Budget2 FC To FRBM
Budget2 FC To FRBM
Budget2 FC To FRBM
Article 280: President of India forms a Finance Commission (a quasi judicial body) every 5th
Year or earlier, with 1 chairman and four members. Eligible for re-appointment.
Recommendations are not binding on the government but usually they are not rejected.
Further self-study@ M.Laxmikanth’s Indian Polity ch.45.
14th FC: YV Reddy Recommendation Period: 1st April, 2015 to 31st March, _ _ _ _
15th FC: NK Singh Recommendation Period: 1st April, 2020 to 31st March, _ _ _ _
Finance Commission also gives formula for How to distribute that share horizontally with
individual States (Guj | Bihar | MH | TN...). 14th FC (YV Reddy)’s formula was…
14th FC horizontal distribution formula components Weight %
आबादी Population:as per Census 1971 17%
जनसाांख्ययकीय Demographic Change as per Census 2011 (To consider the 10%
migration angle.)
बदलाि
आय-दरू ी Income-Distance: _ _%
- Find the best State of India in per capita income (GSDP ÷ its
population).
- Compare your state’s per capita income with them.
Accordingly, poorer states get more weight
क्षेत्र Area: more area more weight 15%
Member4 Prof. Ramesh Chand. He’s member of NITI Aayog & Agri Economist.
(Part Time)
17.5 15TH FC’S TOR: APPREHENSION OF THE STATES (राज्य आशांकािान क्यों है )
Performance
Why states apprehensive?
parameter
State’s Efforts in
achieving replacement Gangetic plain states’ total fertility rate higher, so they’re
level of population growth apprehensive that Kerala & other Southern States will get
i.e. Total Fertility Rate 2.1 more money.
or lower
State’s Efforts in Southern states have been running populist schemes for
controlling the free TV, Fridge, Mixer, farmers’ debt-waiver, Idli at ₹ 1 etc.
expenditure on populist Similarly Northern states run schemes for free bicycle,
measures (लोकलुभािन mobile & laptop schemes. They fear they’ll be reviewed
उपाय). negatively, and union will get to keep more money for itself.
1951: 1st FC setup under - 1951: PC set up and over the - 2015: Formed.
KC Neogy years designed 12 Five Year - Three Year Action Agenda
plans (12th FYP: 2012-2017) (2017-20).
- 2014: Dissolved by Modi - Seven Year Strategy
Government. Document.
- Fifteen Year Vision
Document(2017-32).
- Taxes’ Vertical 1. How much money should It is not in its scope of work to
Devolution and union give to each state for decide how much money
horizontal distribution implementation of centrally should be given to each state.
among states. sponsored schemes (CSS)? That component is decided
- + any other matters 2. How much money should by the Finance Ministry.
referred by the union government give to - NITI’s primary objective is
President in TOR the five year plans of the to serve as the think tank
- Each finance state governments? of the Government of
commission arrived at To answer these Qs, PC would India,
its own methodology. use _ _ _ _ _ _ _ _ _ _ _ _ - Helps in policy design.
E.g. 14th FC: 42% formula (designed in 8TH FYP)- - Helps in monitoring
vertical, and 5 factor based on population, per capita schemes’ implementation
formula for horizontal income, special problems etc. of through its dashboard e.g.
distribution. a state. ‘School Education Quality
Index (SEQI)’, ‘SDG India
Index’ and the ‘Digital
Transformation Index’
(DTI).
We will see more about planning commission and Niti Aayog in Pillar 4
17.7.1 Special category states? विशेष श्रेणी के राज्य?
- 1952: The National Development Council was set up, consisting of PM, CMs and other
representatives to approve the five year plans prepared by the Planning Commission. But
became obscure with establishment of NITI Ayog.
- 1969: 5th Finance Commission recommended giving extra funds and tax-relief to certain
disadvantaged states. Over the years, NDC added more states into the Special Category
List based on (i) hilly and difficult terrain (ii) low population density and / or sizeable share
of tribal population (iii) strategic location along borders with neighbouring countries (iv)
economic and infrastructural backwardness and (v) non-viable nature of state finances.
- Examples: 8 North Eastern states and 3 Himalayan States (JK, Uttarakhand, HP).
- Benefits of Sp.Cat. States?
✓ If Industrialists set factories in these states, they’ll be given benefit in Union Taxes.
Parallel Economy The economy that runs on black money. (समानांतर अर्थव्यिसर्ा)
Tax Evasion When person hides income or transaction from tax authorities, and
कर अपिांचन thereby evades paying taxes. It’s illegal.
