PAST YEAR PAPER ANALYSIS

 TAX SYSTEM- NOT VERY IMP

 PUBLIC V PRIVATE- 5MARKER IMP
 FISCAL POLICY- MOST IMP- 12.5 MARKERS
 CENTRAL BUDGET OR DEFECT AND DEBT CAN COME AS 6.5
VERY LESS CHANCE OF 12.5
 Regressive – progressive- 5marker

 BUT MOST IMP IS FINANCE AND FISCAL

Tax system- its meaning and classification

WHAT IS TAX-
 The most important source of revenue of the government is taxes.
 The act of levying taxes is called taxation.
 A tax is a compulsory charge or fees imposed by government on individuals or
corporations.
 The persons who are taxed have to pay the taxes irrespective of any
corresponding return from the goods or services by the government.
 The taxes may be imposed on the income and wealth of persons or
corporations and the rate of taxes may vary

Taxes are compulsory payments to the government without expectation of

direct return or benefits to the tax payer- [Link]

Features of a tax-
1. A tax is a compulsory contribution from the people to the State,

2. no specific benefits can be expected from the exchequer.

3. A person cannot refuse to pay a tax, even he considers it unjust or

the government does not spend the tax revenue on services beneficial
to him. However, one can escape from commodity taxes by not
purchasing the taxed goods.
4. Tax revenue collections are generally spent by the State in the
common interest of all and not to serve particular interests of some
individuals or a particular section of the society.
5. The tax imposes a personal obligation. The tax payer must pay it since
tax evasion may force the State to take legal action against the
defaulter.
6. Further, a mere payment of a tax does not entitle the tax payer to
certain benefits from the State.
7. not based on quid pro quo principle. In tax, there is no direct
relationship between the tax paid and the benefit derived.

OBJECTIVE OF TAXES-
1. It is a powerful instrument in the hands of the State for mobilising resources.
2. It removes disparities in the distribution of income and wealth.
3. bring about economic stability and growth in the economy.
4. Raising Revenue
5. Regulation of Consumption and Production
 6. Encouraging Domestic Industries
7. Stimulating Investment
8. Development of Backward Regions
9. Ensuring Price Stability

CLASSIFICATION OF TAXES
TAXES CAN BE DIVIDED INTO
1. DIRECT TAXES
2. INDIRECT TAXES

A) DIRECT TAXES
 Direct taxes are those taxes which are levied immediately on the property and
incomes of persons
 pay them directly to the government.
 These taxes are imposed on and collected from the same person.
 Thus, money burden as well as real burden (sacrifice) of the tax falls on the ate
person.
 The Central Board of Direct Taxes deals with matters related to levying , collecting
and formulation of various policies related to direct taxes.
 In case of a direct tax there is a direct contact between the tax payer and tax levying
public authority
 Income tax, wealth tax, corporation tax, gift tax, toll tax, estate duty, etc. are
important examples of direct taxes.

Merits of Direct Taxes

Following are the main advantages of direct taxes.
(a) Equitable taxes: direct taxes are more just and equitable than indirect taxes, as
Progresion can be applied to them, progression is when people are asked to pay
taxes according to their income bracket. They can reduce concentration of income
and [Link] rate of the tax is varied to make it conform to the ability to pay. It is
possible to exempt the poorest sections of the society from the tax.
(b) Elasticity: A direct tax has elasticity. It can be varied according to the needs of the
government and changes in the income of the people. When the income of the people
goes up, the rate of income tax can also be increased. If the income of the people falls,
the rate of income tax can also be lowered. The tax revenue rises as the national income
rises and vice-versa.

(c) Certainty: The government as well as tax-payer can estimate the amount of tax
with certainty on the basis of tax rates and the level of income or wealth. This
property of certainty introduces an element of convenience in the tax system. When
people know their tax liabilities, the mode and time of payment, they can make
arrangements accordingly.
The property of certainty is also of a great value to the government in budget
making.
(d) Civic Consciousness: Direct taxes rouse civic consciousness. Every tax-payer
is conscious of the fact that by paying taxes, he is supporting the government. He is
also interested in seeing that these collections are properly utilised. He develops
interest into the affairs of the government which is essential for retaining the
democratic form of the government.
Thus, direct taxes do have an educative effect.

