The Revenue Budget shows the current receipts of the government and the expenditure that can be met from these receipts.
Revenue receipts are divided into tax and non-tax revenues.
- Tax Revenues consist of the proceeds of taxes and other duties levied by the central government. Tax revenues, an important component of revenue receipts, comprises –
- Direct Taxes – which fall directly on individuals (Personal Income Tax) and firms (Corporation Tax), and
- Indirect Taxes like Excise Taxes (duties levied on goods produced within the country), Customs Duties (taxes imposed on goods imported into and exported out of India) and Service Tax. Excise taxes were the single largest revenue earner contributing 35.7 per cent of total tax revenue in 2003-04.
- Other Direct Taxes like Wealth Tax, Gift Tax and Estate Duty (now abolished) have never been of much significance in terms of revenue yield and have thus been referred to as ‘Paper Taxes’.
- Two new taxes – the Fringe Benefits Tax (on those benefits enjoyed collectively by the employees) and tax on cash withdrawals from banks over a certain threshold in a day – were introduced in the budget for 2005-06.
- Progressive Income Taxation – The redistribution objective is sought to be achieved through progressive income taxation, in which higher the income, higher is the tax rate.
- Firms are taxed on a proportional basis, where the tax rate is a particular proportion of profits.
- With respect to excise 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.
- Non-Tax Revenue of the central government mainly consists of –
- Interest Receipts (on account of loans by the central government which constitutes the single largest item of non-tax revenue);
- Dividends and Profits on Investments made by the government;
- Fees and Other Receipts for services rendered by the government;
- Grants-in-aid from foreign countries and international organisations are also included.
The estimates of revenue receipts take into account the effects of tax proposals made in the Finance Bill*.
* Finance Bill, presented along with the Annual Financial Statement, provides details of the imposition, abolition, remission, alteration or regulation of taxes proposed in the Budget.
Broadly speaking, revenue expenditure consists of all those expenditures of the government which do not result in creation of physical or financial assets. It relates to –
- expenses incurred for the normal functioning of the government departments and various services,
- interest payments on debt incurred by the government, and
- grants given to state governments and other parties (even though some of the grants may be meant for creation of assets).
Budget documents classify total revenue expenditure into plan and non-plan expenditure.
- Plan revenue expenditure relates to central Plans (the Five-Year Plans) and central assistance for State and Union Territory Plans.
- Non-plan expenditure, the more important component of revenue expenditure, covers a vast range of general, economic and social services of the government. The main items of non-plan expenditure are interest payments, defence services, subsidies, salaries and pensions.
- Interest payments on market loans, external loans and from various reserve funds constitute the single largest component of non-plan revenue expenditure. They used up 41.5 per cent of revenue receipts in 2004-05.
- Defence expenditure, the second largest component of non-plan expenditure, is committed expenditure in the sense that given the national security concerns, there exists little scope for drastic reduction.
- Subsidies are an important policy instrument which aim at increasing welfare.
- Apart from providing implicit subsidies through under-pricing of public goods and services like education and health, the government also extends subsidies explicitly on items such as exports, interest on loans, food and fertilisers. The amount of subsidies as a per cent of GDP has been falling from 1.7 per cent in 1990-91 to 1.66 per cent in 2002-03 to 1.45 per cent in 2004-05.
Bibliography : NCERT – Introductory Macroeconomics