Posted by Anjali Kaur on Oct 31, 2020

The Structure of the Government Budget

The government budget is an annual statement showing item wise estimates of receipts and expenditure of the government during a financial year. The structure of the government budget is divided into:

1. Budget Receipts

2. Budget Expenditure

3. Budget Deficit

 Let’s understand the structure of the government budget in detail.

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Budget Receipts

They are divided into revenue receipts and capital receipts. 

Revenue Receipts

Revenue receipts is of 2 types:

1. Tax Revenue receipts

It refers to the sum total of receipts from taxes and other duties imposed by the government. Tax is a compulsory payment made by people and companies to the government. It is of 2 types:

a. Direct Taxes

It refers to the taxes which are imposed on individuals and companies and they are paid directly by them to the government. 

Under direct taxes liability to pay the tax and actual burden of the tax falls on the same person that is, tax impact cannot be shifted to others. For example, income tax, corporate tax, indirect tax, capital gains, etc. 

b. Indirect tax

It refers to those taxes which affect the income and property of the individuals and companies indirectly. The liability to pay the tax and actual burden of the tax lie on different persons, that is, its burden can be shifted to others. For example, sales tax, GST, entertainment tax, service tax, excise duty, customs duty, etc.

Try classifying the value-added tax, wealth tax, and entertainment tax in terms of tax revenue receipts.

Value-added tax is an indirect tax because its burden can be shifted to others.

Wealth tax is a direct tax because its burden cannot be shifted

Entertainment tax is an indirect tax because its burden can be shifted

2. Non Tax Revenue Receipts

It refers to the receipts of the government from all the sources other than those of tax receipts. 

A. Interest

Government receives interest on loans given by the state government, union territories, private enterprises, and the general public. Interest receipts from these loans are an important source of non-tax revenue receipts.

B. Profit and dividends

The government earns profit through public sector undertaking like Indian Railways, LIC, BHEL, etc. It earns profit from the sale proceeds of the products of such public enterprises. The government also get dividends from investment in other companies. 

C. Fees

It refers to change imposed by the government to cover the cost of recurring services provided by it. Such services are general in public interest and fees are paid by those who receive such services, such as court fees, registration fees, import fees, etc.

D. License fees

It is a payment charged by the government to grant permission for something. For example, license fees paid for the permission of keeping a gun or obtaining a national permit for a commodity vehicle or for personal vehicles.

E. Fines and penalty

These refer to those payments which are imposed on lawbreakers. For example, jumping a red light, the penalty for non-payment of taxes. 

F. Escheats

It refers to the claim of a government on the property of a person who dies without leaving behind any legal heir.

G. Gifts and grants

Government receives gifts and grants from a foreign government and international organizations. For example, help received during national crises such as floods, cyclones, etc. 

H. Forfeiture

These are in the form of penalties that are imposed by the court for non-compliance with orders or failing to pay for the loan.

I. Special assessment

It refers to the payment made by the order of those properties whose value has appreciated due to the developmental activities of the government. For example, if the value of property near a  metro station has increased then it is a part of development expenditure and it will come under special assessment. 

Capital Receipts

1. Borrowings

These are those funds that are raised by the government to meet excess expenditure. The government borrows funds from open market operation, RBI, Foreign government, World Bank, IMF, etc

2. Recovery of loans

Government grants various loans to the state government or union territories. Recovery of such loans is a capital receipt as it reduces the assets of the government. 

3. Other receipts

It includes disinvestment and small savings. Disinvestment refers to the act of selling a part or whole shares of selected public sectors undertaking held by the government. They lead to a reduction in assets that is why they are called capital receipts. 

Small savings refers to the funds raised from the public in the form of post office deposit, national savings certificate, Kissan Vikas part. They lead to an increase in liabilities that is why they are called capital receipts. 

Important points about capital receipts

  1. Borrowing creates liabilities for the government and it is considered to be a debt creating capital receipts.
  2. Recovery of loans causes a reduction in assets of the government. That is why it is a non-debt capital receipt.
  3. Disinvestment is treated as a non-debt creating capital receipt because it causes a reduction in assets.

Read more about the Budget Expenditure here:

Thank You for reading.

You can read the related post on macroeconomics:

The Budget Expenditure

The Budget Deficit

The Government Budget

Working of the Investment

Investment Multiplier

Types of Employment Equilibrium

Concept of Short-Term Equilibrium

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