Demerits of Direct Taxes

Though direct taxes possess a number of merits, these are criticised on the following
points:
(a) Tax Evasion: It is the most serious drawback of the direct taxes. Dishonest
individuals and firms through falsification of accounts evade tax liability. Problem of
black money is the result of large scale tax evasion. Salary earners, on the contrary,
cannot evade these taxes, as documentary evidence is available about their
incomes. Hence, direct taxes discriminate against salaried class
(b) Inconvenience: Direct taxes are inconvenient and irksome to the tax-payers.
 Numerous accounting formalities have to be observed.
 In underdeveloped countries with low literacy rates, inadvertent omission in
maintaining accounts is always possible.
 suffer harassment at the hands of officials.
 more painful when a few lump sum payments have to be made, leaving little
income to be spent on consumption.
(c) Adverse Effect on Investment: Any attempt to raise revenue collections by
raising direct tax rates adversely affects saving and hence investment activity in the
economy. John Adler and A.R. Prest support this argument and explain unfavourable
effects of direct taxes on capital formation in underdeveloped economies.
(d) Uneconomical: Direct taxes are often expensive to collect. Sometimes, the cost
of collection of a particular tax may exceed the revenue realised.

(d)Disincentive to Work and Save: reduce the desire to work and save. The rate
of direct taxes are usually high. Many business ventures are not undertaken on
the ground that a large part of the income earned will have to be given to the
government in the form of taxes. Thus, direct taxes reduce incentives to work
hard and save.

INDIRECT TAX

An indirect tax is collected by one entity in the supply chain, such as a

manufacturer or retailer, and paid to the government. However, the tax is
passed onto the consumer by the manufacturer or retailer as part of the
purchase price of a good or service.
The consumer is ultimately paying the tax by paying more for the product.

Indirect taxes are commonly used and imposed by the government to

generate revenue. They are essentially fees that are levied equally
upon taxpayers, no matter your income, so rich or poor, everyone has to
pay them.

Merits of Indirect Taxes

The nature of indirect tax is contrary to that of direct tax. It generally has
those merits, which a direct tax lack. Following are the important merits of
indirect taxes
(a)Convenience: indirect taxes do not put a direct burden on the tax
payers. Sometimes they even do not feel that they are paying the tax, as
the tax is included in the price of the commodity. Indirect taxes are
convenient since they are paid in small amounts, as and when consumers
purchase goods and services. Even collection of Indirect taxes from
producers is very convenient for the government.
(b) Tax Evasion Difficult: The possibility of tax evasion is very remote in
the case of indirect taxes. The consumers who have to ultimately bear the
burden of indirect taxes have no means to evade it, if they decide to
purchase the goods on which the tax is levied.
(c) Wider Ease: Indirect tax has to be paid by everyone who buys the
goods on which tax is imposed. It has a wide base. The main merit of an
indirect tax is that it touches all income groups.
(d) Welfare: Imposition of taxes on harmful and obnoxious drugs like
alcohol, opium, hemp, tobacco, etc. discourages their consumption and
enable the government to collect substantial revenue.
Indirect taxes can also be used to reduce inequalities in income distribution
by imposing heavy taxes on goods purchased by the rich people and
making wage goods tax-free.
(e) Flexibility:, revenue collection can be increased by bringing more and
more new goods under indirect taxation. This has actually happened in
India in respect of central excise duty.

(f) Productivity: Like a direct tax, an indirect tax also enlarges the
revenue receipts of the government. Indirect taxes in India today provide
the bulk of government revenue. Such taxes have been imposed on
sugar, cooking gas, textiles, shoes, petrol, cigarettes, and many other
essential articles of consumption. By the levy of indirect taxes, the tax
net is cast wider and all people are made to contribute to the national
fund.

