machinery
2. If the administrative machinery is insufficient and corrupt, it will result in wastage
and losses
Dissimilarities in public and private financial administration
Income and expenditure adjustment
1. The government adjust the income to the expenditure
2. While the individual adjust the expenditure to the income
Borrowing
1. The government can borrow from internal and external sources
2. It can borrow from the people by issuing bonds
3. However an individual cannot borrow from himself
Right to print currency
1. The government can print currency
2. This involves creation, distribution, and monitoring of currency
3. The private sector cannot create currency

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Present vs future decisions

1. The public finance is more involved with future planning and making long term
decision
2. These investments could include building of schools, hospitals and infrastructure
3. The private finance makes financial decision on project with the short term vision
Objectives
1. The public sector's main objective is to provide social benefit in the economy
2. The private sector aims to maximize personal benefit ie. Profit
Coercion to get revenue
1. The sources of income of a private individual is relatively Limited
2. While those of the government it is wide
3. The government can use its power and authority
Ability to make huge and deliberate changes
1. Government has ability to make big decisions on income
2. But individuals cannot make such massive decisions
Functions of modern state
1. The modern state is a welfare state
2. The state has to ensure stability both internally and externally
3. It has to conserve resources for sustainable development
Main components of a state includes

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Defence
1. The primary function of the government to protect the people from external
aggression and internal disorder
2. Government has to maintained adequate police and military forces and render
protective services
Judiciary
1. Rendering justice and settling up disputes are the concern of the government
2. Government should provide adequate judicial structure to provide justice to all classes
of citizen
Enterprises
1. The Regulation and control of private Enterprises fall under the preview of modern
state
2. Ownership of certain Enterprises and operating them successfully are the
responsibilities of the government
Social welfare
1. It is the duty of the state to make provisions for education, social security, social
insurance, health and sanitation for the betterment of people
Infrastructure
1. Modern state has to build and create social and economic infrastructure for the
economic development of the country
Macroeconomic policy
1. The government has to administer fiscal policy and monetary policy to achieve
macroeconomic goals
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Social Justice
1. During the process of economic growth certain sections of society gain at the cost
of others
2. The government has to intervene with fiscal measures to redistribute income
Control of monopoly
1. Concentration of economic power is another evil to be corrected by the government
2. State has to intervene through control of monopolies and restrictive trade practices
3. To curb concentration of economic power
The state can play three kinds of roles
a. As a Producer of goods and services
b. As a supply of public goods and social goods
c. As a regulator of the system
Public expenditure
1. Public expenditure refers to government spending incurred by central, state and local
governments of a country
2. To satisfy the collective social wants of the people
Classification of public expenditure
Classification on the basis of benefit
Cohn and Plehn have classified public expenditure on basis of benefits in to four
classes
1. Public expenditure benefiting the entire society.
Eg. Expenditure on general administration, defence, education, public health transport
ect
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2. Public expenditure conferring a special benefits on certain people and at the same
time common benefit on the entire community
Eg. Administration of Justice
3. Public expenditure directly benefiting particular group of person and indirectly the
entire society
Eg. Social security, public welfare, pension, unemployment, relief ect
4. Public expenditure conferring special benefit on some individuals
Eg. Subsidy granted to a particular industry
Classification on the basis of function
Adam Smith classified public expenditure on the basis of functions of government in
the following main groups
Production function
1. Public expenditure incurred on the security of the citizen to protect from internal
innovation and internal disorder
eg. Defence police Court ect
Commercial functions
1. This group includes public expenditure incurred on the development of trade and
Commerce
eg. Development of means of transport and communication
Development functions
1. This group includes public expenditure incurred for the development of infrastructure
and industry

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Causes for the increase in government expenditure

1. The modern state is a welfare state
2. Government has to perform several functions like social, economic and political
functions
3. These activities increases the public expenditure
Population growth
1. The population of India has increased from 36.1 crore in 1951 to 121 crore in 2011
2. The growth in population requires massive investment in health, education, law and
order ect
3. Young population requires education and youth services
4. Aging population requires transfer payments like old age pension, social security and
health facilities
Defence expenditure
1. The defence expenditure has been increasing tremendously due to modernization of
defence equipment
2. The defence expenditure of the government was 10874 crores in 1990-91
3. Which increases significantly to 2,95,511 crores in 2018-19
Government subsidies
1. The Government of India has been providing subsidies for number of items like food,
fertilizers, interest on priority sector lending, exports, education ect
2. The expenditure on subsidies by the central government in 1990- 91 was 9,581
crores
3. Increased significantly to 2,29,715.67 crores in 2018- 19

