Budget: What it means

Budget: Just like every individual or household needs to have a budget about his earnings and expenditure, the government also has to have the same. Under a budget (from the French word ‘bougette’ means a little bag), the government states how much money it has earned from the taxes and how much has it spent in the previous year. Article 112 of the Indian Constitution makes it a must for the central government to introduce a statement of estimated receipts (income) and expenditure in Parliament. This is done annually. Traditionally, it has been presented on the last working day of February, but this year, it has been brought ahead to February 1.

Who draws up the Budget? The Ministry of Finance has a Budget division, which has the responsibility for the Budget. All government ministries send their proposals and requirements for funds to this division, which then draws up the allocations. They need to be first approved by the finance minister and then the prime minister.

On the Budget day, the finance minister tables 10 to 12 documents. Of these, the main and
most important document is the Annual Financial Statement.

Annual Financial Statement
Article 112 of the Constitution requires the government to present to Parliament a statement of estimated receipts and expenditure in respect of every financial year April
1 to March 31.
This statement is the annual financial statement. The annual financial statement is usually a white 10 page document. It is divided into three parts, consolidated fund, contingency fund and public account. For each of these funds, the government has to present a statement of receipts and expenditure.

Consolidated Fund
This is the most important of all government funds. All revenues raised by the government, money borrowed and receipts from loans given by the government flow into the consolidated fund of India. All government expenditure is made from this fund, except for exceptional items met from the Contingency Fund or the Public Account. Importantly, no money can be withdrawn from this fund without the Parliament’s approval.

Contingency Fund
As the name suggests, any urgent or unforeseen expenditure is met from this fund. The Rs 500crore fund is at the disposal of the President. Any expenditure incurred from this fund requires a subsequent approval from Parliament and the amount withdrawn is returned
to the fund from the consolidated fund.

Public Account
This fund is to account for flows for those transactions where the government is merely acting as a banker. For instance, provident funds, small savings and so on. These funds do not belong to the government. They have to be paid back at some time to their rightful owners.

Because of this nature of the fund, expenditure from it are not required to be approved by the Parliament.

For each of these funds the government has to present a statement of receipts and expenditure. It is important to note that all money flowing into these funds is called receipts, the funds received, and not revenue. Revenue in budget context has a specific meaning.

The Constitution requires that the budget has to distinguish between receipts and expenditure on revenue account from other expenditure.

So all receipts in, say consolidated fund, are split into Revenue Budget (revenue account) and Capital Budget (capital account), which includes non revenue receipts and expenditure. For understanding these budgets Revenue and Capital it is important to understand revenue receipts, revenue expenditure, capital receipts and capital expenditure.

Revenue receipt/Expenditure
All receipts and expenditure that in general do not entail sale or creation of assets are included under the revenue account. On the receipts side, taxes would be the most important revenue receipt. On the expenditure side, anything that does not result in creation of assets is treated as revenue expenditure. Salaries, subsidies and interest payments are good examples of revenue expenditure.

Capital receipt/Expenditure
All receipts and expenditure that liquidate or create an asset would in general be under capital account. For instance, if the government sells shares (disinvests) in public sector companies, like it did in the case of Maruti, it is in effect selling an asset. The receipts from the sale would go under capital account. On the other hand, if the government gives someone a loan from which it expects to receive interest, that expenditure would go under the capital account.
In respect of all the funds the government has to prepare a revenue budget (detailing revenue receipts and revenue expenditure) and a capital budget (capital receipts and capital expenditure). Contingency fund is clearly not that important. Public account is important in that it gives a view of select savings and how they are being used, but not that relevant from a budget perspective. The consolidated fund is the key to the budget. We will take that up in the next part.

As mentioned in the first part, the government has to present a revenue budget (revenue account) and capital budget (capital account) for all the three funds. The revenue account of the consolidated fund is split into two parts, receipts and disbursements simply,
income and expenditure.

Other terms related to Budget:

Consolidated Fund: All the money raised by the government in whatever form is placed in this fund. It could be in the form of taxes, loans sanctioned or those given by the government and have been repaid now. All expenses of the government are met with the consolidated fund.

Contingency Fund: The money in this fund is only used for managing disasters and crises.

Public Account: The money raised from various government schemes are kept here. The schemes could be small-savings or provident funds.

Revenue Spending: The government has to distinguish how much it spends on itself and how much on creating economic assets. Revenue spending takes place from the Revenue Budget. Salaries of government employees, military personnel, ministers’ perks, subsidies, interest on home loans, pensions for former defence officials are accounted for in the revenue budget or spending. These are all financed from the revenue the government earns – in the form of taxes, duties, etc.

Capital Spending: This refers to the money spent on creating assets like infrastructure in the form of constructing roads, highways, buying machinery, equipment, etc. The spending is financed from the capital receipts, i.e., the money the government gets from loans from the market, banks or international organisations.

Non-Plan Expenditure: This consists of the defence expenditure, interest payments, grants to states and subsidies. It can be divided into capital and revenue spending.

Plan Expenditure: It consists of pension, salaries and subsidies and consists mainly of revenue spending.

Corporate tax: Tax on companies’ profits. It was introduced by late prime minister Rajiv Gandhi in the budget of 1987.

Other taxes on income: They include income-tax paid by non-corporate entities, individuals, etc.

Fringe benefit tax: The taxation of privileges that are provided by the employer to his employees besides the regular salary is called the fringe benefit tax or FBT. It was introduced in the budget of 2005-06 after the government felt that many firms were disguising privileges like club facilities as ordinary expenses and avoiding paying taxes.

Customs: Taxes that are imposed on imports to protect the domestic industry against foreign competitors.

Union Excise Duty: This is the duty imposed on goods made in India.

Service tax: It is a tax, which is rendered on services.

Direct tax: This mainly includes taxes on income or wealth. Income tax is an example of direct tax.

Indirect tax: This tax is not levied directly from the person who pays tax but on expenditure. Excise, service taxes are some examples.

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