Demerits of indirect Taxes

Though indirect taxes have become quite popular in the developed as well
as underdeveloped nations, these suffer from the following drawbacks:
(a) Inequitable: This is the most serious drawback of indirect taxes.
Whether the tax is imposed on the production of a commodity or on its sale,
the rate remains uniform for the rich and the poor alike. It does not
discriminate between various economic groups. Indirect laxes involves
greater sacrifice on the part of wage earners and salaried people. When
the Indirect tax is imposed on necessaries, it falls disproportionately on the
poor. Hence, great reliance on them for revenue collection results in greater
economic inequalities.
(b) Uncertainty: Revenue proceeds from indirect taxes are not certain due
to inadequate information about the elasticities of demand for and supply of
commodities placed under taxation, It is difficult to estimate how much
demand of the commodity has declined as a result of increase in tax.
(c) Tax Evasion: Indirect tax can also be evaded by smuggling, falsification
of accounts, [Link] traders and sellers may evade tax by not issuing cash
memo/bill for the purchase. The consumers too may not insist on the
sellers to issue cash memo to save tax.

PUBLIC FINANCE-
Public finance is about how government funds are handled in a way that is most
beneficial to the development of a country both locally and internationally.

It basically refers to the government’s responsibility to manage public funds and

successfully improve a nation’s economy.

Public Finance refers to the study of the government’s revenue and expenditure
activities. The government has various resources to generate revenue and is used
to benefit the general public. It mainly has three functions: making efficient use of
resources, stabilising the economy, and distributing the revenue generated among
citizens.

Significance
Public finance has a huge impact on the economy since it can be utilized for
implementing economic objectives. This includes ensuring equality in terms of
income as well as wealth redistribution for citizens. It also helps in redistributing
resources so that certain industries are encouraged while limiting the rest. For this
purpose, subsidiaries are offered and investments are brought in.
Through taxes, strategic planning takes place which helps in funding the massive
project so that the purchasing power of the economy can improve during periods of
crisis. Public finance contributes the holistic development and well-being of the
macroeconomics of the society. This results in the sustained growth consistent with
the time in full transparency.

Components
Public revenue is composed of the following components:
 Collecting Revenue: One of the important components of public finances is
collecting revenue through fines, taxes, charges, import duty for running the
economy.
 Preparing budgets: Another important component is setting a budget which
includes an annual forecast of revenue and expenditure. This helps in analyzing
the requirement of debtor for investing in finances.
 Investment analysis: It is necessary to assess and determine whether the funds are
in excess or short. Accordingly, the decision related to the deployment of funds is
made.
 Public expenditure: This is important for building infrastructure and fulfilling
requirements in order to run the government.
 Tax collection: It is one of the main sources of revenue for governments that help in
the development of the country.

Functions of Public Finances

The following are the functions of public finances:
 Preparing economic policies for the development of the economy and nation.
  Managing income and expenditure through the optimum utilization of resources.
 Maintaining transparency of policies as well as records of income and
expenditure.
 Comparing actual position with budgets and modifying policies to better manage
the economy.
 Fulfilling the financial and infrastructural requirements of the public.
 Maintaining functionality and effectiveness of financial policies.

What is Private Finance?

Private Finance is the study of the revenue and expenditure
activities of an individual or a company. Under private finance,
individuals or private entities have fewer resources to generate
income, and this income is used to create profit and meet personal
desires.

Private finance can be categorised into two types: Personal

Finance and Business Finance. Individuals, households,
companies, or business firms have access to personal finance. It
comprises activities like banking, savings, investment, loans, etc.
Individuals make short-term investments, but before making any
investments they carefully evaluate their income. The management
of a company’s financial activities is referred to as business
finance.
Characteristics of Private Finance
 The main objective of private finance is profit by increasing investors’ wealth and
economic value.
 It is based on the maximization of income and profits.

 It involves the minimization of costs and expenses.

 Private finances seek the efficiency of financial resources to obtain greater

profitability.

