people start evading tax payments. Thus, with the help of Laffer curve, the optimum tax rate can be found so that the tax collected by the Government can be maximised Tax Elasticity — It is a measure of the degree of responsiveness of the change in tax collection due to the change in tax rate. Laffer curve is the graphical representation of tax elasticity. Tax Buoyancy — It refers to the responsiveness of tax revenue growth to the changes in GDP. It is per cent change in tax revenue per cent change in GDP Pigouvian Tax It is a special tax that is often levied on companies for the actions or activities that causes pollution or consequences for the society known as negative externalities. A type of a Pigouvian taxis a ‘sin tax, which is a special tax on tobacco products and alcohol. Tobin Tax- It was developed with the intention of penalising short-term currency speculation, and to place a tax on all spot conversions of currency. Revenues from this tax are intended to be used for environmental and basic human needs. Tax Haven -It is a geographical area where certain taxes are levied at a low rate or not at all. Tax haven leads to loss of revenue for Govern- ments, money laundering, etc Some examples of tax haven countries include Andorra, the Bahamas, Belize, Bermuda, the British Virgin Islands, the Cayman Islands, the Channel Islands, the Cook Islands, the Island of Jersey, Hong Kong, the Isle of Man, Mauritius, Lichtenstein, Monaco, Panama Tax Evasion: It is an illegal practice where a person, an organisation or a corporation intentionally avoids paying his or her true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties. Tax Avoidance- An arrangement made to beat the intent of the law by taking unfair advantage of the short- comings in the tax rules is known as tax avoidance. It refers to finding out new methods or tools to avoid the payment of taxes which are within the limits of the law Presumptive Taxation- Often filing complex tax returns and paying taxes are expensive and troublesome af- fairs for small businesses. To incentivise them to pay tax, tax law allows them to declare their turnover and pay taxes according to that fixed turnover. The composition scheme in the GST regime is an example of presumptive taxation where small taxpayers can pay GST at a fixed rate of turnover. The composition scheme can be opted by any GST taxpayer whose turnover is less than 1.5 crore. Angel Tax- It is the income tax payable on capital raised by unlisted companies via issue of shares where the share price is seen more than the fair market value of the shares sold. The excess realisation is treated as income and is taxed accordingly. Capital Gains Tax -Capital Gains tax is a levy assessed on the positive difference between the sale price of the asset and its original purchase price. Long-term capital gains (LTCG) tax is a levy on the profits from the sale of assets held for more than a year.Grandfathering Clause - When a new clause or policy is added to a law, certain persons may be relieved from complying with the new clause. This is called ‘grandfathering. ‘Grandfathered’ persons enjoy the right to avail concession because they have made their decisions under the old law. NON-TAX REVENUE Some of the non-tax receipts of the Government are Interest receipts -The Central Government many a times provides loan to State Governments, UTs with legislative assemblies, Public Sector Enterprises, statutory bodies, etc. Interest paid by them to the Central Government is considered as non-tax revenue receipt and the principal amount re- turned is included under capital receipt. idend and profit receipts- In public sector enterprises, the Government has majority shareholding (51 per cent or more). The dividend and profit forms the revenue to the Central Government, Grant: or external assistance- Various foreign nations and interna- tional monetary institutions (like World Bank group, UNDP, ADB, etc.) provide grants-in-aid to the Central Government. It is included under the head non-tax revenue receipts and not under capital receipts because it need not be paid back unlike loan. Capital Receipts 1. Debt Creating Capital Receipts -Loan taken by the Central Government from foreign Governments (ex- ternal debt), public financial institutions, etc. are included under capital receipts. Borrowings from the market by sale of Government securities (G-Secs) through RBI also results in capital receipts. 