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Debt servicing
1. Government has been borrowing heavily both from internal and external sources
2. Hence government has to make those payments back
3. The interest payment of the central government has increased from 21,500 crores in
1990-91 to 15,75,794 crores in 2018- 19
Development projects
1. The government has been undertaking various development projects such as
irrigation, iron and steel, heavy machinery, power, telecommunications ect
2. This involves huge investment
Urbanisation
1. In 1950- 51 about 17% of the population was urban based
2. At present the Urban population is about 43%
3. There are more than 54 cities above 1 million population
4. Heavy expenditure is required on law and order, education, civic amenities ect
Industrialisation
1. Setting up of basic and heavy industries which involves heavy capital and long
gestation.
2. The government can start such industries in a planned economy
Increase in Grant in aid to state and union territories
1. There has been tremendous increase in in grant-in-aid to state and union territories
to meet natural disasters

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Public revenue
1. Public revenue occupies the important position in the study of public finance
2. Welfare of the people which involves substantial amount of public expenditure which
can be financed only through public revenue
3. Public revenue can be raised based on the necessity of public expenditure and the
people's ability to pay
Meaning
1. The income of the government through all sources is called public income of public
revenue
Classification of public revenue
It is of two types
Tax revenue / Non-tax revenue
Tax revenue
1. Tax is a compulsory payment by the citizen to the government to meet the public
expenditure
2. It is legally imposed by the government
3. In no case taxpayer can refuse to pay taxes to the government
Characteristics of tax
1. It is a compulsory payment, people on whom tax is imposed should pay tax and
refusal is a punishable offence
2. No Quid Pro quo -The taxpayer cannot claim any specific benefit against the
payment of tax
3. Tax involve some sacrifice on part of the taxpayer
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4. Tax is not levied as a fine or penalty for breaking law

Some of the tax revenue sources are
a. Income tax
b. Corporate tax
c. Sales tax
d. Surcharge
e. Cess
Non tax revenue
The revenue obtained by the government other than tax revenue is called non tax
revenue
The sources of non-tax revenue are
Fees
1. Fees is charged by public authority for rendering a service to the citizens
2. There is no compulsion involved in case of fees
3. Example; fees are charged for issuing of passports, driving licence ect
Fine
1. It is a penalty imposed on individual for violation of law
Example; violation of traffic rules
Earnings from public Enterprises
1. Government also gets revenue by way of surplus from public enterprises
2. Some public Enterprises make good profits

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3. The profits or dividend from the government enterprises can be utilised for public
expenditure
Special assessment of betterment levy
1. It is a kind of special charge levied on certain members of the community who are
beneficiaries of certain government activities like public projects
Example; people in the locality can experience and appreciation in the value of their
property due to public projects like public Park or due to construction of roads
Grant, gift and aids
1. A grant from one government to another is an important source of revenue in the
modern days
2. The central government provides grant to state government
3. The state government will provide grant to the local government
4. Grants from foreign countries are known as foreign aid
5. Developing countries receive military aid, food aid, technological ect
Escheats
1. It refers to the claim of the state to the property of a person who die without legal
heirs or documented well
Canons of taxation
1. The qualities which a good tax possess are described as canons of taxation
2. It refers the quality of an isolated tax and not to the tax system as whole
According to Adam Smith there are four Canons or maxims of taxation
Canon of ability/ canon of certainty / canon of convenience/ canon of economy

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Canon of ability
1. Government should impose tax in such a way that people can pay tax according to
their ability
2. Rich should pay more compared to middle class are lower middle class
Canon of certainty
1. The government must ensure that there is no uncertainty regarding the rate of tax
are the time of payment
2. If government collects taxes arbitrarily, it will have adverse effect on the efficiency
of people and their working ability too
Canon of convenience
1. The method of tax collection and the timing of the tax payment should suit the
convenience of the people
2. Government should make arrangements for all the taxpayers to pay the taxes without
any difficulty
Canon of economy
1. The government has to spend money for collecting taxes
Example; salary is given to the person who are responsible for collecting tax
Direct tax and indirect tax
Direct tax
1. A tax levied on person's income and wealth and it is paid directly to the
government
2. The burden of such tax cannot be shifted
3. The tax is progressive in nature
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4. It is levied according to the paying capacity

