0ef99indian fiscal system

7/31/2019 0ef99Indian Fiscal System

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Indian Fiscal System


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Fiscal SystemFiscal system of a country refers to the revenue and capital

resources that can be raised by government, the procedure to be

observed in raising and spending funds and in case of a federation

such as ours the provision that governs the relationship of the

constituent unit of federation.

It includes with in its purview taxation, expenditure, debt

management and inter-governmental fiscal relation.


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Fiscal SystemIndian fiscal system is based on the constitution of India

which is federal in character. The constitution envisages two

layers of government: the Union of central government and

the state government. Local bodies do not find a place in the

constitution and the function and resources allotted to them

are delegated by the state government.


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Division and functionsThe constitution distributes the legistative functionand resources into three lists

(i) The Union list

(defence, foreign relation, railway, currency )(i) The state list(education ,medical public health, police, law & order )(i) The concurrent list

( Trade union, planning & price policy)


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The taxes over which there is legislative jurisdiction of centre extends fall under four groups

Group I : The taxes which are levied and collected by the union and the proceed are

retained by it. These are corporation tax, custom duties, taxes on capital value of asset.of individual.

Group II: The taxes levied and collected by the union but the proceed of which are

shared with the states. These are Income tax and excise duties.

Group III : The taxes which are levied and collected by the union and the proceed are

assigned to states with in which they are levied. These are succession and estate

duties in respect to property other then agriculture land ,taxes on goods and passenger

carried railway ,sea and air.Group IV : The taxes which are levied by the union but the proceed are of which are

collected and retained by state. These are stamp duties and duties on excise on

medicine and toilet preparation containing alcohol.


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Expenditure of Government

The total expenditure consist of revenue

expenditure (83%) and capital expenditure(27%)

The total expenditure may also be classified

plan(26%) and non plan expenditure(74%).


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Non Plan expenditure

Interest payment Defense expenditure

Subsidies Grant to state Grant to foreign government Other non plan expenditure


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General Service+ Organ of state + tax collection + Police +Pension + Write off loan +others

Social Service + Edu. Sports & Youth affairs + Health andfamily welfare +water supply +housing+ Information andbroadcasting+ Labour and employment +Welfare of ST,SC &

OBC +others

Economic Services + Ag. & Allied activities +Ruraldevelopment+ Irrigation and flood control +energy + Industry

& minerals +Transport+Communication +Science Tech.& Env.

Postal Services

Loan + advances


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Receipt of Central Government

Tax Revenue ( Corporation tax +Tax on income on other thenCorporation Tax +Interest tax +Expenditure Tax +Custom +UnionExcise Duties + Wealth Tax +Gift Tax +Other Tax +Taxes on UT +Service Tax)

Non tax revenue : Fiscal Service +Interest Receipt +Dividend

and profit + Other general service +Social service +EconomicService +UT without Legislature + Grant in aid and contribution.

Capital Receipts : International debt Market +External assistance+Recovery of Loan +Small saving +State provident fund +Specialdeposit + Disinvestment +Others


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Budget Deficit = Total Expenditure

Total Revenue( The excess of revenue expenditure over revenue receipts.It shows thedeficit of government on current account)

Revenue Deficit = Revenue Expenditure RevenueReceipts

( The excess pf all expenditure over all types of receipts

including borrowings)


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Fiscal Deficit = Revenue Deficit + Capital expenditure

( The excess of expenditure over revenue receipts and non debtcapital receipts. It represent the total borrowing requirement of thecentral government )

Primary Deficit = Gross Fiscal deficit Interest Payments( Fiscal deficit net of interest payments. It is the non interest deficitand reflects the current fiscal of the government.)

Monetised Deficit : The part of fiscal deficit which is financed by

RBI through printing of notes.


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What is the fiscal deficit?

The fiscal deficit (FD) measure the shortfall in government ability to fundits expenditure through regular sources.

Sources of funds for a government are of to kind- revenue and capital

The fiscal deficit is a measurable number which occurs in the governmentstatement.

To get more technical , FD is what you take away the totalexpenditure from the sum of revenue receipt (T& NT), recoveries

of loan and other receipt


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In case you are wondering what revenue expenditureis, it is administrative expenditure, and capital expendituregoes towards capital or asset formation.

FD is important to annual budget. The budget is the governmentannual report, which differs from corporate annual report in onekey area- a budget gives projection Or next years number alongside its performance for a finished year.


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How is FD bridged ?

FD represent the extent to which the government needs fund, butdoes not have them. One simple way getting funds you dont have is to Borrow.

GOI is the largest borrower in India. Annual borrowings Of Govt.are probably larger then that of entire Corporate Sector.

Besides, borrowing the govt. has another way of finding funds it doesnot have.

Being the law maker of the land gives the govt. the power tocreate money which is simply printing additional notes .This iscalled monetization.


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How to make sense of FD number ? Is it goodor bad?

FD to some extent is fine. One typically looksat ratio of FD to gross domestic product. Thisratio should ideally remain around 4% for acountry like India. So says the IMF.A muchhigher number is bad news.

Typically many nation and definitely developingnation, will run FD as govt, has the governmenthas large role to play in the economy in areaslike infrastructure, education, social support( India does not have this), defense, Civil admn.

and so on. Government, Needs are likelyto more then its income in a growingeconomy.


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Why is FD so important?

FD has a lot of impact on govt. policy. For example,

if it turns out to be very high in a year the govt willhave to either borrow a lot or print a lot of money.Borrowing a lot will push up interest rate their bymaking the economy costlier and reducing

Competitiveness of goods produced Vis--vishose made by other country.

Printing lots of money breeds inflation, which is alsobad beyond a point. Sustained high deficits can lead to

ery high accumulation of debt by the govt. leading towhat is called internal debt trap.

H k FD i l?


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How to keep FD in control?

t is important keep FD within a limit for this thereare obvious ways

ncrease revenue or cut expenses or both. Revenue canbe increased in three fashion- increase tax rate or taxmore things or reduce tax evasion.

One example of tax more things is taxing agricultural incomecurrently free from levy in India.

n cutting expenses GoI has traditionally taken easierroute. Like cutting infrastructure spending instead harderones like cutting subsidies or freezing recruitment.

0ef99indian fiscal system

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