Explore topic-wise InterviewSolutions in .

(A) Interest incomes earned from loans given by the centre in earlier periods,

(B) Profits and dividends from public sector enterprises.

Correct option is (B) The elected representatives

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

A budget in which the total expenditure is not equal to the total income i.e. either the expenditure is more than or less than the income is called unbalanced budget. Types: deficit budget and surplus budget.

Revenue deficit:

• 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.
• Revenue account contains current transactions of the government. A deficit in this account means that the government is not able to meet its routine ‘ expenditures from its current income.
• Revenue deficit shows’ inefficient working of government.

Solution:

Revenue deficit can be overcome by increasing borrowings on the capital account.

• In order to run the state, the state needs money. The state incurs expenses for the activities it undertakes. In order to pay for these expenses, it must raise and generate income.
• A budget in which the government plans its expenditures in such a way that all the expenditures can be fully made from the available sources of revenue is called a balanced budget.
• 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.
• On the other hand, developed countries also do not have a balanced budget because they keep on increasing their expenditures on defence, research, technology, etc. to maintain their growth rate and develop in newer directions.
• Since, neither developing countries can have a balanced budget nor developed countries, it is said that balanced budget is a theoretical situation.

The planning commission of India is now known as NITI Aayog. Its full form is National Institution for Transforming India Aayog.

Receipts from transactions which have long term or continuous impacts on government funds. Incomes 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.

Need of budget:

• In order to run the state, the government needs money. The state incurs expenses for the activities it undertakes. In order to pay for these expenses, it must raise and generate income.
• In democracy, the government cannot undertake activities, incur expenses or raise incomes without the approval of elected representatives in the constituted body. This approval can be obtained only when the government prepares and presents the budget to the elected body.
• In India, such permission the government take from the Lok Sabha, State legislative assembly, Municipal bodies and Panchayats.

Meaning of budget:

Every year, before the hew financial year starts (i.e. before 1st April), the government of India prepares and presents an estimated statement of expenditure and income before the elected body for its approval. This statement is called budget.

Definition:

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

Need of budget:

• In order to run the state, the government needs money. The state incurs expenses for the activities it undertakes. In order to pay for these expenses, it must raise and generate income.
• In democracy, the government cannot undertake activities, incur expenses or raise incomes without the approval of elected representatives in the constituted body. This approval can be obtained only when the government prepares and presents the budget to the elected body.
• In India, such permission the government take from the Lok Sabha, State legislative assembly, Municipal bodies and Panchayats.

Direct taxes:

• When the taxpayer ‘directly pays the taxes’ to the government, the tax is called a direct tax.
• A direct tax is applied on individuals and organizations directly by the government.
• Income tax, corporation tax, wealth tax, etc. are examples of direct taxes.

Indirect taxes:

• The taxes applied on the manufacture or sale of goods and services are called indirect taxes.
• The tax payer does not pay this tax directly to the government. These taxes are initially paid to the government by an intermediary. The intermediary then adds the amount of the tax it paid to the value of the goods /services and passes on the total amount to the end user.
• Sales tax, service tax, excise duty, GST, etc. are examples of indirect taxes.

Indirect taxes replaced by GST:

(A) Indirect taxes of the centre replaced by GST –

• Central State Tax (CST)
• Central Excise Duty (and additional excise duties)
• Additional Custom Duties
• Service Tax

• GST refers to Goods and Service Tax. It is an indirect tax which has been introduced in India from 1st July, 2017.
• Before the introduction of GST, all forms of government namely central, state and local government used to collect various types of indirect taxes.
• The government of India made constitutional amendments and introduced a common indirect tax called Goods and Services Tax (GST). GST has replaced almost all indirect taxes.
• Thus, a common tax introduced in lieu of several indirect taxes imposed by the central and state governments in India came to be known as the Goods and Services tax (GST).
• GST is levied on the supply of goods and services.
• The administrative authority for GST is the GST Council.
  The finance minister of India is the chairperson of the GST council whereas the finance ministers of states are the members.

Indirect taxes replaced by GST:

(A) Indirect taxes of the centre replaced by GST:

• Central State Tax (CST)
• Central Excise Duty (and additional excise duties)
• Additional Custom Duties
• Service Tax

(B) Indirect taxes of the states and union territories replaced by GST :

• Value Added Tax (VAT)
• Purchase Tax
• Octroi
• Sales Tax,
• Entertainment Tax,
• Entry Tax, etc.

Note that, the basic custom duty collected separately and not yet replaced by GST.

GST in India is introduced to:

• Impose a single tax on a particular good/service by eliminating taxing it multiple times by states and centre, the way it used to happen before GST.
• Eliminate the difference in tax rates between states for similar good/services.
• Reduce the cost of collecting the tax as well as making its administration simpler.
• Ease the digital procedures of tax collection.
• Reduce tax evasion and avoidance and make the indirect tax structure more productive in terms of raising revenues.
• Reduce the burden of indirect taxes on people.