5. The plans and policies of the direct taxes are recommended by the central board of
Direct taxes under the ministry of finance Government of India
Merits of direct taxes
Equity
1. Direct taxes are progressive
2. Example; income-Tax satisfies the Canon of equity
Certainty
1. Canon of certainty can be insured by direct taxes
2. Example; an income tax payer knows when and at what rate he has to pay the
income tax
Elasticity
1. Direct taxes also satisfied that canon of elasticity
2. As income level increases the tax revenue to the government also increases
automatically
Economy
1. The cost of collection of direct taxes is relatively low
2. The taxpayers pay the tax directly to the state
Demerits of direct taxes
Unpopular
Direct taxes are generally unpopular it is inconvenient and less flexible

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Productivity affected
1. Citizens are not willing to earn more income because in that cause they have to pay
more taxes
Inconvenient
1. The taxpayers find it inconvenient to maintain accounts, submit Returns and pay tax
in lump sum
Tax evasion
1. The burden of direct tax is so heavy
2. The taxpayers always try to evade Taxes
3. This will leads the generation of Black Money
4. Which is harmful to the economy
Indirect taxes
1. The taxes charged on a person who purchase the goods and services and it is paid
indirectly to the government
2. The burden of tax can be usually shifted to one person to another
3. It is levied on all persons equally whether rich or poor
There are several types of indirect taxes such as
Excise duty
1. Payable by the manufacturer who shifts the tax burden to retailers and wholesalers
Sales tax
1. Paid by a shopkeeper or retailer who then shifts the tax burden to customers by
charging sales tax on goods and services

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Custom duty
1. Import duties levied on goods from outside the country
2. Ultimately paid or by consumers and retailers
Entertainment tax
1. Liability is on the cinema theatre owners
2. Who transfer the burden on to the cinema goers
Service tax
1. Charge on services like telephone bill, insurance premium, food bill in the restaurant
ect
Merits of indirect taxes
Wider coverage
1. All the consumers whether they are rich are poor have to pay indirect taxes
2. It covers more people than the Direct Access
3. In India everybody pays indirect taxes as against 2% paying income taxes
Equitable
1. The indirect tax satisfies the Canon of equity
2. When higher tax is imposed on luxurious used by rich people
Economical
1. Cost of collection is less as producers and retailers collect tax and pay to the
government
2. The traders act as honorary tax collector

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Checks harmful consumption

1. The government impose indirect taxes and those commodities which are harmful to
health
2. Example; tobacco, liquor ect
3. They are known as sin taxes
Convenient
1. Indirect tax are levied on commodities and services
2. Whenever consumer makes a purchase they pay tax along with their price
3. They do not feel The Pinch of tax paying
Demerits of indirect taxes
Higher cost of collection
1. The cost of collection of indirect taxes is higher than the Direct taxes
2. The government has to spend huge money to collect indirect taxes
Inelastic
1. Indirect taxes or less inelastic compared to direct taxes
2. As indirect taxes are generally proportional
Regressive
1. Indirect taxes or sometimes unjust and regressive in nature
2. Both rich and poor citizens has to pay same amount as taxes irrespective of their
income level
Uncertainty
1. The rise indirect taxes increase the price and reduce the demand for goods

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No Civic consciousness
1. As the tax is hidden in price the consumers are not aware of paying tax
GST goods and service tax
1. GST is an indirect tax which replaced many indirect taxes in India
2. The goods and service taxes act was passed in the Parliament on 29th March 2017
3. That act came into effect on 1st July 2017
4. It is comprehensive, multistage, destination- basic tax that is levied on every value
addition
5. GST is one indirect tax for the entire country
6. Under the GST regime the tax will be levied at the final point
7. In case of intra State sales, central GST and state GST will be charged
8. Interstate sales will be charged to integrated GST
Destination based
1. When a goods is manufactured in Tamilnadu and sold to the final consumer in
Karnataka
2. The goods and Service Tax is levied at the point of consumption
3. The entire tax revenue will go to Karnataka and not Tamilnadu
Components of GST
The GST are of three types
They are central GST, state GST and integrated GST