Tax Avoidance When person discloses his income and transactions to tax
कर पररहार authorities but uses legal loopholes to avoid paying taxes. E.g.
Bollywood stars who register digital media companies in Tax
Havens. It may not be illegal in every case, but still unethical.
Tax Haven Is a country that demands little taxes from foreigners and offers
कर स्िगथ legal loopholes for Tax Avoidance & opportunities for Tax Evasion.
E.g. Liechtenstein, Mauritius, Marshall Islands, Cayman Islands,
Panama, Nauru, Vanuatu etc.
These countries are geographically small, & without viable
Money laundering - When drug trafficking, ransom, corruption and other criminal
(गैरकानन
ू ी तरीके से प्राप्त activity generates substantial profits, the person has find ways to
spend / invest / hide the money without attracting attention.
धन को िैध बनाना / - Money laundering is the process of disguising the source of
धनशोधन करना money, as if it came from a legitimate activity, & then channelize
it into banks, share market and other financial intermediaries.
Shell firms They do not have any active business operations, and are created
Post-box with the sole objective of money laundering and tax evasion. E.g.
Letter-box companies Ms Mishail Packers and Printers Pvt Ltd. setup by Misa Bharti Yadav
to launder ₹1.2 crores (as per Enforcement Directorate).
Panama Papers (2016) German Journalists released these incriminating documents from
Paradis Papers (2017) certain law firms in tax havens & showed how notable people across
the world engaged in tax avoidance/ evasion. Bachchan &
Aishwarya also named in them.
Tax Terrorism Happens when tax authorities put undue pressure on an honest
कर आतांकिाद taxpayer to pay more taxes.
2012: Vodafone won a case against income tax department in the
supreme court related to Capital Gains Tax on purchase of Hutch
mobile company.
Afterwards, UPA government amended the income tax act with
retrospective effect and issued fresh notices against Vodafone. So,
Modi called it “UPA’s Tax Terrorism on Corporates”
Financial Action Task is a brainchild of G7, Combating Money laundering and terror
Force (FATF-1989: finance. HQ@Paris. India became member in 2010.
वित्तीय कारथ िाई कायथदल)
Pradhan Mantri - ~50% of the undisclosed income shall be taken away by Govt. as Tax
Garib Kalyan + Penalty + Pradhan Mantri Garib Kalyan Cess.
Yojana (PMGKY) - The PM Garib Kalyan cess, and deposit will be used for schemes
Launched after
related to irrigation, housing, toilets, infrastructure, edu, health etc.
Demonetization
Validity? - Further, 25% of the undisclosed income shall be deposited in RBI’s
2016-Dec: ‘Pradhan Mantri Garib Kalyan Deposit Scheme, 2016’. It’ll be a fixed
To 2017-April deposit for 4 years @ ZERO % Interest
- The scheme was not so successful, hardly ~5000 cr. declared.
18.2.5 Tax Evasion → Other Initiatives
Banking Cash A 0.1% direct tax levied on cash withdrawals from banks. Started by
Transaction Tax Chidambaram but later withdrawn (2005-09). Objective was to
(BCTT: 2005-09) encourage less-cash economy and data mining of transactions.
Electoral Bonds, 2017 Ref: SEBI/Sharemarket handout & write the gist in margin.
This bill aimed to replace the Income Tax Act, 1961 with simpler
Direct Tax Code 2010
provisions. But, lapsed with 15th LokSabha dissolution in 2014.
Easwar Panel on To simplify the provisions of IT Act, 1961, to remove ambiguities that
Direct Taxes 2015 cause unnecessary litigations & hardships to Tax payers.
18.4.3 Even if 99.30% SBN returned, it’s not failed experiment because:
✓ Those who could not return their SBN, have lost their black money (₹ 10,720 crore)
✓ Those who used poor people are money mules- must have paid some commission to
them. So even if government did not get tax from black money, atleast poor people
benefited.
✓ Further, during Operation Clean money, IT-dept issued notices to the suspicious bank
accounts where large amount of money was deposited. Such shell firms & their benami
properties are being seized.
✓ With Project Insight & Op. Clean Money: IT dept fetched ₹ 1.30 lakh crore in taxes and
penalty, attached ₹ 7000 crore worth Benami properties, ₹ 1600 crore worth foreign
assets & de-registered ~3.40 lakh shell firms. (Figures from Int-Budget-2019).
