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Indian Fiscal System
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  • 1. Indian Fiscal System
  • 2. Fiscal System Fiscal 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.
  • 3. Fiscal System • Indian 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.
  • 4. Division and functions The constitution distributes the legistative function and resources into three lists (ii) The Union list (defence, foreign relation, railway, currency ) (iv) The state list (education ,medical public health, police, law & order) • The concurrent list ( Trade union, planning & price policy)
  • 5. 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.
  • 6. Group III The taxes which are levied and collected by the union and the proceed are assigned to states with in which they are leviable. 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.
  • 7. Expenditure of Government The total expenditure consist of revennue expenditure(83%) and capital expenditure(27%) The total expenditure may also be classified plan(26%) and non plan expenditure(74%).
  • 8. Non Plan expenditure • Interest payment • Defense expenditure • Subsidies • Grant to state and UT government • Grant to foreign government • Other non plan expenditure
  • 9. General Service+ Organ of state + tax collection + Police + Pension + Write off loan +others Social Service + Edu. Sports & Youth affairs + Health and family welfare +water supply +housing+ Information and broadcasting+ Labour and employment +Welfare of ST,SC & OBC +others Economic Services + Ag. & Allied activities +Rural development+ Irrigation and flood control +energy + Industry & minerals +Transport+Communication +Science Tech.& Env. Postal Services Loan + advances
  • 10. Receipt of Central Government Tax Revenue ( Corporation tax +Tax on income on other then Corporation Tax +Interest tax +Expenditure Tax +Custom +Union Excise 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 +Economic Service +UT without Legislature + Grant–in–aid and contribution. Capital Receipts : International debt Market +External assistance +Recovery of Loan +Small saving +State provident fund +Special deposit + Disinvestment +Others
  • 11. Budget Deficit = Total Expenditure – Total Revenue ( The excess of revenue expenditure over revenue receipts.It shows the deficit of government on current account) Revenue Deficit = Revenue Expenditure – Revenue Receipts ( The excess pf all expenditure over all types of receipts including borrowings)
  • 12. Fiscal Deficit = Revenue Deficit + Capital expenditure ( The excess of expenditure over revenue receipts and non debt capital receipts. It represent the total borrowing requirement of the central government ) Primary Deficit = Gross Fiscal deficit – Interest Payments ( Fiscal deficit net of interest payments. It is the non interest deficit and reflects the current fiscal of the government.) Monetised Deficit : The part of fiscal deficit which is financed by RBI through printing of notes.
  • 13. What is the fiscal deficit? The fiscal deficit (FD) measure the shortfall in government ability to fund its 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 government statement. To get more technical , FD is what you take away the total expenditure from the sum of revenue receipt (T& NT), recoveries of loan and other receipt
  • 14. In case you are wondering what revenue expenditure is, it is administrative expenditure, and capital expenditure goes towards capital or asset formation. FD is important to annual budget. The budget is the government annual report, which differs from corporate annual report in one key area-a budget gives projection Or next year’s number alongside its performance for a finished year.
  • 15. How is FD bridged ? FD represent the extent to which the government needs fund, but does not have them. One simple way getting funds you don’t 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 does not have. Being the law maker of the land gives the govt. the power to create money which is simply printing additional notes .This is called monetization.
  • 16. How to make sense of FD number ? Is it good or bad? FD to some extent is fine. One typically looks at ratio of FD to gross domestic product. This ratio should ideally remain around 4% for a country like India. So says the IMF.A much higher number is bad news. Typically many nation and definitely developing nation, will run FD as govt, has the government has large role to play in the economy in areas like infrastructure, education, social support ( India does not have this), defense, Civil admn. and so on. Government, Needs are likely to more then its income in a growing economy.
  • 17. 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 will have to either borrow a lot or print a lot of money. Borrowing a lot will push up interest rate their by making the economy costlier and reducing Competitiveness of goods produced Vis-à-vis those made by other country. Printing lots of money breeds inflation, which is also bad beyond a point. Sustained high deficits can lead to very high accumulation of debt by the govt. leading to what is called internal debt trap.
  • 18. How to keep FD in control? It is important keep FD within a limit for this there are obvious ways Increase revenue or cut expenses or both. Revenue can be increased in three fashion- increase tax rate or tax more things or reduce tax evasion. One example of tax more things is taxing agricultural income, currently free from levy in India. In cutting expenses GoI has traditionally taken easier route. Like cutting infrastructure spending instead harder ones like cutting subsidies or freezing recruitment.