It's that time of the year when you eagerly wait to see if the government has been kind enough to lower your income tax, among other things.
As the Assam Finance Minister Himanta Biswa Sarma presents the state budget on Friday, March 6, here's all you need to know about the Union Budget, the State Budget and key terms related to budgeting.
According to the Constitution of India, there is three-tier system of government, namely Central (or Union) Government, State Government and local government (like Municipal Corporation, Municipal Committee and Zila Parishad).These governments prepare their own respective budgets (called Union Budget, State Budget and Municipal Budget) containing estimates of expected revenue and proposed expenditure.
The basic structure of government budget is almost the same at all levels of government but items of expenditure and sources of revenue differ from budget to budget. Again, there is no clash with regard to sources of revenue because functions of Central, State and local government have been clearly demarcated and laid down in the Indian Constitution.
What is a Union Budget?
The Union Budget is an exercise carried out by the central government every year, presented by the Union Finance Minister. The government makes an estimate of revenue and expenses for the forthcoming financial year. The date of budget presentation has varied throughout the history of Independent India. Since 2017, the Union Budget has usually been presented on the first of February, every year. Before that, it used to be presented on the last day of February. However, the proposals made in the budget (if passed by the Parliament) come into effect from April 1 of every year and are valid till March 31 of the next year.
What is a State Budget?
The State Budget is the “Annual State Government Financial Statement” which includes the estimated receipts and expenditure of the State for every financial year, which runs from April 1 to March 31. States opt for their own presentation formats as per practice and convenience. Also, sources of revenues may vary from state to state and similar variations can be seen in expenditure profiles.
What are the key Expenditures and Receipts?
Budgets have two basic parts: Revenue Budget and Capital Budget. The revenue part consists of revenue receipts and expenditures including tax revenue, non-tax revenue (like interest receipts, profits) while the capital part comprises capital receipts like borrowings, disinvestment, creation of assets and investments.
Any expenditure that doesn’t create assets or reduce liabilities is treated as Revenue Expenditure. Examples include salaries, subsidies, interest payments, rents etc.
Proceeds from taxes, non-tax sources of revenue and other receipts are recorded as Revenue Receipts. Income tax, corporation tax, and union excise duty are some of the sources of tax-revenue, while interest receipts, fees/ user charges, and dividend & profits from government enterprises are some examples of non-tax revenue.
Any expenditure incurred for the purpose of creation of assets or reduction of liabilities is recorded as Capital Expenditure.
Capital Receipts are those that lead to a reduction in the assets or an increase in the liabilities of the government. Examples include recoveries of loans, earnings from disinvestment and debt.
What are Budget Estimates (BE) and Revised Estimates?
Most budget documents like the Annual Financial Statement contain information for three financial years. For instance, the Union Budget 2017-18 contain figures for 2015-16 Actuals, 2016-17 Revised Estimates and 2017-18 Budget Estimates.
Actuals refer to the amounts actually spent by the government in a previous financial year, which have been audited and certified by the office of Comptroller & Auditor General (C&AG) of India. It usually takes the office of C&AG around eight months to audit and certify the accounts/actual expenditures reported by the government after the financial year ends.
Budget Estimates (BE) refer to the amounts of expenditure ‘projected’ by the government for the ongoing/approaching financial year (say, April 1, 2020 – March 31, 2021 in the current case and time).
After the initial projection of expenditure for an ensuing financial year, the government revises those projections after six months of the concerned financial year are over. These ‘revised projections’ are known as Revised Estimates (RE).
Budget Deficit vs. Budget Surplus
In cases where a budget deficit is identified, current expenses exceed the amount of income received through standard operations. One of the primary dangers of a budget deficit is inflation, which is the continuous increase of price levels. Countries can counter budget deficits by promoting economic growth through fiscal policies, such as reducing government spending and increasing taxes.
When a surplus occurs, revenue exceeds current expenses and results in excess funds that can be allocated as desired. A budget surplus might be spent to make a purchase, pay off debt or save for the future.
In situations where the inflows equal the outflows, the budget is balanced.