Public

Finance
 PUBLIC FINANCE

INCOME OF GOVT. OF EXPENDITURE OF GOVT. LOANS OF GOVT. OF

INDIA OF INDIA INDIA
 Recent Changes in Budget

Date Advancement Plan and Non Plan Railway budget merged

(Vote on Account and Expenditure distinction with the general
Interim Budget). removed. budget.
 TYPES OF BUDGET
a. Zero based Budget:
b. Outcome budgeting:
c. Performance budgeting:
 It manages Income, Expenditure and
Loans of the Govt. of India
1. Public Income:

a. Revenue Income

i. Tax Revenue: (Tax Vs. Cess and Surcharge, Laffer Curve, Fiscal
Perspective and Institutional Perspective)

1. Direct Tax

a. Income tax
b. Wealth tax (Abolished in 2014-15 and super rich surcharge was
increased by 2%. This surcharge was introduced in 2013-14.

c. Corporate Tax
 i. Dividend Distribution Tax

ii. Tonnage Tax

d. Presumptive Tax

i. Minimum Alternate Tax (MAT)

ii. Fringe Benefit Tax (FBT)

iii. Commodities Transaction Tax (CTT)

iv. Securities Transaction Tax (STT)

v. Cash Withdrawal Tax (CWT)

2. Indirect Tax

a. Excise Duty
 i. Central Excise Duty: Reforms-: 1981-MANVAT, 1986-
MODVAT, 1999-2000-CENVAT

ii. State Excise Duty/State Sales Tax/since 2005 VAT

iii. Central Sales Tax (CST)

b. Customs Duty

i. Export Duty

ii. Import Duty

c. Service Tax
ii. Non-Tax Revenue
b. Capital Income
• Income Tax + Dividend Distribution Tax + Wealth Tax = Direct Tax Code
(DTC)

• CENVAT + VAT + Service Tax + Central Sales Tax = GST (Majorly)

2. Public Expenditure

a. Planned Expenditure: (Expenditures of 5-year Plans)

b. Non-Planned Expenditure

I. Subsidy

II. Defence

III.Interest payment

IV. Administrative

1. Salary

2. Pension

3. Miscellaneous
• Since 2017-18 this Distinction has been done away with as now there is no
five-year plan model of development.
Loans:
Impact of Internal Loans:

1. Over-Crowding/crowding out effect

2. Income and substitution effect (Inflationary and Recessionary tendencies)

3. Scope of Fiscal Indiscipline

 Understanding the Government Debt
Total Liabilities of
Central Government

96.8% Public Debt (Taken against Other Liabilities (Taken Extra-

3.2% Budgetary
Consolidated Fund of India) against Public Account)
Resources

94.1% Includes Refers to the expenditure undertaken

Internal Debt External Debt
liabilities on by the PSUs through the market
account of PFs, borrowings based upon guarantee of
2.7% Reserve Funds repayment of loans given by
Marketable Non- and Deposits Government. Used by the government
Debt Marketable etc. to meet revenue and capital
Debt requirements outside budgetary
79.1% 15% allocation. Thus it remains outside the
parliamentary control. It is also not
counted under fiscal deficit.
Example: Payment of Food Subsidy bill
to the FCI through borrowings from
NSSF.
 Since, they are kept
“off ” the budget for Extra/Off-Budget
current year, they are Liabilities
also called:

The Fifteenth Finance Outstanding extra-budgetary

Commission in its initial liabilities need to be clearly
report advised both the identified and eliminated in a
centre and the states to time-bound manner as per the
eliminate extra budget amended FRBM Act of 2018.
borrowings.
Why is this Transparency
even important?
 State’s Borrowings

Centre increased borrowing limit of Total net borrowing by states for 2020-21
states to 5% of GSDP from 3%. (Again stood at Rs 6.41 lakh crore, based on 3% of
3.5%) GSDP

0.5% 1% 0.5%

0.25% Urban Local Bodies

Untied
Empowering
0.25% If 3 of 4 is
Power Distribution done.
0.25% Reforms

Improvements
0.25% in EoDB

Universalization of One
Nation, One Ration
1. Public Income:

Revenue Income V. Capital Income

Taxes are what we pay for a civilized society……….Justice Oliver Wendell

Holmes
Tax Revenue V. Non-Tax Revenue
DISINVESTMENT
 Singapore's Model of Temasek Holdings
Temasek Holdings was incorporated by Economic Survey 2019-20 suggests
Singapore government as a private commercial this model to lend professionalism
entity, to hold and manage its investments in its and autonomy to disinvestment
government-linked companies. program of the Government.