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1. Central GST- collected by the central government on and intra State sale(within the
state/ union territory)
2. State GST- collected by the state government on an intra State sale(within the state/
union territory)
3. Integrated GST- collected by the central government for inter state sale(maharashtra
to Tamilnadu)
Nature of Sales tax, VAT under GST
1. Sales tax was multipoint tax with cascading effect
2. VAT was multipoint tax without cascading effect
3. GST is one point tax without Cascading effect
Advantages of GST
1. The GST will remove the cascading effect on the sales of goods and services
2. The removal of cascading effect will directly impact the cost of the goods
3. The cost of the goods will eventually decrease
4. GST is also mainly technological driven
5. All activities like registration, return filing, application for refund and response to
notice need to be done via online
6. This will speed up the process
Public debt
1. The role of the state in 18th and 19th century was minimum and limited
2. But since 20th century the role of the state has been enormously increased
3. The state has so much of responsibilities to do for the Welfare of the people
4. In order to supplement traditional revenue sources with borrowing from individuals
and institutions within and outside the country

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5. The debt burden is a big problem and most of the countries are in debt trap

Types of public debt

Internal public debt
1. A loan taken by the government from the citizens are from different Institutions
within the country
The main sources of internal public debt are
1. Individuals, who purchase Government Bonds and securities
2. Banks, both private and public buy bonds from the government
3. Non-financial Institute UTI, LIC, GIC, also by the Government Bonds
4. Central Bank and lend the government in the form of money supply
External public debt
1. When a loan is taken from abroad are from any International Organisation it is called
external debt
2. The external sources are IMF, World Bank, Asian Development Bank, IDA
3. Loan from other countries and from their governments
Causes for the increase in public debt
War and preparation of War
1. Waging war has become one of the important cause of incurring debt by the
government
Social obligations
1. Modern states are considered to be as welfare state
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2. Many social obligations like public health, sanitation, education, insurance, transport
and communication
Economic development and deficit
1. Economic development projects such as construction of railways, power project,
irrigation projects, heavy industries ect
2. Due to heavy public expenditure government always face deficit budget
Employment
1. Unemployment it is the greatest task for the present day government and it has
become the duty of the government to solve this by making huge public expenditure
Controlling inflation
1. The government can withdraw excess money from circulation
2. By raising public debt and thus prevent prices from rising
Fighting depression
1. During the time of depression the private investment will be lacking
2. The government applies compulsory public spending from internal and external
sources
Methods of redemption of public debt
1. The process of repaying public debt is call redemption
2. The government sell securities to the public and at the time of maturity the person
surrenders the security it to the government
Sinking fund
1. The government credits every year if excess amount of money to this fund

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2. By the time the debt matures, the fund accumulates enough amount to pay of the
principal along with the interest
3. This method was first introduced in England by walpol
Conversion
1. And old loan is converted into a new loan
2. High interest public debt is converted into low interest public debt
3. Dalton felt that the debt conversion actually relaxes the debt burden
Budgetary surplus
1. When the government presents surplus budget
2. The surplus can be utilised for repaying the debt
3. Surplus occurs when public revenue exceeds the public expenditure
Repudiation
1. It is the easiest way for the government to get rid of the burden of payment of a
loan
2. The government does not recognise its obligation to repay the loan
3. Certainly not paying off alone but destroying it
4. In normal case the government does not do so
5. Because it will lose its credibility
Reduction in rate of interest
1. Compulsory reduction in the rate of interest during the time of financial crisis
Capital levy
1. When the government imposes levy on the capital assets owned by an individual or
institution
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2. The levy is imposed on capital assets above a minimum limit on a progressive scale
3. The fund is used by the government for paying off war time debt obligations
4. This is the most controversial method of debt repayment
Budget
1. Its origin from the French word Bougett which means a small leather bag
2. The budget is an annual financial statement
3. Which shows the estimated income and expenditure of the government for the
forthcoming financial year
Union budget and state budget
1. India is a federal economy hence the budget is divided into Central and state
2. Union budget under article 112 the parliament and article 202 the state legislative
assembly
Types of budget
Revenue and capital budget
Revenue budget
It consists of revenue receipts and revenue expenditure
1. The revenue receipts can be categorised into tax revenue and non-tax revenue
2. Revenue expenditure can be categorised into planned revenue expenditure and non-
planned revenue expenditure
Capital budget
1. It consists of capital receipts and capital expenditure
2. The main sources of capital receipts are loan, advances ect