Functions of Private Finance

The functions of private finance include:
Investment: Involves making decisions like where to invest money to generate
returns and build wealth over time.
Risk management: Managing financial risk through diversification, insurance, and
hedging strategies.
Financing: Obtaining financing through borrowing or equity investments.
Savings and wealth accumulation: Managing personal finances to save money,
build wealth, and achieve financial goals.
Consumption and spending: Managing personal finances to balance current and
future savings goals.

Basis Public Finance Private Finance

Public finance is Private Finance is

concerned with the considered with the
Meaning expenditure and expenditure and
revenue of the revenue of individuals
government. and business firms.

Government usually Private entities usually

Nature of the makes a deficit budget, make a surplus budget,
Budget i.e., where expenditure i.e., where revenue
exceeds revenue. exceeds expenditure

The objective of public

The objective of private
finance is to encourage
finance is to only
Objective social welfare and
enhance the profit of
provide benefits to the
the entities.
general public

Private finance is less

Public finance is more elastic than public
Elasticity of
elastic as it has a scope finance as there is not
Finance
of drastic changes. much scope for changes
in it.

The financial
The financial
Financial transactions in this
transactions in this case
Transaction case are open and
are kept a secret.
known to everyone.

The government has

more sources for
Private entities have
Sources of creating money, such
limited sources to
Revenue as printing money and
generate revenue.
establishing laws to
raise its revenue
 Basis Public Finance Private Finance

The government A private individual first

Determinatio determines the amount evaluates his income
n of of expenditure first and before deciding how
Expenditure then searches for ways much money is needed
to generate income. to be spent.

The government has

Right to complete authority over Private entities are not
Print the currency. They can allowed to create
Currency create, distribute and currency
monitor the currency.

Public Finance has a Private Finance has

Effect on tremendous impact on little or negligible
Economy the overall economic impact on the overall
system. economic system.

In public finance, the In private finance, an

Differences
government’s capacity individual’s credibility
in Credit
for borrowing or public and borrowing
Status
credit is unlimited. capability are restricted.

The time horizon of There is no fixed time

Time Horizon public finance is one horizon for private
year. finance.

Mortgage,saving
Public Debt, Taxation, Insurance, Stock Market
Example Public Spending, Investment, Personal
Monetary Policy, etc. Savings and
Investments, etc.

. FISCAL POLICY-
1. Describe the role of fiscal policy in achieving economic growth and in
stabilizing the economy. Do the policy measures for growth & stability
conflict with one another.
2. Discuss the tools and the objectives of fiscal policy in the developing
countries. What are its limitations?
3. Explain the technique of fiscal policy.
 4. State the various objectives of fiscal policy in detail. Discuss the role
of fiscal policy during depression along with the limitations
5. It is the Revenue Deficit than the Fiscal Deficit that the policy makers
should be more concerned about." Comment.
6. What is Fiscal Policy? What are its objectives? How does it help
economic development?

DEFINITION-

How it came into existence-

Till the depression of 1930s, monetary policy was looked upon as a proper
and efficient instrument for the attainment of economic stability.

The limitations of the monetary policy came to limelight during the Great
Depression This policy was inadequate to revive business and
employment

At this juncture, under the influence of Keynes, fiscal policy came to the
fore., fiscal policy emerged as a powerful instrument of economic
management and control. According to Keynes, the fiscal policy is a
reasonable effective weapon to check inflationary pressures.

Definition-

Fiscal policy refers to the use of government spending and tax policies to
influence economic conditions, especially macroeconomic conditions.
These include aggregate demand for goods and services, employment,
inflation, and economic growth.

During a recession, the government may lower tax rates or increase

spending to encourage demand and spur economic activity. Conversely, to
combat inflation, it may raise rates or cut spending to cool down the
economy.

 The major purpose of these measures is to stabilize the economy.

And for growth of economy
 Fiscal policy measures are frequently used in tandem with
monetary policy to achieve these macroeconomic goals.