2. Non-Debt Creating Capital Receipts Recovery of loans and advances — The principal amount of loans which are repaid by State Governments, Public Sector Enterprises, other foreign Governments, etc. to Central Government is considered capital receipts, and it does not leave a burden of debt on the Central Government. Disinvestment of GOI shareholding in various Central Public Sector Enterprises like Air India, NTPC, ONGC, etc. is also a non-debt creating capital receipt for the Central Government. Department of Investment and Public Asset Management (DIPAM) under Ministry of Finance is the nodal agency dealing with disinvestments of Government of India. It was earlier called the Department of Disinvestment and has been renamed as DIPAM in 2016. With DIPAM coming into play, there has been a paradigm shift in the approach from Disinvestment to Investment Management. The disinvestment proceeds collected are credited to the National Investment Fund (which is a public account specially meant for this purpose). The funds remain in NIF until withdrawn invested for approved purposes.PUBLIC EXPENDITURE Public expenditure refers to the Government expenditure. It is incurred by the central and State Governments. Public expenditure is incurred on various activities for the welfare of the people and also for the economic development. In other words, the expenditure incurred by public authorities like Central, State and Local Governments to satisfy the collective social wants of the people is known as Public Expenditure. In developing countries, the public expenditure policy not only accelerates economic growth and promotes employment opportunities, but also plays a useful role in reducing poverty and inequalities in income distribution. 1. Reventie Expenditure These are current or consumption expenditures incurred on civil administration, defence forces, public health and education, maintenance of Government machinery, etc. This expenditure is of recurring type which is incurred year after year. It does not impact the asset-liability status of the Government. Such expen something permanent. High revenue expenditure indicates poverty and backwardness of the economy. re does not increase the long-term efficiency of the firm, nor does it result in the acquisition of 2. Capital Expenditure Capital expenditure results in the acquisition of a tangible or intangible asset or payment of liabilities. Thus, it impacts the asset-liability status of the Government. Capital expenditures are focussed on GDP growth and thereby incurred on building durable assets like highways, multipurpose dams, irrigation projects, buying machinery and equipment. However, high capital expenditure indicates lack of private investment in the economy. Classification as Plan and Non- Plan Expenditure — Scrapped after abolishment of Planning Commission During the five-year plan period, every financial year’s budget estimates were formulated in the form of plan and non-plan expenditure. Plan expenditures were those expen- ditures which were detailed under five-year plans and were taken into account in every year’s general union budget in order to enhance the overall productive capacity of various sectors and improve socio-economic parame- ters in the economy, It included both revenue expenditure (like grant-in-aid to states, etc.) and capital expenditure (expenditure on construction of high- ways, hospitals, etc.) Non-plan expenditures were related to obligatory yet routine functioning of the Central Government such as interest payment, subsidies, defence expenditure, salaries and pension, etc.TYPES OF BUDGET Balanced Budget — when budgeted receipts = budgeted expenditure. It raises moderately the level of aggregate demand in the economy and is recommended when economy is close to achieving full employment. Deficit Budget — when budget receipts budget expenditure. It is recommended when there is a state of depression and aggregate demand needs to be increased. Surplus Budget — when budget receipts exceeds budget expenditure. It is recommended when there is an inflationary gap and aggregate demand needs to be reduced. Out of the above three, normally deficit budget occurs in a developing country like India Revenue Deficit It is the excess of revenue expenditure over revenue receipts. This revenue deficit is funded either through borrowings from the public or through disinvestment or by cutting revenue expenditure (mainly subsidies). Implications of Revenue Deficit -Higher revenue deficit forces Government to cut its expenditure on social welfare programmes, thereby impacting socio-economic development. Raising money through borrowings to fund the deficit, raises liabilities and unproductive interest payments and also lowers the credit-worthiness of the Government. Fiscal Deficit -It is the difference between what the Government earns and its total expenditure. It indicates the total borrowing requirements of the Government from all sources. This tool is used to determine the actual liability of the Government at a certain point of time. Itis one of most important policy parameters to measure the fiscal performance of the Central Government. IMPLICATIONS OF FISCAL DEFICIT It implies greater borrowings by the Central Government. Borrowings from RBI raise the money supply in the economy, which results in rise in the general price level over a period of time. This leads to inflationary spiral. its affects GDP growth as a significant amount of budgeted revenue is spent on the payment of interest on borrowings by the Central Government, thus resulting in reduced investment. This if not checked over a period leads to a vicious circle of high fiscal deficit and low GDP growth.High fiscal deficit also leads to the ‘crowding out effect’ as its lead to a situation when large borrowings by the Government to manage large fiscal deficit reduce the availability of funds for private investors. Credit worthiness or credit rating of the Government also gets lowered due to high fiscal deficit. Measures to Check Fiscal Deficit 1. By reducing public expenditure through {a) Rationalisation of subsidies. {b) Reduction in revenue expenditure in terms of bonus, LTC, leaves encashment, etc. to Government employees. {c) Curtailing other avoidable revenue expenditure. 