In the Indian Constitution, there is no declaration about Budget. But Article 112 makes provision of Annual Financial Statement. And this statement is called Budget in a Common language. So, according to the constitution, the Government is bound to present the financial statement. And it will be presented before starting of every financial year.
The Financial Statement alias Union Budget is an estimate of income and expenditure of the Central Government. It contains the details of estimated receipts and expenditures of a particular fiscal year.
Note:- The Financial Year starts from 1st April and ends with 31st March of next year.
Why there is a need of Union Budget
What do you think, why the Government issue Budget every year? What is its need? Let us see the main reason behind it-
Allocation of Resources
Every sector of the economy is important. And it may participate in economic growth with the help of resources. In the absence of proper allocation of resources, it is not possible. And obviously without a Budget efficient allocation is impossible. So, the budget defines the allocation of resources to the sectors.
For the improvement of Infrastructures and Public Enterprises
The government makes provision for the financing of its infrastructures in the budget. And it helps for the betterment of those. Also, the Government decides the disinvestment procedure of Public Enterprises, whenever it is required.
Economic Growth and Public Welfare
A good budget helps to increase in GDP and living standard of the people. That’s why Budget is necessary to grow up the economic condition of the country. So, the Government issue Budget to manage public welfare with the help of economic growth.
Reduce Unemployment and Poverty
Another need for Budget is to reduce unemployment. It also promotes job opportunities to minimize poverty. It helps to gain the basic need of the citizens, like, food, shelter and clothing. Also, its effort to provide education, health and social acceptance.
To reduce income and wealth inequality
With the help of taxation and subsidies, the Government tries to reduce income inequality. The government levies a higher tax on high earners. It helps to reduce disposable income.
On the other hand, it levies lower taxes on low income group. It ensures a sufficient money in their hand. By this way, the Government tries to reduce the inequality.
To maintain economic stability
The budget also helps to control the economic fluctuations. Some times you see inflation and deflation situations in the market. The government tries to control these situations through taxes, subsidies and expenditure. For example, when there is a rise in prices (inflation), the Government reduces its expenditure and makes a surplus based budget.
On the other hand, when there is deflation, the Government reduces taxes and grant subsidies. Then it makes a deficit budget.
Changes in Tax Policy
In the annual budget, the Government declares the changes in tax structure for the Indian citizens. There may be a change in tax rate or in tax slab in Income tax. These changes you can see in the Budget.
Also in Indirect Taxes, like Excise and Custom, there may be an increase or decrease.
The Format of Union Budget
As I said above, the Union Budget contains item wise details of Government Receipts and Expenditure. You can see these details of the three consecutive years-
- Actual data of the Preceding Year
- Estimates and Revised Estimates of Current Year
- And Estimates of just upcoming Year.
In the light of aforesaid heads, the Union Budget is to be formed in two parts-
- Revenue Budget and
- Capital Budget.
Again Revenue Budget is divided into two parts-
- Revenue Receipts and
- Revenue Expenditures
Also, the Revenue Receipts are of two kinds- 1. Tax Revenue (like, Income Tax, Corporate Tax, Custom duty) and 2. Non Tax Revenue (like, Interest receipts, profits etc.)
Revenue Expenditures are those expenditures who are related to Revenue Receipts. And these are incurred by the Government to manage its day to day functions. For example, The Government incur the expenditure to offer different types of services to the public.
In the same way, we can divide the Capital Budget into two parts as well-
- Capital Receipts and
- Capital Expenditure
So, the Capital Receipts are those receipts which are earned by the government by various methods. Like, Recovery of Loans, Market Borrowings (loans from public/ foreign government / RBI), Disinvestment, Provident Fund etc. In other words, Capital Receipts create Government Liabilities or reduce Financial Assets.
In a reciprocal manner, Capital Expenditures are those expenses which reduce the liabilities or create financial assets. Hence, the Expenses of the Government on the development of infrastructures e.g. buildings, machinery, equipment, health sector, education etc. are the examples of Capital Expenditure.
In short, the format of Union Budget is a box of Budget Receipts and Budget Expenditures.
Income Tax and Union Budget
Income Tax is an intimate section of the Union Budget. In Union Budget, we can see the provisions for Direct and Indirect Taxes. And as an important part of Direct Tax, there may be provisions for Income Tax as well. Like, the new tax rate and tax slab.
Also, the budget has new provision or changes in deductions and exemptions and much more available to tax payers.
But, if there is no change in the tax section, there might be no description. For Example, In the Union Budget of Financial Year 2019-20, there is no description of changes in Income Tax section. But you can see a Government declaration for the benefit of low income earners. It is, ‘Those having income up to ₹5 lakh need not pay income tax’.
Also, there is a provision of an additional ₹1.5 lakh income tax deduction for interest on loan on the purchase of an electric vehicle.
Hence, Income Tax is an essential and unavoidable part of the Union Budget. And it affects a very large number of Indian citizens. No one can deny its importance to the budget. That’s why the Income Tax payers have a keen interest during the presentation of Union Budget.
Union Budget Vs State Budget
Because of the Federal system of Government, in India, Budget is prepared under three levels, viz. Central, State and Municipal Corporation. The components, objectives and procedure are the same for all types of budgets. Same as the Central Government, State Government presents its Budget before the State Legislative at the end of every financial year.
As you know the Union Budget contains provisions for whole the country. Moreover, it has provisions for all the States separately as well. And it gives the shares to States out of central revenue items, like Central GST and Central Excise Duty.
In the same way, the State Government makes provision for the respective State. Also, it includes the provisions for all Municipal Corporations under its jurisdiction. And it shares the revenue among them.
Though the basic structure is almost the same in Union Budget and State Budget. But the items of Revenues and Expenditure differ from each other. Also, there is no dispute regarding sources of revenue between them. Because the Constitution clearly differentiates the items between both the Governments.
All the State Government prepare Budgets and make provisions. But do you know the heads of revenue and expenditure are not completely the same in all States Budgets? It is different according to their requirements and other grounds. But some main heads are the same in all States Budgets. For Example,
- Tax and non tax revenues collected by the respective State
- Share of Central taxes shared among States
- Stamps and Registration Duty
- State Excise Duty etc.
Hence the Union Budget and States Budgets are approximately the same. The difference among them is due to their situation and diversity.