Government can transfer its stake in the listed CPSEs to a

separate corporate entity. This entity would be managed by
an independent board and would be mandated to divest the
government stake in these CPSEs over a period of time.
 ISSUES
1. LACK OF POLITICAL CONCENSUS

2. PRESSURE GROUPS AND LABOUR UNIONS

3. MORAL HAZARDS

4. IN THE NAME OF NATIONAL IDENDITY

5. LACK OF INTEREST BY INVESTORS

6. NON-PROFESSIONAL BUREAUCRACY
TAX V. CESS & SURCHARGE
TAXES: DIRECT & INDIRECT
DIRECT & INDIRECT TAXES: FINANCIAL &
INSTITUTIONAL PERSPECTIVE
 WAYS TO IMPOSE TAXES
PROGRESSIVE, PROPORTIONAL AND REGRESSIVE AND DEGRESSIVE
T/Y

Progressive
Percent of Income paid in
Tax
taxes

Proportional
Tax

Regressive
Tax

Income
 WAYS TO IMPOSE TAXES
SPECIFIC AND AD VALOREM
HOW TAX RATES ARE DECIDED: LAFFER CURVE
 Public Finance
Functions of taxation:

• Raise revenues

• Income redistribution

• Promote savings and investment

• To promote growth in backward regions

Which principle should guide a government to collect taxes from society?

• First, Benefit Principle:

• Second, Ability to Pay Principle:

• Third, the Horizontal Equity and the Vertical Equity Principles:

• Principle of Economic Efficiency:

TPRU (2016)
Tax Expenditure
Tax Policy Council (2016)
• Equalization Levy: Introduced in 2016, to tax the business-to-business
digital transactions.
EQUALIZATION LEVY 2.0
TONNAGE TAX (2004)
PRESUMPTIVE TAX (1991)
MAT (1988) & AMT (US-1982, India-2012-13)
FBT (2005-2010)
STT (2004)
 CGT STT
ONLY ON CAPITAL GAINS PART ON ENTIRE VOLUME OF TRADE
PAID ONLY BY SELLER PAID BY BOTH SELLER AND BUYER

• Till 1948: Progressive like Income Tax. This tax kicked in after Rs. 15,000/-
• 1949: Abolished
• 1957-1992: Made permanent
• 192-1999: linked with rate of inflation to provide relief to tax payers.
• 1999-2004: Capped at 10%
• 2004-2018: Abolished

IN 2018-19 NEW 10% CAPITAL GAINS TAX ON GAINS EXCEEDING RS. 1 LAKH ON
INCOME FROM INVESTMENT IN EQUITIES AND EQUITY MUTUAL FUNDS WAS
INTRODUCED.
IMPLICATION OF THIS CAPITAL GAINS TAX
CTT
CWT (2005-06 TO 2009)
1. PARTHASARATHI SHOME COMMITTEE OF TAX ADMINISTRATION REFORMS

COMMITTEE-2014

2. COMMITTEE OF CMs ON DIGITAL PAYMENT-2016

3. RATAN WATAL Committee

 IS CASH A DEMON?

1. HIGH FEE OR CHARGES

2. THRID PARTY MAKING HUGE PROFITS

3. WHY CASH IN DEVELOPED NATIONS?

4. WHY INDIANS PREFER CASH?

5. RATIONALISATION OF TAXES

6. WHY TO FORCE

7. DISPUTE REDRESSAL
 FEW CONCEPTS

1. SPV

2. FISCAL DRAG

3. LTUs

4. VIABILITY GAP FUNDING

Indirect Tax
 Indirect Tax Reforms Timeline

1944-Central Excise
1956-Central Sales Tax 1962-Customs Act
Duty

1994-Service Tax 1986-MODVAT 1980-MANVAT

1999-2000-CENVAT 2005-VAT 2017-GST

MODVAT (1986) V. VAT (2005)
• In recent times, the CST was reduced from 4 to 3% and has been 2%
since June 2008. The entire revenue accruing under levy of CST is
collected and kept by the state in which the sale originates.
CUSTOMS DUTY
SERVICE TAX
 GST
• The present format of GST was recommended by Kelkar task force on
implementation of FRBM act in 2004 as the ultimate reform in indirect
taxes, to bring about 1 unified tax for the whole country.

• The indirect taxes to be subsumed includes following central taxes: 1.

Central Excise Duty (CENVAT), 2. Additional Excise Duty, 3. Service
Tax, 4. Additional Customs Duty, 5. Special Customs Duty and 6. All
Central Cess and Surcharges.
• GST will subsume following State Taxes: 1. VAT, 2. Central Sales Tax,
3. Entertainment Tax (but excluding those levied by local self Govt.),
4. Entry Tax, 5. Luxury Tax, 6. Taxes on betting, lottery and gambling,
7. Stamp Duty, 8. Vehicle Tax, 9. Electricity Tax, 10. Purchase Tax,
11. Octroi, 12. Advertisement Tax, 13. Special Countervailing Duty,
14. All State Surcharges and cess.