2. By increasing revenue through {a) Increasing the tax base in the economy. {b) Checking tax evasion. {c) Restructuring the Public Sector Enterprises through disinvestment and u strategic sectors like health and education. sing the received fund in Primary Deficit While fiscal deficit shows borrowing requirement of the Government inclusive of interest payment on past loans,primary deficit indicates borrowing requirement excluding interest payment. The amount by which a Government's total expenditure exceeds its total revenue, excluding interest payments on its debt, is termed ‘primary deficit’. In other words, it is the difference between fiscal deficit, and interest payments by Governmer Primary Deficit = Fiscal Deficit — Interest Payments by Government. Implication of Primary Deficit it does not carry the load of interest payments on past loans. It simply indicates total borrowings (and not total liabilities) Monetised Defic It refers to the borrowings made by the Central Government from RBI through printing fresh currency. Itis resorted to when Government cannot borrow from the market to fund fiscal deficit. That fresh currency is provided by RBI against special securities of the Central Government. It increases the level of inflation in the economy due to Increased money supply in the economy (because of issue of fresh currency}. DEFICIT FINANCING Deficit financing is defined as financing the budgetary deficit through public loans and creation of new money. Deficit financing in India means the expenditure which is in excess of current revenue and public borrowing, The Government may cover the deficit in the following ways 1. By running down its accumulated cash reserves from RBI 2. By issuing new currency itself 3. By borrowing from the RBI and RBI giving the loans to the Government by printing more currency notesObjectives of Deficit Financing- 1. Toact as a remedy for depression To grant subsidies To increase aggregate demand For payment of interest To overcome the losses of public sector enterprises For implementing anti-poverty programme oyaes Adverse Effects of Deficit Financing Deficit financing may lead to inflation. Due to deficit financing, money supply increases and the purchasing power of the people also increases, which increases the aggregate demand, and the prices also increase. Lit puts an adverse effect on saving and investment. 2.It may lead to rise in the level of inequality. 3.lt may create a deficit in balance of payments due to price rise, which may lead to exports becoming uncompetitive in the global market. 4.it may increase the cost of production. If the deficit financing is undertaken to finance lower revenue expenditure and higher capital expenditure, it is good for the economy. It is because the borrowings in this case are routed to create capital assets in the economy, which may lead to increased production and higher GDP. On the other hand, if the majority of deficit financing is spent to meet revenue expenditure, it could be worst for a developing economy like India. It is because only routine expenses are tackled through this huge liability in terms of borrowings and not in the creation of capital assets, which may increase productive capacity of our economy. Status of Deficit Financing in India India first used this tool in 1969 and since then it became a routine phenomenon till 1991 in order to tackle higher and higher fiscal deficits. The fiscal deficit which was below 4 per cent of GOP till the 1970s climbed above 7 per cent in the second half of the 1980s.The revenue deficit also increased considerably. Thus, India was bound to resort to deficit financing. However, India after 1991 gradually moved towards fiscal reforms in the form of fiscal consolidation to reduce its dependence on deficit financing. In this regard, the Fiscal Responsibility and Budget ‘Management Act (FRBM Act) was enacted in 2003. However, even after various measures undertaken, Government has not been able to bring fiscal deficit to the desired level. FISCAL CONSOLIDATION It is a process through which the economy's fiscal health is improved by taking measures to reduce fiscal deficit to a manageable level. Among the components of fiscal consolidation include improved revenue