✓ The number of PAN card registration, IT returns, registrations under excise / VAT / GST
have greatly increased in the aftermath of demonetisation which proves that crooked
18.4.4 Demonetization: short term challenge, long term benefit (Eco. survey 2016-17)
Area Short term challenges long term benefits
Real Sale of houses declined Prices & rents of houses should decline.
Estate Migrants will benefit.
Tax elasticity
If first income tax slab increased from 5% to 15% then in absolute terms how
(कर लधचलाता): much more IT-revenue will be generated?
E Minus the Tax devolution to States (कर हसतांतरण) (-)~8.5 lakh crores
as per GST council (for CGST) and Finance
Commission (for non-CGST taxes).
*National Disaster Response Fund (राष्ट्रीय आपदा प्रनतक्रक्रया कोष) is a statutory fund under
Disaster Management Act, 2005. Previously, called National Calamity Contingency Fund
(NCCF).
Gross Tax Revenue → 22.7 lakh crores 22.4 lakh crores 26 lakh crores
- 1/2/2018: Budget 2018 is presented for the next financial year starting from 1st April
2018 to 31st March 2019. So, FinMin could have only made projections /estimations
about how much taxes will be collected during 1/4/18 to 31/3/19.
- But throughout the year, based on the advance tax-collection figures & monthly GST
collection figures, FinMin will have to re-adjust the estimates.
- 1/2/2019: (Interim) Budget 2019 is presented, along with that, Govt will present
revised estimates for previous Financial Year (2018-19).
- From the table we can see that Gross Tax collection is less than expected (22.7
MINUS 22.4) = ~30,000 crores is ‘Revenue Shortfall’, mainly because _ _ _ _ _ _ _ _
were less than expected.
18.7 BUDGET → REVENUE PART → RECEIPTS → NON-TAX RECEIPTS
✓ Interest receipts (ब्याज प्राप््तयां received on Union’s loans to states, 1.5 lakh cr.
railways, CPSE, foreign countries.) is a revenue receipt. [Had those
borrowers repaid loan-principal, then that portion is ‘Capital Receipt.]
✓ Dividends and profits received from CPSE, PSBs, RBI. [Had Union
sold its shares to a third party (disinvestment / privatization), then that
will be ‘Capital Receipt’].
Union’s income from (Dividend & Profits) >> from Interests.
Income from selling various goods & services such as railways, postal 1.2 lakh cr.
services, selling of India Yearbook-, Yojana-Kurukshetra magazines, fees that
CISF charges for giving protection to Private Airports, auction of spectrum &
mining rights, selling of commemorative coins etc.
Sum of Above= Total Non-Tax Revenue Receipts कर-भभन्न प्राप््तयां ~2.7 lakh cr.
Total Revenue Receipts= NET Tax receipts (~17.0 lcr) + Non-Tax receipts (~2.7 lcr)= ~20lcr.
Figures are not important, but the fact that revenue budget: the tax receipts >> non-tax
- Grant-in-Aid (अनद
ु ान) to States & Local Bodies for Disaster 4.7 lakh cr.
Management, Panchayati Raj Development etc. as per Finance
Commission recommendations. Additionally, Govt also gives grants
to foreign countries for its soft-diplomacy.
Defense related revenue expenditure (e.g. soldier salaries, fuel for tanks) 2 lakh cr
Pension to retired employees (In the last 3 years it has kept rising.) 1.9 lakh cr
➢ Economic services related revenue expenditure (Agriculture, energy, Fig. not imp.
transport, communication, Science technology)
➢ Social services related revenue expenditure ( health, education,
social security):
➢ Expenditure on Administrative machinery (Police, Jail, External
Affairs etc.), Elections, Parliament, Judiciary:
➢ Revenue expenditures of UT without Legislature:
Total Revenue Receipts (Tax + Non Tax Receipts) कुल राजसि प्राप््तयां ~20 lakh cr
Projected GDP for 2019-20 is ₹ 210 lakh crores. So Revenue Deficit as a ____%
percentage of GDP = (4.7 lakh crore /210 lakh crore)*100. =
Tax doesn’t promise specific and direct A specific benefit is promised e.g. 6000 to
goods/services to the taxpayer. (Mukesh farmers, idlis @₹ 1 rupee in Amma Canteen
Ambani will still be subjected to potholes) (Tamilnadu).