There are four different types of GST as listed below:

1. The Central Goods and Services Tax (CGST)
2. The State Goods and Services Tax (SGST)
3. The Union Territory Goods and Services Tax (UTGST)
4. The Integrated Goods and Services Tax (IGST)

Government gathers current development data and target of each sector. Based on this it decides the estimates needed for the targeted development of each and hence the resources to allocate.

Allocation of resources is one of the important objectives of the government budget. In such a situation, the government through the budgetary policy, aims to reallocate resources in accordance with the economic (profit maximisation) and social (public welfare) priorities of the country.

Types of budget:
1. Balanced budget:

• A budget in which the government plans its expenditures in such a way that all the expenditures can be fully made from the available sources of revenue is called a balanced budget.
• A balanced budget is an ideal as well as a theoretical situation. In reality a balanced budget is impractical.

2. unbalanced budget:
A budget in which the total expenditure is not equal to the total income i.e. either the expenditure, is more or less than the income is called unbalanced budget.

Types of unbalanced budget:
(a) Deficit budget:

• 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.
• In present times, government budgets are mostly deficit budgets.

(b) Surplus budget:

• A budget in which the government’s anticipated total expenditure is less than the anticipated total income is called deficit budget.
• Thus, Surplus Budget = Anticipated Expenditure < Anticipated Income.
• In reality most governments do not have a surplus budget.

The goods and services tax (GST) is a tax on goods and services sold domestically for consumption. The tax is included in the final price and paid by consumers at point of sale and passed to the government by the seller. The GST is a common tax used by the majority of countries globally.

Merits of surplus budget:

• Surplus budget is useful in times of severe inflation. When the government spends less, employment, income and demand reduce. This helps in restricting inflation.
• Since the budget is surplus, there is no burden of borrowing.
• Savings of the government increase which can be used for development in future periods.

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

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.

With respect to double entry book keeping system, all budgets are balanced because the credit (income side) and debit (expenditure side) must always balance. However, in reality, government budgets -may be balanced or unbalanced.

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.

Conclusion:

• Thus, the budget is an important component of planning of the government.
• Various economic policies get guided by the budget allocations in concerned sectors.

1. Surplus budget is useful in times of severe inflation. When the government spends less, employment, income and demand reduce. This helps ¡n restricting inflation.
2. Since the budget is surplus, there is no burden of borrowing.

People are made to pay more taxes to increase the income of government, On the other hand, the welfare they receive from government spending reduces. If the surplus in the budget persistently rises for several years then excess savings may lead to several problems.

(A) Surplus budget:

• A budget in which the government’s anticipated total expenditure is less than the anticipated total income is called deficit budget.
• Thus, Surplus Budget = Anticipated Expenditure < Anticipated Income.
• If a government’s budget is a surplus budget it means that the government is collecting more revenue from citizens through taxes as compared to the amount it is spending for the citizens.
• A surplus budget will result in lesser overall development and welfare activities. In reality most governments do not do this i.e. do not have a surplus budget.

(B) Merits of surplus budget:

• Surplus budget is useful in times of severe inflation. When the government spends less, employment, income and demand reduce. This helps in restricting inflation.
• Since the budget is surplus, there is no burden of borrowing.
• Savings of the government increase which can be used for development in future periods.

(C) Demerits of a surplus budget:

• People are made to pay more taxes to increase the income of government. On the other hand, the welfare they receive from government spending reduces.
• In case of deflation lower spending will result in lower investment, employment, income and production which may lead to depression in the economy.
• If the surplus in the budget persistently rises for several years then excess savings may lead to several problems.

Types of budget deficits:
An unbalanced budget can be either surplus or deficit.

The types of deficits in a budget with specific reference to India are:
1. Revenue deficit:

• 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.
• Revenue account contains current transactions of the government. A deficit in this account means that the government is not able to meet its routine ‘ expenditures from its current income.
• Revenue deficit shows’ inefficient working of government.

Solution:
Revenue deficit can be overcome by increasing borrowings on the capital account.

2. 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.

3. 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.

4. Primary deficit:

• Primary deficit is a relatively new concept in the Indian budget.
• The difference between fiscal deficit of the current year and interest payments on the previous borrowings is called primary deficit.
• Thus, Primary deficit = Fiscal deficit – Interest payments
• The interest payment is an important part of government expenditures. However, these expenditures actually do not incur on current activities but are an inevitable burden to be paid for amounts borrowed in the past.
• Hence, the concept of primary deficit takes out interest payments from fiscal deficit.
• This concept does not have an impact on the policy.

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.