Union Budget, Taxation & Fiscal Policy
The Union Budget, taxation and fiscal policy together form the core of public finance in India and are among the most repeatedly asked areas in the economics section of Assam competitive examinations. The Union Budget is the annual financial statement through which the central government presents its estimated receipts and expenditure for a financial year, and fiscal policy is the use of government spending, taxation and borrowing to influence the level of economic activity. Taxation supplies the revenue with which the government runs its administration, defence and welfare schemes, while the Goods and Services Tax is the biggest indirect tax reform since Independence. These notes cover the constitutional basis of the budget, its structure and the different kinds of deficits, the meaning and tools of fiscal policy, the Fiscal Responsibility and Budget Management Act, the classification of taxes, and the design and working of GST. Every fact given below is useful for objective-type questions on articles, dates, institutions and definitions.
The Union Budget: Meaning and Constitutional Basis
A government budget is an annual statement of the estimated receipts and expenditure of the government for a financial year, which in India runs from 1 April to 31 March. The word budget is derived from the French word "bougette", meaning a small bag. Article 112 of the Constitution of India deals with the Annual Financial Statement, which is the constitutional name of the Union Budget. The budget is presented in the Lok Sabha by the Union Finance Minister and cannot be passed without the approval of the Parliament. In India the Union Budget is presented on 1 February, and since 2017 the Railway Budget has been merged with the Union Budget. The main budget documents are the Annual Financial Statement, Demands for Grants, the Finance Bill and the statements laid under the FRBM Act. All revenues and loans of the government flow into the Consolidated Fund of India under Article 266, and no money can be withdrawn from it without the approval of the Parliament. The Contingency Fund of India under Article 267 is placed at the disposal of the President to meet unforeseen expenditure.
Structure of the Budget: Revenue and Capital
The budget has two main parts, the revenue budget and the capital budget. Revenue receipts are those receipts which neither create any liability for the government nor reduce its assets; they include tax revenue such as income tax, corporate tax, GST and customs duty, and non-tax revenue such as interest, dividends, fees and fines. Capital receipts are those which either create a liability, as in the case of borrowing, or reduce assets, as in the case of disinvestment and recovery of loans. In the same way, revenue expenditure is spending which neither creates assets nor reduces liabilities, and includes salaries, pensions, interest payments and subsidies. Capital expenditure creates durable assets such as roads, bridges, dams and machines, or reduces the liabilities of the government. The classification of receipts and expenditure into these accounts allows the government and the public to see clearly how much of the spending is for current consumption and how much is for building the productive capacity of the economy.
Deficits: Revenue, Fiscal and Primary
The budget may be balanced when receipts equal expenditure, in surplus when receipts exceed expenditure, or in deficit when expenditure exceeds receipts; in practice India has mostly presented deficit budgets since Independence. The revenue deficit is the excess of revenue expenditure over revenue receipts, and it shows that the government is borrowing even to meet its day-to-day consumption needs. The fiscal deficit is the excess of total expenditure over total receipts excluding borrowings, that is, over revenue receipts plus non-debt capital receipts. The fiscal deficit shows the total borrowing requirement of the government in a year and is expressed as a percentage of the gross domestic product. The primary deficit is the fiscal deficit minus interest payments on past debt, and it shows the current fiscal position of the government after removing the burden of past borrowing. A related measure is the effective revenue deficit, which is the revenue deficit minus grants given to the states for the creation of capital assets.
Fiscal Policy and the FRBM Act
Fiscal policy means the policy of the government regarding its public expenditure, taxation and public borrowing, through which it influences the level of economic activity, employment and prices. When the economy is in recession the government follows an expansionary policy by increasing spending and cutting taxes, and when inflation is high it follows a contractionary policy by reducing spending and raising taxes. Fiscal policy is different from monetary policy, which is framed by the Reserve Bank of India and works through money supply, interest rates and credit. To bring fiscal discipline, the Fiscal Responsibility and Budget Management Act was passed in 2003 on the basis of the recommendations of the E.A.S. Sarma Committee. The Act originally targeted a fiscal deficit of 3 per cent of GDP and the elimination of the revenue deficit. It was amended several times, and the FRBM Review Committee headed by N.K. Singh in 2017 recommended a debt-to-GDP ratio of 60 per cent, with 40 per cent for the centre and 20 per cent for the states, along with a fiscal deficit of 3 per cent. The Finance Commission under Article 280 recommends the distribution of tax revenue between the centre and the states; the Fifteenth Finance Commission was chaired by N.K. Singh and the Sixteenth Finance Commission by Arvind Panagariya.
Taxation: Direct and Indirect Taxes
A tax is a compulsory payment made by the people to the government without any direct benefit in return, and taxes are the main source of revenue of the government. Taxes are divided into two broad classes. Direct taxes are those whose burden cannot be shifted to another person, such as income tax, corporate tax and capital gains tax, and they are progressive because the rate rises with income. In India direct taxes are governed by the Income Tax Act, 1961 and are administered by the Central Board of Direct Taxes. Indirect taxes are those whose burden can be shifted to the final consumer, such as GST, customs duty and the erstwhile excise duty, and they are called regressive because they fall equally on the rich and the poor. In India the share of direct taxes in total tax revenue has been rising steadily and now contributes more than half of the total. Under the new tax regime introduced in 2020, the 2025-26 Budget raised the exemption limit under the new regime to four lakh rupees and increased the standard deduction, which gave relief to salaried taxpayers.