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3. Capital expenditure can be categorised into planned capital expenditure and non-
planned capital expenditure
Supplementary budget
1. During the time of War emergency or natural calamities
2. The expenditures allotted in the budget provisions are not always enough
3. Supplementary budget can be presented by the government to tackle unforeseen
events
Vote on account
1. Under article 116 of the Indian Constitution
2. The budget can be presented in the middle of the Year
3. The reason maybe political in nature
4. The existing government may or may not continue for the year due to elections
5. It is also called as lame duck budget
6. The government gets permission from the parliament to incur expenditure till the
budget is finally passed in the parliament
7. Withdrawal of money from the consolidated fund of India
8. This type of budget is generally sanctioned for not more than two months
Zero based budget
1. The Government of India presented zero based budget first time in 1987- 88
2. It involves fresh evaluation expenditure in the government budget
Performance budget
1. When the outcome of any activity is taken as the base of any budget is called
performance budget
2. For the first time in the world the performance budget was made in USA
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3. In 1949 in America under sir Hooper commission was recommended making of a

performance budget
4. In India performance budget is also known as outcome budget
Balanced budget vs unbalanced budget
1. Balanced budget -Estimated revenue during a year is equal to its anticipated
expenditure
2. Unbalanced budget- estimated revenue during year is not equal to its anticipated
expenditure
Unbalanced budget is of two types
1. Surplus budget- when the revenue exceeds the anticipated expenditure
2. Deficit budget- when anticipated expenditure exceeds the revenue
Budgetary procedures
The system through which the budget is prepared, enacted and executed
Preparation of the budget
1. The Ministry of Finance prepares the central budget every year
2. At the state level the finance department is responsible for the annual state budget
The factors which are taken into account while preparing budget are
a. Macroeconomic targets to be achieved within yeah plan period
b. The basic strategy of the budget
c. The financial requirement of different projects
d. Estimate of the revenue expenditures
e. Estimate of the capital expenditures
f. Estimate of revenue receipts from tax and non-tax revenues
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g. Estimate of capital receipts, example; recovery of loan

h. Estimate of the gap between revenue receipts and revenue expenditure
i. Estimate of Fiscal deficit, primary deficit and revenue deficit
Presentation of the budget
1. The honourable minister of Finance on behalf of the central government places the
union budget before the parliament
2. At the state level honourable Finance Minister of the respective state government
places the state budget before the state legislative assembly
3. According to the Indian Constitution all the money bills must be initiated in the
lower house
4. Demands of various tax proposals are included in the budget
5. After the financial bill is passed and appropriation bill is presented to give legal
effect to the voted demands
Execution of the budget
1. The budget is mainly executed by different departments of the government
Parliamentary control over the budget
Government accounts are maintained in three parts
a. Consolidated fund of India
b. Contingency fund of India
c. Public account of India
There are also two committees of parliament
a. The public accounts committee
b. The Estimates committee

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1. These committees keep a constant vigil on the expenditure

2. No ministry or department exceeds the amount sanctioned to it
Budgetary deficit
1. When the anticipated expenditure exceeds the revenue is call all government deficit
2. Budget deficit is of four major type
Revenue deficit/ Budget deficit/ Fiscal deficit/ primary deficit
Revenue deficit
1. Revenue expenditure exceeds over revenue receipts
2. It never consider capital receipts and capital expenditure
3. It clearly shows that government is living beyond its means to conduct day to day
operations
Budget deficit
1. But the deficit is the difference between total receipts and total expenditure
2. Which includes both revenue and capital
Fiscal deficit
1. Budget deficit and which includes government’s market borrowing and liabilities
Primary deficit
1. Primary deficit is equal to fiscal deficit minus interest payments
2. It shows the real burden of the government

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Federal Finance
1. Assigning the source of revenue to the centre as well as the state for efficient
discharge of their respective functions

