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The division of the power for generating revenues and making expenditures into a three-tier government is called the concept of federal finance. The three tiers are free to make expenditures on their respective heads and get revenue from their respective sources.

• The Constitution of India has distributed the power of generating revenue and making expenditures into a three-tier government. These tiers are:
  1. The central government
  2. The state governments and
  3. The local governments (For e.g. municipality).
• All these three forms of government are free to make expenditures on their respective heads and to get revenue from their respective sources. This system of financing is called federal finance.

When a government’s total expenditures exceed the revenue that it generates, excluding money from borrow:ngs, it gives rise to fiscal deficit. Thus, fiscal deficit = Total expenditure – Total income (excluding market borrowings).

Fiscal deficit:

• When a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings, it gives rise to,fiscal deficit.
• Thus, Fiscal deficit = Total expenditure – Total income (excluding market borrowings).
• The borrowings that a government does from the market are considered as income on the capital account. In fact this borrowing is a debt created by the government and must not be included as a source of income.

(A) Interest payments (on loans borrowed in earlier periods)
(B) Social services like education, health, public utilities and administration and general services.

Panchayats are mainly responsible for raising facilities of water supply, water pumps, sewage, roads, cleanliness, public health, electricity, etc. in their concerned region.

The expenditure of the budget of state governments is classified into

1. Developmental expenditures and
2. Non-developmental expenditures.

1. Developmental expenditure:

Expenditure that provides a direct boost to economic development is known as developmental expenditure. For example, expenditure on irrigation.

2. Non-developmental expenditure:

Expenditure which does not have a direct impact on development is called non-developmental expenditure. For example, expenditure on pensions.

Correct option is (D) Both (A) and (C)

Correct option is (C) 2016

Correct option is (D) Both (A) and (B)

Correct option is (D) Revenue deficit

• The constitution of India has made a provision under which the panchayats in their respective areas can prepare a plan for economic development and social justice and execute it.
• The constitution has also mentioned several functions and responsibility for the panchayats.

Panchayat means ‘an assembly of fives. Panchayati Raj Institution is the oldest method of local governance in Asia.

• The panchayats get a share in state taxes as suggested in the constitution and by the state finance commissions.
• They receive grants directly from central government.
• They also get funds from the state government to execute development projects announced by the state government.

Expenditure that provides a direct boost to economic development is known as developmental expenditure. For example, expenditure on irrigation.

Correct option is (C) Three tier

Correct option is (B) State Government

Correct option is (A) An assembly of 5 persons

Correct option is (A) Adam Smith

1. A balanced budget ensures financial stability.
2. The government avoids wasteful expenditures so that it can maintain the expenditure equal to income.

The account showing current incomes and current expenditures in a budget is called the current account of a budget.

Current expenditure and capital expenditure.

Receipts of those transactions which have long term or continuous impacts on government funds. Income generated by the government in the form of borrowings from the market in own country and abroad, borrowing from central bank, income from disinvestment, etc. are recorded in this account.

The account showing capital incomes and capital expenditures in a budget is called the capital account of a budget.

Education, health, nutrition, family welfare, water supply, sainitation, welfare of SC, ST and QBC, etc.

• Through the budget people come to know which sectors is the government favouring and how much resource is it allocating to those sectors.
• People also come to know the change in the tax structure that will be done in the commodities and the sectors.
• All this information helps entrepreneurs to understand which commodities will become costlier and which will become cheaper. Based on this they then set their market prices.

Correct option is (A) It ensures financial stability

A developing economy usually spends a lot on development activities like education, social welfare, creation of public utilities, etc. However, since the economy is yet developing, the income of such nations from taxes and other sources are lower. Hence, developing nations have a deficit budget.

Developed countries keep on increasing expenditures on defence, research, technology, etc. so that they can maintain their growth rate and develop in newer directions.

By increasing borrowings on the capital account.

When the total expenditure (current as well as capital) is greater than the total income (current as well as capital) it results in budgetary deficit.

A government budget is an annual accounting statement of the item-wise estimates of expected revenue and anticipated expenditure of the government for a new fiscal year

Two:

1. The credit side which shows income and
2. The‘debit side which shows expenditure.

The state must delegate powers to the panchayats so that they can function accordingly and welfare their regions. The states also provide finance to the panchayats as per the recommendation of the state finance commissions.

The list that contains subjects that are common to both i.e. center as well as state. Both of them are jointly responsible for the areas mentioned in this list. These subjects are important for the country and are uniform in purpose for all states. However, the subjects may vary among states. Example: Economic planning, electricity, education, social security, etc.

Generally, the finance minister of the country presents the budget in the Lok Sabha.

A budget is made for the period of 1st April to 31st March of next calendar year.

• India introduced GST from July 1,2017 after making amendment in the constitution.
• GST replaced about 17 different indirect taxes which were imposed by the central and state government in India.

Some important enforcement areas of GST in India:
1. Respective rates of central and state indirect taxes were determined by the centre and state with different considerations.

• Since one single GST was applied on the entire country, it became necessary for the government to set up a nodal agency to determine GST rates and regulate the GST procedures.
• This nodal agency came in the form of GST council. The finance minister of India was made its chairperson whereas the finance ministers of states were made its members. The council meets every three month.

2. Rates of GST:
There are five different rates of GST applied on various types of goods and services. They are:
1. Zero GST:
The government does not charge GST.on certain goods and services and hence they fall under the zero (0%) GST rate.
Example:
Certain agricultural goods like vegetables, fruits, cereals, education and health services.