OBJECTIVES

 Attainment of full employment:

 It is of supreme importance to developing countries to avoid unemployment if
not attained full employment. The state, therefore, has to spend on social
and economic overhead in order to create employment. Expansion of job
opportunities is one of the important objectives of fiscal policy.. Thus, fiscal
policy can help in creating an atmosphere, where people get employment
opportunities. Tax benefits in the form of lower or no excise duty may be
granted to those goods, which are produced under labour intensive
techniques like handloom and handicrafts. Such tax benefits will induce
private producers to employ more labour

 Price stability:

Fiscal policy measures are deployed to control the inflationary tendencies of

the economy. In a period of deflation budget have to be prepared as such that
expenditure is more and create income for people. During inflation
expenditure should be decreased to curb the spending capapcity of people
Expenditure tax. Luxury tax etc applied to control people spending on non
essential items

 Accelerating the rate of economic development:

One major objective of fiscal policy is to promote economic development of

the country. The government can step up saving and investment through its
taxation policy, public borrowing and public spending. To accelerate the rate
of capital formation and investment, the resources should be diverted to items
fish priority for development purposes.

. The pattern of investment is so important in the developing countries that

they lay a great stress on construction of roads, canals, power houses, iron
and steel, chemicals, fertilisers, etc. To encourage production of specific
items, subsidies may be provided. Expansion of investment opportunities will
definitely have a favourable effect on the level of business activities and
hence development of the economy

 Economic stability:

The budgeting system should have built-in flexibility so that

the government's income and expenditures automatically offer
a compensatory effect on the increase or fall of the nation's income and
prevent the economy from external shocks.

 Capital formation and growth:

Capital formation is crucial to a developing economy. India’s fiscal

policy has given a lot of importance to capital formation in order
to bring the country out of poverty. The fiscal policy continues to
prioritize investing in capital.
 Reduction of disparities of income-

the government can transfer the purchasing power of the people

through its fiscal policy.. These transfers can be regulated to
minimise the inequalities of income and wealth. Extreme
disparities create political and social discontentment and general
instability in the economy. Following measures can be taken to
reduce the disparities of income and wealth.

(i) Progressive taxes may be imposed to reduce the

spending power of the richer sections of the society, while
poor people should be exempt from tax.
(ii) (a) Luxury and harmful goods should be heavily taxed.
The proceeds may be used on the social services or on
the items, which benefit the poor people the most.
(iii) Unearned income should be discouraged.
.

LIMITATIONS OF FISCAL POLICY IN DEVELOPING COUNTRIES

Fiscal policy has achieved a great success in the advanced countries.
However, it suffers from a number of limitations in the developing
countries on account of their inherent characteristics.
Some of the limitations responsible for only partial success of fiscal
policy in the developing countries are as follows :
(i) The tax structure of the developing countries is narrow and rigid.
There is need for a well-knit and integrated tax policy.
(il) On account of sociological reasons, there is a tendency on the part of
the people to invest their savings in immovable property and jewellery.
The interest seldom induces them to part with their savings to the
government. The outlook of the people is now slowly changing with the
development of banking and financial institutions.
(iil) A sizable portion of the developing countries is non-monetised,
adversely affecting the success of the fiscal policy.
(iv) Lack of adequate data regarding income, expenditure, saving,
investment, employment, etc. complicates the task of the State to
formulate and implement an effective fiscal policy.
Further, the administrative machinery responsible for execution of the
fiscal policy is corrupt, incapable, inefficient and politically motivated.
(v) The government fails to collect the required amount of tax revenue
due to large scale tax evasion by the people.

INSTRUMENTS OF FISCAL POLICY-

The government can influence the level of economic activities in a country through
its fiscal policy. There are three main constituents of the fiscal policy.
1. Public Expenditure
The public expenditure can affect the economic development of a country through its
size and composition. Expenditure on defence, police and such other activities,
being unproductive, can rarely help in the growth of a country. On the other hand,
productive expenditure on development of infrastructure and basic industries assists
growth in a significant manner.
The importance of public expenditure becomes more prominent during the period of
depression, when the private entrepreneurs are reluctant to take up investment
activities. Public expenditure injects a fresh purchasing power and fills the gap
created by the deficiency of private spending.
An initial rise in public expenditure sets in motion a process of recovery from the
condition of depression. In the words of Keynes,
"Government expenditure becomes a balancing factor in
order to maintain national income at a given level. Such an expenditure may be
progressively raised during depression phase of the business cycle and
progressively reduced in the recovery phase".