Division of powers
1. In our constitution there is a clear division of power between the centre and the
state
2. We have three list enumerated in the seventh schedule of constitution
3. They are the union list, the state list under the concurrent list
4. The union list consists of 100 subjects of national importance such as defence
Railway a post and Telegraph ect
5. The state list consists of 61 subjects of local interest such as public health, police
ect
6. The concurrent list has 52 subjects important to both the Union and the state such
as electricity, trade union, economic and social planning ect

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Principles of Federal Finance

Principle of independence/ principle of equity/ principle of uniformity/ principle of
adequacy/ principle of fiscal access/ principle of integration and coordination/
principle of efficiency/ principle of Administrative economy/ principle of accountability

Principle of independence
1. Under the system of Federal Finance government should be autonomous and free
about the internal financial matters concerned
2. Each government should have a separate source of revenue authority to levy taxes
and to borrow money to meet the expenditure
Principle of equity
1. The resources should be distributed among the different states so that each state
receive fair share of revenue
Principle of uniformity
1. In a federal system each state should contribute equal tax payment for Federal
Finance
2. But this principle cannot be followed in practice because the taxable capacity of each
unit is not of the same
Principle of adequacy of resources
1. The resources of each government, Central and state should be adequately to carry
out its function effectively
2. Adequacy must be decided with reference to both current as well as future needs
3. The resources should be elastic in order to meet the growing needs and unforeseen
expenditure like war, flood ect

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Principle of fiscal access

1. There should be possibility for the centre and the state governments to develop new
source of revenue within their prescribed fields to meet the growing demand
Principle of integration and coordination
1. That should be perfect coordination among different layers of the financial system of
the country
2. Which leads to overall economic development of the country
Principle of efficiency
1. The financial system should be well organised and efficiently administered
2. There should be no scope of evasion and fraud
3. No one should be taxed more than once in a year
4. Double taxation should be avoided
Principle of Administrative economy
1. The cost of collection should be at the minimum level and the major portion of
revenue should be made available for other expenditure outlays of the government
Principle of accountability
1. Each government should be accountable to its own legislature for its financial
decision
2. Centre to the parliament and the state assembly
History of finance commission
1. Finance commission is a Quasi-judicial body setup under article 280 of the Indian
Constitution
2. It was established in the year 1951
3. To define the fiscal relationship between the centre and state
4. Finance commission aims to reduce the fiscal imbalances between the centre and the
state and also between the states
5. It promotes inclusiveness
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6. Finance commission is set up once in every five year

7. It is constituted two years before the period
8. It is a temporary body
9. 15th finance commission has been set up in November 2017 its recommendation
were implemented from 1st April 2020
Functions of finance commission of India
1. Article 280 speaks about the functions of the finance commission of India
2. It shall be the duty of the commission to make the recommendations to the
president

3. Distribution between the Union and the states of the net proceeds of taxes
4. Which may be divided between them and the allocation among the states of the
respective shares of such proceeds

5. To determine the quantum of grant in aid to be given by the centre to the states
(article 275) and to avail the principles governing the eligibility of the state for such
grant-in-aid

6. Any other matter refer to the commission by the president of India in the interest
of sound Finance

Local Finance
There is a large variety of local bodies in India they are
a. Village panchayat
b. District Board of Zilla Parishad
c. Municipality
d. Municipal Corporation
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Village panchayat
1. It is usually confined to one revenue village
2. Some cases two or more small villages are grouped under one panchayat
3. The establishment of Panchayat raj is enumerated in the constitution by 73rd
Amendment Act 1992
Functions
1. The functions of Panchayat are civil, economic and so on
2. Thus small disputes may be disposed by the panchayat on the spot
3. Roads, primary schools, village dispensaries ect are to be managed by panchayats
4. The supply of water , both drinking and for irrigation falls within their field of
responsibility sometimes farming, marketing, storage ect are interested to them

Sources of revenue of village panchayats

The following are the sources of revenue of village panchayats
1. General property tax
2. Taxes on land
3. Professional tax
4. Tax on animals and vehicles
5. Other taxes include service tax, octroi, theatre tax, pilgrimage tax, tax on marriage,
tax on births and deaths and Labour tax
6. The taxes are levied by the panchayats only with the sanction of the state
government