• GST was first recommended by LK Jha Committee in 1976 and in

2005 it was redrafted on the recommendations of Asim Dasgupta
Committee.
 Why GST?

● Cascading effect
● Multiplicity of indirect taxes
● Setting off not allowed/difficult in some case
● The transportation costs will add to the costs
● Lines between goods and services have blurred (eg-IPR are considered goods
for imposing sales tax and as services for imposing service tax)
 Why was it delayed?

● Who will levy

● Who will administer
● Inter-state services
● Goods and Service components
● Constitutional amendment
● Concerns raised by advanced states
Provisions of GST Bill
But there are following weaknesses in the present version of GST:
Major goods/sectors excluded:

• Alcohol

• Petroleum and energy

• Electricity

• Land and real estate

• Education

• Healthcare
 Old vs New

Old method GST

Goods and services were taxed separately No differentiation between Goods and
services
Different states different tax rates Uniform tax rates across the country

National market not possible National market can be established

Tax on production (origin based taxation) Tax on consumption (target/end based

taxation)
Cascading effect No cascading effect

Many indirect taxes Only one

Setting off in some cases not allowed Setting off is allowed

GST and Anti-Profiteering
 Taxpayer Charter
 Commitments Include
 fair, courteous and reasonable treatment
 Treat taxpayer as honest
 Provide mechanism for appeal and review
 Provide complete and accurate information
 Provide timely decisions
 Respect the privacy of the taxpayer

 Taxpayer Obligation
 Be honest and compliant
 Disclose complete information
 Be informed about tax rules and compliance requirements
 Maintain accurate record and documentation
 Rupee comes from (2022):

 Borrowings and other liabilities: 34%

 GST: 17%

 Corporation tax: 15%

 Income tax: 15%

 Union Excise Duty: 7%

 Non-tax revenue: 6%

 Customs: 4%

 Non-Debt Capital Receipts: 2%

 Rupee comes from (2021):

 Corporation tax: 21%

 GST: 21%

 Borrowings and other liabilities: 19%

 Income tax: 17%

 Non-tax revenue: 8%

 Union Excise Duty: 7%

 Customs: 4%

 Non-Debt Capital Receipts: 3%

 Rupee goes to (2022):
 Interest Payments: 20%
 States share of taxes and Duties: 18%
 Central Sector Schemes: 17%
 Centrally Sponsored Schemes: 9%
 Finance Commission and other transfers: 9%
 Defence: 8%
 Other Expenditure: 8%
 Subsidies: 7%
 Pension: 4%
 Rupee goes to (2021):
 States share of taxes and Duties: 23%
 Interest Payments: 18%
 Central Sector Schemes: 12%
 Centrally Sponsored Schemes: 9%
 Subsidies: 9%
 Defence: 8%
 Other Expenditure: 8%
 Finance Commission and other transfers: 8%
 Pension: 5%
PLANNED Vs NON-PLANNED
Subsidies
• Reduction in subsidies-

• Subsidies are of 2 types-

a. Merit subsidies
b. Non- merit subsidies
○ Direct / Indirect

○ Universal / Targeted

○ Conditional / Unconditional

○ Implicit / Explicit
● Need for subsidy
○ Improved production/Promoting better inputs
○ Achieve social objective
○ Price control
○ Increasing efficiency
○ Export promotion

● Criticism against subsidy

○ Ill-targeting
○ Doesn’t allow for optimal utilization of resources
○ Creates inefficiencies in the market
DBT (Direct Benefit Transfer)
 DBT vs. BAPU

• Many of the states are ill-prepared, hence BAPU (Biometrically Authenticated Physical
Uptake) is a better option till the time banking coverage and mobile penetration
increases
 Issues with DBT

1. Cash is not equal to calorie intake

2. Law of consumption
3. Threat of sin goods
4. Issues of domestic violence or violence against women
5. It’s about govt. responsibility
6. Why not strengthen existing system?
 Fertilizers-Leakages
• Black marketing

• Impact on the small farmers

• Inefficient subsidy given to domestic manufacturers

• Disparity in the usage

 Other bounties
• Gold-top 20% of the population consumes 80% of the gold which is taxed at
very low rates

• LPG-subsidized at 36% and the better off consume 91% of the LPG

• Electricity-better off are subsidized at a rate of 32% and poor at 49% but
better off consume 84% of the demand

• Kerosene-subsidized at a rate of 38% for both. 50% of the kerosene given at

PDS is consumed by well off
Total Subsidy to the Rich