CAG will audit directly Some of these Acts provide Companies Act requires
for internal audit & exclude these companies to produce
CAG from auditing the audited reports. CAG will
Corporation. E.g. RBI, LIC. empanel the (private) auditors
Their earning will go directly Their earning → profit → dividend goes to shareholders.
in Public Account / CFI
Their employees are Not considered govt employees. Their service / discipline
considered government conditions are governed by the respective organizations’
employee- subjected to internal manuals.
service and discipline rules
framed by the government.
- Public sector Undertaking (PSU) = collective term for Centre’s + State’s + Local
Bodies’ Public Sector Enterprises.
- Significance of corporations and companies: Development of infrastructure,
affordable services, regional balance, prevent concentration of economic power in
the hands of Corporates and MNCs.
- Challenges? Political interference, lack of innovation & consumer responsiveness,
employee unions, loss making enterprises.
Miniratna ✓ made profits in the last 3 years continuously, further subdivision in Cat-I
Cat-I and & Cat-II depending on how much profit is generated.
Cat-II ✓ Examples: National Film Development Corporation ltd, Mazagaon Dock
ltd, Airports Authority of India, Mishra Dhatu Nigam ltd, NHPC ltd,
WAPCOS ltd, ONGC Videsh ltd, Rail Vikas Nigam ltd,
Maharatna ✓ Already a Navratna Company, and fulfilling “z” conditions such as min. ₹
5000 crore profit per year in last 3 years, listed at a Stock exchange,
significant global presence etc.
✓ Very few cos here: Bharat Heavy Electricals ltd, Coal India ltd, Indian
Oil Corporation ltd, NTPC ltd, Oil & Natural Gas Corporation ltd, Steel
Authority of India ltd, Bharat Petroleum Corporation ltd,
1998’s Vajpayee - In strategic sector (Railways, Defense, Atomic Energy)- we’ll not do
disinvestment
- In Non-strategic = phased disinvestment
UPA-1 (2004-09) Due to pressure from the left is parties in the coalition: No
Disinvestment from any government companies. If a government
company is sick, we will try to revive it.
UPA-2 (2009-14) - All Govt Companies can be disinvested upto 49%. Money will goto
National Investment Fund (NIF: Public Account) → used for Bank
recapitalization, metro rail, nuke energy, EXIM-NABARD-RRB etc.
- Also launched CPSE-Exchange Traded fFunds (ETF): Ref SEBI
handout
Capital Expenditure: पज
ांू ीगत व्यय Interim-2019 (₹ lakh cr): अन्तररम-2019
Effective Revenue Deficit Revenue Deficit minus Grants for 2.70 lcr. (1.3% of GDP)
प्रभािी राजस्ि घाटा creation of capital assets
MCQ. In India, the price of petroleum products has been deregulated mainly to (UPSC-
CDS-2013-II)
(a) reduce the burden of subsidies given to the oil companies
(b) discourage the exploration of oil reserves in the country
(c) discourage the demand for private vehicles
(d) curb the use of black money in the economy
It is associated with the income and associated with the income and expenditure
expenditure that are of temporary in nature that are of long term nature and/or results into
(1 year or less), and/or do not result into creation of permanent / capital /financial
Taxation, revenue from selling goods and Borrowings, disinvestment, and expenditure
services, interest payment on previous loans, on assets creation.
salaries, pension, subsidies and other non-
developmental expenditure
MCQ. Which of the following is/are included in the capital budget of the Government of
India? (Asked in UPSC-Pre-2016)
1. Expenditure on acquisition of assets like roads, buildings, machinery, etc,
2. Loans received from foreign governments
3. Loans and advances granted to the States and Union Territories
Ans Codes: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3
22.2 GENERAL BUDGET VERSUS RAILWAY BUDGET (आम बजट बनाम रे लिे बजट)
- 1920-21: _ _ _ _ _ _ _ _ Committee recommends separate Railway Budget. This practice
continued even after Independence, first the railway minister would present the Railway
budget in parliament, and after a few days finance minister will present General Budget.
- NITI Aayog’s Bibek Debroy committee recommends its abolition because 1) No
constitutional requirement 2) During coalition governments, Rail budget was used for
populism, cheap fares which eroded the profitability of Railways. 3) during the British
time, railway revenue used to be quite large compared to other sources of revenue, but
after independence, Railway revenue is quite small compared to overall General budget-
So it does not deserve a special presentation.
- Therefore, Modi govt merged Railway budget merged with General budget from 2017.
Performance calculating the income and expenditure tied with underlying benefit or
budgeting performance
प्रदशथन बजट - Allot ₹ 50,000 to buy a new computer with target that it should result
in 30% the faster clearance of RTI-applications compared to pen and
paper based office system.