2) TAXATION-

The principal source of government revenues are taxes. They can be broadly classified as: (i) direct
taxes and (ii) indirect taxes. Personal and corporate taxes are the main form of direct taxes levied by
the central government. Indirect taxes are levied on goods and services and are paid by their end
users. Examples of indirect taxes are: excise duty, service tax, customs duty, etc.

In the period immediately after India attained its independence, the tax system in India was so
structured as to transfer resources from private sector Macroeconomic Policies 34 to public sector
dominated industrialisation process and to cover the cost of social welfare schemes. The share of
indirect taxes in total revenue collection of India was higher than direct taxes. Such indirect taxes
distort the resource allocation in the economy as their burden falls disproportionately on different
groups of consumers (i.e. those who buy goods with lower elasticity of demand are also burdened
with the same amount of tax as others). In other words, higher indirect taxes results in a higher
burden of taxes on people with relatively low incomes

Tax structure in a developing country should be in such a way that it can raise resouces for
governmental develepoment without having adverse affect on investment activity. In developing
country cant rely too much on income rax for raising revenue due to low per capita inome of people

Not good idea to tax people-

1) Disincentive to productive activities in private sector

2) Effect capacity to work and save

Good idea to tax luxury items-

1) Progressive tax
2) Reduce income disparity
Government should focus that not too much pressure is on poor people. The burden
is shared by both classes of people.

3. Public Borrowing
Taxation policy may fail to mobilise enough resources in the developing countries
due to low level of per capita income. Sometimes, it may not even considered to be
just. Some people recommend public borrowing for financing of long gestation
development projects, the benefit of which may not be available to the present
geheration.
Public borrowing may be used to check non-essential private consumption
expenditure. The government may issue debentures, bonds, etc, with attractive rates
of interest for this purpose.
When the government fails to collect sufficient resources, it may resort to compulsery
savings.
Public borrowing will be successful only when debts are collected from the idle
balance with the people. If borrowing leads to a fall in current consumption or is
financed through cut in investment, it may not have desired effects.
As far as external sources of borrowing are concerned, developing countries can
take loans not only from developed countries, but also from international financial
institutions like I.D.U, IF.C., etc

Role of Fiscal Policy in Developing Economy

Resource Mobilization: Owing to acute poverty, the marginal propensity to consume is very high in
developing economies. As a result the level of saving is very low in these economies. Therefore fiscal
policy has an important role to play in mobilizing saving for capital formation through taxation and
public borrowing

Development of Private Sector: In a developing economy private sector forms an important

constituent of the economy. The production and productivity of private sector can be influenced by
fiscal policy. Tax relief, rebates, subsides may be granted to boost up the productive activity in the
private sector

Optimization of Resources Allocation: In developing economies, fiscal tools can be utilized to effect
optimum allocation of resources. Very often resources in private sector are directed towards the
production of goods which cater to the requirement of richer section of society. Fiscal tools can be
employed to allocate the mobilized resources in desirable channels of investment.

Reduction of Inequality: Provision of equality in income wealth and opportunities form an integral
part of economic development in developing economics. Fiscal policy has an important role to play in
reducing inequality

Creation of Social and Economic Overheads: In developing economics, there is the lack of proper
development of basic infrastructures which are vital requirements for economic development.
Provision of social overheads like education and health service will directly enhance the productive
capacity of the people

Essentials of a budget

How is it prepared

INGREDIENTS OF A CENTRAL BUDGET

CENTRAL BUDGET
DEFINTION-

 It is the annual financial statement of the government.

