PUBLIC FINANCE

UNDERSTANDING THE CONCEPT:

Market failure occurs when goods or services are not allocated efficiently by private markets.
The existence of market failure provides an efficiency-based rationale for collective or
governmental provision of goods and services. Under broad assumptions, decisions made by
government about the efficient scope and level of activities can be efficiently separated from
decisions about the design of taxation systems. Public sector programs should be designed to
maximize social benefits minus costs (cost-benefit analysis), and then revenues needed to pay
for those expenditures should be raised through a taxation system that creates the fewest
efficiency losses caused by distortion of economic activity as possible. In practice, however,
budgeting is substantially more complicated and often results in inefficient practices.

Government can pay for spending by borrowing (for example, with government bonds),
although borrowing is a method of distributing tax burdens through time rather than a
replacement for taxes. A deficit is the difference between government spending and revenues.
The accumulation of deficits over time is the total public debt. Deficit finance allows
governments to smooth tax burdens over time, and gives governments an important fiscal
policy tool. Deficits can also narrow the options of the governments to follow.

FISCAL 2012 2013- 2014- 2015- 2012- 2013- 2014- 2015-

INDICATOR -13 14 15 16 13 14 15 16

In lakh Crores % of GDP

Revenue receipts 8.8 10.1 11.0 11.4 8.8 9.0 8.8 8.1

Gross tax revenue 10.4 11.4 12.5 14.5 10.4 10.1 10.0 10.3

Net tax to centre 7.4 8.2 9.0 9.2 7.5 7.2 7.2 6.5

Total expenditure 14.1 15.6 16.4 17.8 14.2 13.8 13.2 12.5

Revenue 12.4 13.7 14.6 15.4 12.5 12.2 11.7 10.9

expenditure

Capital expenditure 1.7 1.9 1.9 2.4 1.7 1.7 1.5 1.7

Revenue deficit 3.6 3.6 3.6 3.9 3.7 3.2 2.9 2.8
Fiscal deficit 4.9 5.0 5.0 5.6 4.9 4.5 4.0 3.9

Primary deficit 1.8 1.3 1.0 1.0 1.8 1.1 0.8 0.7

SOURCE: Budget document, Controller General of Accountant(CGA) and Central

Statistical Office (CSO)

Major Fiscal Indicators of the Centre

Public finance is closely connected to issues of income distribution and social equity.
Governments can reallocate income through transfer payments or by designing tax systems
that treat high-income and low-income households differently.

Public finance means the financial transactions made by the government. Under the federal
structure, the financial relationship between the union government and the state governments
are based on the principle of federal Finance. As per the Indian constitution, the centre and
the states possess a three-fold distribution of legislative powers. The Seventh schedule of the
constitution consists of the Union List, the state list and the concurrent List.

Union List includes the taxes which are levied, collected and retained by the central
government.
State List includes those taxes which are levied, collected and retained by the state
governments.

Those taxes which are not specified in the first two lists are included in concurrent list. To-
avoid any dispute between the centre and states in the field of tax revenue, some
constitutional provisions have been made. The division of powers between the centre and
states in respect of the imposition and collection of tax revenue and the appropriation of that
revenue can be shown in the following:

1. Taxes levied, collected and appropriated by centre:

i. Customs duty,
ii. Corporation tax.

2. Taxes levied and collected by centre but appropriated by both centre and states:
i. Income tax,
ii. Union excise duty.

3. Taxes levied and collected by centre but appropriated by states:

i. Taxes on railway freight and fares,
ii. Estate and succession duty other than agricultural land
 4. Taxes levied by centre but collected and appropriated by states:
i. Rates of stamp duties on financial documents,
ii. Taxes other than stamp duties on transactions in stock exchanges.

5. Taxes levied, collected and appropriated by states:

i. Sales tax,
ii. Land revenue

2011-12 2012-13 2013-14 2014-15 2015-16

GTR 8.89 10.36 11.39 12.45 14.49
CT 3.23 3.56 3.95 4.29 4.71
IT 1.64 1.97 2.38 2.58 3.21
CD 1.49 1.65 1.72 1.88 2.08

UED 1.45 1.76 1.69 1.89 2.29

ST 0.98 1.33 1.55 1.68 2.10
GTR= Gross tax revenue, CT= corporation tax, IT= income tax, CD= custom duty, UED=
union excise duty, ST= service tax
SOURCE: Budget document and CGA

Contribution of different taxes towards gross tax revenue

Source: Statement of Revenue Foregone, Budget documents and CSO.
Source: Statement of Revenue Foregone, Budget documents and CSO.
TAXATION:

Taxation is the central part of modern public finance. It is significant, not only because of the
fact that it is by far the most important of all revenues, but also because of the gravity of the
problems created by the present day tax burden. The main objective of taxation is raising
revenue. Taxation is used as an instrument of attaining certain social objectives i.e. as a
means of redistribution of wealth and thereby reducing inequalities. Taxation in a modern
Government is thus, needed not merely to raise the revenue required to meet its ever-growing
expenditure on administration and social services, but also to reduce the inequalities of
income and wealth. Taxation is also needed to draw away money that would otherwise go
into consumption and cause inflation to rise.

A tax is a financial charge imposed on an individual or an entity, by a state or a functional

equivalent of a state. A payment exacted by legislative authority. A tax is not a voluntary
payment or donation, but an enforced contribution, exacted by some legislative authority.

PUBLIC FINANCE MANAGEMENT

Public Finance Management (PFM) basically deals with all aspects of resource mobilization
and expenditure management in government. Just as managing finances is a critical function
of management in any organization, similarly public finance management is an essential part
of the governance process. Public finance management includes resource mobilization,
prioritization of programmes, the budgetary process, efficient management of resources and
exercising controls. Rising aspirations of people are placing more demands on financial
resources. At the same time, the emphasis of the citizenry is on value for money, thus making
public finance management increasingly vital. The following subdivisions form the subject
matter of public finance.

1. Public expenditure

2. Public revenue

3. Public debt

4. Financial administration