Goods and Services Tax (GST)
The Goods and Services Tax is the biggest indirect tax reform of India and was introduced with effect from 1 July 2017 by the 101st Constitutional Amendment Act, 2016. Its motto is "One Nation, One Tax". GST is a destination-based tax on consumption which subsumed many earlier indirect taxes such as excise duty, service tax, value added tax and octroi, and thus removed the cascading effect of tax on tax. The GST Council is a constitutional body established under Article 279A and is chaired by the Union Finance Minister; its decisions are taken by a three-fourths majority, in which the centre has one-third of the voting weight and the states together have two-thirds. GST is levied as the Central GST, the State GST, the Integrated GST on inter-state supply and the Union Territory GST. Originally there were four main slabs of 5, 12, 18 and 28 per cent along with a cess on demerit goods, while essential items were placed at the nil or 5 per cent rate. The Goods and Services Tax Network is the information technology backbone of GST. Under the next-generation reform of 2025, the slabs were rationalised mainly to two rates of 5 per cent and 18 per cent with effect from 22 September 2025.
Key Facts at a Glance
- The Annual Financial Statement is presented under Article 112.
- The Union Budget is presented by the Union Finance Minister in the Lok Sabha.
- The financial year in India runs from 1 April to 31 March.
- The Railway Budget was merged with the Union Budget in 2017.
- The Consolidated Fund of India is under Article 266 and the Contingency Fund under Article 267.
- Revenue deficit equals revenue expenditure minus revenue receipts.
- Fiscal deficit equals total expenditure minus total receipts excluding borrowings.
- Primary deficit equals fiscal deficit minus interest payments.
- The FRBM Act was passed in 2003, based on the E.A.S. Sarma Committee.
- The FRBM Act originally targeted a fiscal deficit of 3 per cent of GDP.
- The FRBM Review Committee of 2017 was headed by N.K. Singh.
- The Fifteenth Finance Commission was chaired by N.K. Singh; the Sixteenth by Arvind Panagariya.
- Income tax, corporate tax and capital gains tax are direct taxes.
- GST and customs duty are indirect taxes.
- Direct taxes are administered by the Central Board of Direct Taxes under the Income Tax Act, 1961.
- GST was implemented on 1 July 2017 by the 101st Constitutional Amendment Act, 2016.
- The GST Council is a constitutional body under Article 279A, chaired by the Union Finance Minister.
- GST is a destination-based tax on consumption; its motto is One Nation, One Tax.
- GST was originally levied in slabs of 5, 12, 18 and 28 per cent plus cess.
- The GST reform of 2025 rationalised the slabs mainly to 5 per cent and 18 per cent.
Quick Revision Points
- Article 112 gives the budget its constitutional name, the Annual Financial Statement.
- Revenue receipts do not create liabilities; capital receipts do.
- Fiscal deficit is the best single measure of the government's borrowing need.
- FRBM 2003 brought fiscal discipline and set the 3 per cent target.
- Direct taxes are progressive, indirect taxes are regressive.
- GST replaced a web of indirect taxes and removed cascading.
- The GST Council decides rates and is chaired by the Finance Minister.
How to Prepare This Topic
- Memorise the Article numbers: 112, 266, 267, 279A and 280.
- Learn the definitions and formulas of revenue, fiscal and primary deficits.
- Remember the FRBM Act year (2003) and its 3 per cent target.
- Note the difference between direct and indirect taxes with examples.
- Learn the GST launch date, amendment number and Council composition.
- Keep the Finance Commission and FRBM committee chairpersons in memory.
Common Exam Traps
- Confusing the revenue deficit with the fiscal deficit; the fiscal deficit includes borrowing for capital spending.
- Forgetting that primary deficit excludes interest payments.
- Mixing up Article 112 (budget) with Article 266 (Consolidated Fund) and Article 267 (Contingency Fund).
- Attributing the FRBM Act to the wrong committee; it was based on the E.A.S. Sarma Committee.
- Calling GST a direct tax; it is an indirect, destination-based tax.
- Mixing up the 101st Amendment (GST) with the 279A article that created the GST Council.
- Naming the wrong chairperson of a Finance Commission.
Frequently Asked Questions
What is the Union Budget and under which Article is it presented?
The Union Budget is the annual statement of the estimated receipts and expenditure of the central government for a financial year. Constitutionally it is called the Annual Financial Statement and is presented under Article 112 of the Constitution of India by the Union Finance Minister in the Lok Sabha.
What is the difference between revenue expenditure and capital expenditure?
Revenue expenditure neither creates assets nor reduces liabilities; examples are salaries, pensions, interest and subsidies. Capital expenditure creates durable assets such as roads, dams and machines, or reduces the liabilities of the government. The distinction matters because only capital expenditure adds to the productive capacity of the economy.
What is fiscal deficit and how is it different from primary deficit?
Fiscal deficit is the excess of total expenditure over total receipts excluding borrowings, and it shows the total borrowing requirement of the government. Primary deficit is the fiscal deficit minus interest payments on past debt, and it shows the current fiscal position after removing the burden of past borrowing.
What is the FRBM Act and what targets did it set?
The Fiscal Responsibility and Budget Management Act was passed in 2003 to bring fiscal discipline, based on the recommendations of the E.A.S. Sarma Committee. It originally targeted a fiscal deficit of 3 per cent of GDP and the elimination of the revenue deficit. The FRBM Review Committee of 2017 under N.K. Singh recommended a debt-to-GDP ratio of 60 per cent.
What is GST and how does the GST Council work?
GST is a destination-based indirect tax on consumption introduced on 1 July 2017 by the 101st Constitutional Amendment Act, 2016, with the motto One Nation, One Tax. The GST Council is a constitutional body under Article 279A, chaired by the Union Finance Minister, and its decisions require a three-fourths majority in which the centre has one-third and the states two-thirds of the voting weight.