 It shows the receipts and expenditure of the government for a particular
financial year.
 Article 112 of the Indian Constitution makes a requirement in India to present
before the Parliament a statement of estimated receipts and expenditures of
the government in respect of every financial year which runs from 1 April to 31
March.
  The budget comprises mainly of two accounts:

 revenue account (revenue budget), that relate to the current financial year
transactions; and
 capital account (capital budget), that relate to the assets and liabilities of the
government.

Budget is always presented after economic survey of previous year

- Accounting year (April-March)
- presented in Lok Sabha on 1st February by finance minister under article 112 of Indian
constitution
- It is a financial statement showing the estimated receipt/expenditure of the govt for the
coming fiscal year.
- 26 November 1947- independence ke baad pehli baar budget present karaya tha

Objectives of Government Budget

 Allocation of resources: Through budget the government allocates and mobilise
resources that benefit all. This also provide public goods and services such as
national defence, roads, government administration etc. GIVING subsidies to
promote setting up of business on rural area. Encouraging more tax on alohcol and
tobacoo
 Income redistribution:

 The government sector affects the personal disposable income of households by

making transfers and collecting taxes to ensure a fair and equitable distribution of
this income. The redistribution objective is sought to be achieved
through progressive income taxation, in which higher the income, higher is the tax
rate. With respect to indirect taxes, necessities of life are exempted or taxed at low
rates, comforts and semi-luxuries are moderately taxed, and luxuries, tobacco and
petroleum products are taxed heavily.

 Economic stabilisation: Economic stabilisation is crucial to correct fluctuations
in income and employment. Any intervention by the government to expand or
to reduce the aggregate demand in the economy constitutes the
stabilisation function.

 ECONOMIC GROWTH- saving and investment are two factors on which

economic growth depends on. Every government provides schmes in the budget for
the citizen to save and invest.

Decrease regional differences – It aims to diminish regional inequalities by

implementing taxation and expenditure policy and promoting the installation of
production units in underdeveloped regions.

COMPONENTS OF BUDGET
There are two components of a budget.
1. Budget Receipts
Budget receipts mean the estimated receipts of a government during a financial year
from all the sources. Budget receipts are of two types:
(a) Revenue Receipts: These are those receipts which neither increase the liabilities
nor decrease the assets of the government. For example, income tax, excise duty,
service tax, fines, etc. But, if the government sells out a government company to a
private sector, an asset (the company) of the government is reduced. Therefore,
such receipt cannot be termed as revenue receipt.
(b) Capital Receipts: These are those receipts which either increase the liabilities or
decrease the assets of the government. When the government borrows money from
the World Bank, IMF, the US, etc., such receipts increase the liabilities of the
government. Therefore, these are capital receipts.

2. Budget Expenditure
Budget expenditure means the estimated expenditures of a government during a
financial year.
Budget expenditures are of two types:
(a) Revenue Expenditure: These are those expenditures which neither
decrease the liabilities nor increase the assets of the government. For
example, when a government pays salaries to the government
employees or pays interest on loan taken from the World Bank, IMF,
etc. Such expenditures neither decrease the liabilities nor increase
some asset of the government. Therefore, these expenditures are
revenue expenditures
b) Capital Expenditure: These are those expenditures which either decrease the
liabilities or increase the assets of the government. For example, when a
government repays her loans taken from the World Bank, IMF, etc. Such repayment
reduces the liability of the government. Therefore, this repayment is a capital
expenditure.

WRITE ABOUT SOURCES FROM HAND AND TYPES OF BUDGET

HOW BUDGET PREPARED-

 The Annual Budget is prepared by the ministry of finance in consultation with

Niti Aayog and other concerned ministries.
 The Budget division of the department of economic affairs (DEA) in the
finance ministry is the nodal body responsible for producing the Budget.
 The budget-making process starts in August-September, that is, about six
months prior to the presentation date.
 It involves stages that include the issuance of circulars to all ministries,
Consultations on proposals received, allocation of revenues, per-budget
meetings.
 Later, the finance minister and other officials participate in the ‘halwa
ceremony’, which marks the process of printing documents for the Budget.
 And finally, the budget is presented by the Finance Minister in the Lok Sabha