2. Levels of rates:
The goods and services not exempted from GST attract 5%, 12%, 18% or 28% depending on the type of needs which they satisfy. The highest GST rate of 28% is imposed mostly on entertainment and luxury goods and services.

3. Compensation to states:
With the introduction of GST it was calculated that some states may incur loss in revenue. Hende the government decided to provide compensation to such states for 5 years since the introduction of GST.

4. Goods and Services kept outside the realm of GST:
In the initial phase, government has not levied GST on certain goods and services. These are to be taxed according to the earlier rates of various indirect taxes. Gradually these goods may be brought under the purview of GST.

These goods are:
(a) Alcohol and
(b) Petroleum products (petrol, diesel, crude, Aviation Turbine Fuel (ATF) and natural gas)

Purpose (Objective) of the budget:

The government must plan its expenditures and raise its income in such a way that the following objectives can be fulfilled:

1. To obtain approval of the body of elected representatives:

The ruling government need to take approval of the elected representatives of the democratic government for the expenditures and incomes estimated to incur in the coming financial year.

2. To get an idea regarding available resources and areas requiring expenses:
To get an idea regarding:

(a) The activities which the government can and should undertake
(b) The expenses to be incurred in various sectors and
(c) The sources from where the necessary income may be raised

3. Provide direction for allocation of resources:

• To allocate the resources i.e. income earned into different sectors with respect to their priority and need.
• If proper estimates are not made for each sector then it is quite possible that ‘ some sectors may receive more than necessary funds and some seciors may get neglected.

4. For knowledge of the public:

• Through the budget people come to know which sectors is the government favouring and how much resource is it allocating to those sectors.
• People also come to know the change in the tax structure that will be done in the commodities and the sectors.
• All this information helps people to understand which commodities will become costlier and which will become cheaper.

Correct option is (C) For knowledge of the government

A budget in which the government’s anticipated total expenditure is more than the anticipated total income is called deficit budget. Thus, Deficit budget = Anticipated total expenditure > Anticipated total income.

• For any effective tax regime, it is very important to ensure that there is no duplication of tax. When tax is levied on the same transaction more than once, it is known as duplication of tax.
• Input Tax Credit (ITC) is a mechanism to avoid duplication of tax on the same transaction. ITC ensures that whatever tax is paid on a given product at an earlier stage, it is set off against the tax payable at the present stage. Earlier, there was no provision under indirect tax system for input tax credit on indirect tax paid, but now GST allows for input tax credit.

Example:

Suppose a trader pays GST of ₹ 35000 at the time of purchase of goods. Suppose at the time of selling this product he is liable to pay GST of ₹ 40,000/-. Then the person needs to pay only the difference in the amount of GST i.e. GST during sale – GST during purchase = ₹ 40,000 – ₹ 35,000 = ₹ 5000/-

Budgetary deficit:

When the total expenditure (current as well as capital) is greater than the . total income (current as well as capital) it results in budgetary deficit.

Solution:

The central government undertakes deficit financing (i.e. borrows from RBI) to meet this deficit. The state governments borrow more from the central government which is then called overdraft.

• The accounts of budget help to thoroughly understand the concept of budget.
• As per the rules of accounts, every budget has two sides. They are:
  1. The credit side and
  2. The debit side

(I) The credit side:

The revenues (i.e. incomes) of the government are recorded on this side.

There are two accounts on the credit side. They are:

1. Current ineome (revenue):

• The revenue income includes direct and indirect taxes, profits of public enterprises, fees and fines from public utilities, etc.
• Revenue income is also called current income because this section records receipts and expenditures transactions of the current period.

2. Capital income:

• The section of capital income records receipts of those transactions which have long term or continuous impacts on government funds.
• Income generated by the government in the form of borrowings from the market in own country and abroad, borrowing from central bank, income from disinvestment, etc. are recorded in this account.

(II) The debit side:

The expenditures of the government are recorded on this side.

There are two accounts on the debit side. They are:
1. Current (Revenue) expenditures:

Current expenditures include expenditure made in the current year on salaries of government employees, interest payment on loan taken by the government, pension, subsidies, grants, current expenses on defence, etc.

2. Capital expenditures:

• These are expenditures on those transactions which have long term or continuous impact on government funds.
• This account includes loans given by the government to other governments, repayment of previously taken loans, capital expenses on social and economic services, as well as capital expenses on defence, etc.

Conclusion:

Thus a budget has following two accounts:
(A) Current account which records current incomes and expenditures and
(B) Capital account which records capital incomes and expenditures

Main elements of the budget:

• It is a statement of estimates of government receipts and expenditures.
• Budget estimates are for a fixed period, generally a year.
• The objective of budget of any government is economic development of the region and public welfare.
• A budget must be approved by Lok Sabha or Assembly or some such public body before its implementation.
• Usually the finance minister of the country, state-or the head of the governing body declares the budget.

Capital expenditure is expenditures on transactions which have long term or continuous impacts on government funds. This account includes loans given by the government to other governments, repayment of previously taken loans, capital expenses on social and economic services, as well as capital expenses on defence, etc.

When the total expenditure of the government on revenue (current) account is more than total receipts of the government on the revenue account it results in revenue deficit.

(A) Revenues from direct taxes and
(B) Revenues from indirect taxes.

Developing countries need a lot of funds to develop their nations. Hence, the government of these nations cannot plan expenditures within given revenue constraints. So, such countries cannot have a balanced budget.

Correct option is (B) Deficit