District boards and Zila Parishads

1. In rural areas, district board for Zila Parishad are established at district level
2. The territorial jurisdiction of a district board is generally Revenue District
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Functions
1. In Tamilnadu, the Zila Parishad is a coordinating body which exercises general
supervision over the working of Panchayat Samitis and advise them on
implementation of development schemes
Sources of revenue of district boards
1. Grant in aid from the state government
2. Land cesses
3. Toll, fees ect
4. Income from the property and loan from the state government
5. Grant for the centrally sponsored schemes related to development work
6. Income from fairs and exhibitions
7. Property tax and other taxes which is the state government may authorise the
district boards

Municipalities
1. The municipality are bodies or institutions which are established in the urban areas
for looking after local affairs such as sanitation, public health, local roads, lightning,
water supply, cleaning of streets, maintenance of parks, and Gardens, maintenance of
hospitals, dispensaries and veterinary hospitals, provisions of drainage, provisions of
primary education, organising fairs and exhibitions ect
2. All these functions are performed under the control of the state government

Sources of revenue of municipalities

1. Tax on property
2. Taxes on goods, particularly octroi and terminal taxes
3. Personal taxes, taxes on profession, trade and employment
4. Taxes on vehicles and animals
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5. Theatre are show tax

6. Grant in aid from state government

Municipal Corporation
1. The municipal corporation have wide powers and enjoy greater freedom as compared
to municipalities
2. Their functions are water supply and Drainage, lightning, roads, slum clearance,
housing and town planning ect

Sources of revenue of Corporation

1. Tax on property
2. Tax on vehicles and animals
3. Tax on trades and employment
4. Theatre and show tax
5. Taxes on goods brought into the cities for sale
6. Taxes on advertisements
7. Octroi and terminal taxes
Corporation have fair degree of freedom in respect of their choice and modification
of these taxes

Fiscal policy
1. It means budgetary manipulation affecting the macroeconomic variable output,
employment, savings, investment ect
Fiscal instruments
1. Fiscal policy is implemented through fiscal instruments it is also called as fiscal tools
or fiscal levers
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2. Government expenditure, Taxation and borrowing are called fiscal tools

Taxation
1. Taxes transfer income from the people to the government
2. Increase in tax reduces the disposable income
3. So taxation should be raised to control inflation
4. During depression taxes are to be reduced
Public expenditure
1. Public expenditure rises wages and salaries of the employees
2. Increase the demand for goods and services
3. Public expenditure is raised to fight recession and to control inflation
Public debt
1. When government borrows by floating loan, transfer of funds from public to the
government
2. Interest of payment and repayment of public debts in which funds are transferred
from government to public
Objectives of fiscal policy
Full employment/ price stability/ economic growth/ equitable distribution/
external stability/ capital formation/ regional balance
Full employment
1. Full employment is the common objective of fiscal policy in both developed and
developing countries
2. Public expenditure has been spent to create employment opportunities
3. In India public expenditure on rural employment programs like mahatma Gandhi
National Rural Employment Guarantee scheme is an example
Price stability
1. Price instability is caused due to mismatch between aggregate demand and aggregate
supply
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2. Inflation is due to excess of demand

3. In case of excess of demand is caused by public expenditure then public expenditure
should be cut down
4. Taxation reduces disposable income and aggregate demand
5. To fight depression the government needs to increase its pending and reduce
taxation
Economic growth
1. Fiscal policy is used to increase the productivity capacity of an economy
2. Tax is used as an instrument for encouraging investment
3. Tax holidays and tax rebates for new industries which stimulates investment
4. Public Sector Investment has to be increased to fill the gap left by private
investment
5. When the resources from tax is inadequate then government resorts to borrowing
both from internal and external sources
Equitable distribution
1. Progressive rates in taxation help to reduce the gap between rich and poor
2. Public expenditure through welfare schemes promote the living standard of people
Exchange stability
1. Fluctuations in international trade cause movements in exchange rate
2. Tax concessions and subsidy to export help to boost Exports
3. Custom duties on import of non-essential items help to cut import bill
4. Reduction in import duty on import of raw material and machinery enables reduction
in cost and make the export competitive
Capital formation
1. Capital formation is essential for Rapid economic development
2. Tax relief help to increase disposable income, savings and thereby capital formation

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3. Government expenditure on infrastructure development like power and transport

encourages private investment
Regional balance
1. Fiscal incentives for industries in the backward region help to narrow down regional
imbalances
2. Public expenditure may be used to start Industrial Estate so that industrial activity is
stimulated in the backward region

GOOD LUCK

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