Such budgeting helps measuring everything in terms of cost:benefit,
efficiency.
____ It is not a separate budget but rather within the general budget, FinMin will
____ put a separate expenditure document showing women specific schemes,
लैंर्गक बजट targets, and commitments- in two parts:
✓ Part A = Women Specific Schemes, i.e. which have 100% allocation
meant for women. E.g. Minority Affairs Ministry’s “Nai Roshni”
scheme for Leadership Development of Minority Women,
✓ Part B = Pro Women Schemes, i.e. where at least 30% allocation is
meant for women. E.g. HRD Ministry → Sarva Shiksha Abhiyan.
✓ Practice started from Budget-2005.
Started from Budget-2017 onwards, the FinMin uploads a document showing outlay output
and outcomes for each ministry and department. These are monitored by NITI Ayog. e.g.
Ministry & Scheme Outlay Output (Deliverables) Outcome
22.7 LAPSABLE FUNDS & MARCH RUSH: व्यपगत ननर्ध और माचथ व्यस्तता
- Appropriation act allows the government to spend funds from consolidated fund of
India for a period of one year (ending in 31st March).
- If any allotted funds remain unutilised, then by the ‘ _ _ _ _ _ _ _ _ ’, they must be
returned (& government will have to again seek Parliament approval for the next
financial year using next appropriation bill).
- So, in March, there is rush among the Government organisations to spend money (in
a haphazard / reckless manner) lest they’ve to return it back.
- 2017-18: Finance ministry issued directive that in “In the fourth quarter (Jan to
March) and in the March-Month, Govt organizations shall not spend more than “x%”
& “y%” of funds”. This helps controlling the March Rush.
So? Since colonial times, Govt. - 12th FC suggest to use this method, for
preparing accounts and better estimation of income and
budget in this manner. expenditure. HOW? #BcomNOTIMP.
- From 2019 Railways planning to adopt
this. So, TheHindu columnists
suggesting that all depts shd adopt
_ _ _ _ funded by Union Not 100% funded by union. States have to bear some cost.
Int-Budget-2019: ₹8.60lcr Interim Budget 2019 allotted ₹ 3.27 lakh crores here.
22.10.1 Mock Questions for UPSC Mains GSM3 (250 words each)
1. What are the terms of reference of the 15th finance commission? Why are some state
governments apprehensive about them? १५िें वििीय आयोग के विचारार्थ विषय क्या है ? कुछ
राज्य इस विषयमें आशंकािान क्यों है ?
2. “The constitution of GST Council has reduced the role of Finance Commission as the
balancing wheel of fiscal federalism in India.” Do you agree? Justify your stand. "जीएसटी
पररषद के गठन ने विि आयोग की भारत में राजकोषीय संघिाद के संतल
ु न में भभू मका को कम कर हदया
है ।" क्या आप सहमत हैं? अपने तकथ को उधचत ठहराएं।
3. (Asked in GSM3-2018) Comment on the important changes introduced in respect of the
Long-term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union
Budget for 2018-2019. केंद्रीय बजट 2018-2019 के दीघथकाभलक पज
ूं ीगत कर (एलसीजीटी) और
लाभांश वितरण कर (डीडीटी) के संबध
ं में पेश क्रकए गए महत्पिपण
ू थ पररितथनों पर हट्पणी करें ।
4. (Asked in GSM3-2016) Discuss the requirements and status of gender budgeting in the
Indian context? भारतीय संदभथ में भलंग बजट की आिश्यकताएं और प्सर्नत चचाथ कीप्जए.
5. (Asked in GSM3-2013) What are the reasons for introduction of Fiscal responsibility and
Budget Management (FRBM) act, 2003? Discuss critically its salient features and their
effectiveness. राजकोषीय उिरदानयत्पि और बजट प्रबंधन (FRBM) अधधननयम, 2003 को लागु करने
का क्या कारण है ? इसकी प्रमख
ु विशेषताओं और उनकी प्रभािशीलता पर गंभीर रूप से चचाथ करें .
6. (Asked in GSM3-2013) Money laundering poses a serious threat to country’s economic
sovereignty. What steps are required to be taken to control this menace? मनी लॉप्न्रंग दे श
की आधर्थक संप्रभत
ु ा के भलए एक गंभीर खतरा है । इस खतरे को ननयंत्ररत करने के भलए क्या कदम उठाए
जाने की आिश्यकता है ?