Fiscal Indicators: Types of Deficit in Budget- Revenue Deficit;

Effective Revenue; Deficit and Fiscal Deficit

Fiscal Indicators: Types of Deficit in Budget- Revenue Deficit; Effective Revenue;
Deficit and Fiscal Deficit

Revenue Receipts: Tax Revenue and Non-Tax Revenue

The receipts that do not create any liabilities and does not lead to a claim on the government
are called revenue receipts. These revenue receipts are non-redeemable and can be classified
into two categories namely: tax revenue and non-tax revenue. Tax revenues are the vital
components of revenue receipts that have been bifurcated for the long term into direct taxes,
enterprises and indirect taxes such as customs duties, excise taxes and service tax. Non-
tax revenues, on the other hand, are the recurring income that is earned from the
sources other than taxes by the government.
What are Revenue Receipts?

The money received by a business through normal business operations is known as revenue
receipts. The revenue receipts are recurring and affect the profit and loss of business on the
income statement. They are the government receipts which neither create an asset nor reduce
any liability and are considered as the current income receipts for the government from all
sources.

A receipt is considered as a revenue receipt if it fulfils the following two criteria:

●It should not create any liability for the government. For example, the taxes that are levied by the
government are regarded as revenue receipts but any amount that is borrowed by the
government is not a revenue receipt.

● It should not any decrease in the assets.

These revenue receipts are non-redeemable and can be classified into two categories namely: tax
revenue and non-tax revenue.
Tax Revenue- Direct Tax and Indirect Tax

Tax is a compulsory payment which is made to the government by the people or the
companies without having any direct benefit in return. The sum of all receipts from the taxes
and all other duties under the government are referred to as tax revenue. They are either from
direct taxes or indirect taxes. It is the main source of regular receipts of the government and is
categorized into

Direct Taxes and Indirect

Taxes. What are Direct Taxes?

The taxes that are imposed on the property and income of an individual and a
company are known as direct taxes. Direct taxes are paid directly to the government by the
companies and the individuals. The income level, as well as the purchasing power of the
people, are affected by direct taxes. It also helps in changing the level of aggregate demand of
the economy. Direct Tax Systems can be progressive, regressive or proportional.
Nontax Revenue: While taxation is a primary source of income for the government, it
also earns some recurring income other than tax, which is called non-tax revenue. While
sources of tax revenue consist of few but bulk direct and indirect taxes, the number of sources
of non-tax revenue are very large with wide variance in the quantum of collections per
source. Although there are large sources of non-tax revenue, the quantum of collection per
source is much less than that of tax collections. For instance, when people avail services
offered by the government, like electricity, telecommunication, DTH, broadband etc, they pay
bills, which include the share of non-tax revenue as the government provides infrastructure
support to facilitate the services. The government also collects interest as non-tax revenue
on the loans and funds advanced to states for various purposes. So, the government
collects non-tax revenue in return for providing/facilitating any goods or services.

Components of Non-Tax Revenue

There are several services provided by the government that creates the sources or components
of non-tax revenue. Here are examples of some components of non-tax revenues are as follows:
1. Interest: It comprises of interest of loans given to states and union territories for
reasons like non-plan schemes (e.g., flood control) and planned schemes with maturity
period of 20 years such as modernisation of police forces and also interest on loans
advanced to Public Sector Enterprises (PSEs), Port Trusts and other statutory bodies etc.

2. Dividends and profits: This includes dividends and profits from PSEs as well as the
transfer of surplus from Reserve Bank of India (RBI).

3. Petroleum license: This includes fees to get the exclusive right for exploration in
a particular region. Such fees may be in the form of royalty, share of the profit earned
from contact areas during a specific period, Petroleum Exploration License (PEL)
fee or Production Level Payment (PLP).

4. Power supply fees: This includes fees received by Central Electricity Authority from
the supply of power under the Electricity (Supply) Act.
5. Fees for Communication Services: This mainly includes the license fees from
telecom operators on account of spectrum usage charges that licensed Telecom Service
Providers pay to the Department of Telecom (DoT).

6. Broadcasting fees: It includes license fee paid by DTH operators, commercial TV

services, commercial FM radio services etc.

7. Road, Bridges usage fees: This includes receipts through toll plazas on account of the
usage of national highways, permanent bridges etc.

8. Examination fees: This includes fees paid by applicants of competitive

examinations conducted by the Union Public Service Commission (UPSC) and
Staff Selection Commission (SSC) to fill up vacancies in government offices.

9. Fee for police services: This includes fee received for supplying central police
forces to state governments and other parties like Central Industrial Police Force (CISF) to
industries etc.
 10.Sale of stationery, gazettes etc: This includes receipts under ‘Stationery and Printing’
relating to the sale of stationery, gazettes, government publications, etc.

11.Fee for Administrative Services: This includes fees received for providing services
like audit services, issuance of passport, visa etc.

12.Receipts relating to Defence Services: This relates to services provided through

Canteen Stores Department (CSD).

Importance of Non-Tax Revenue

Tax revenue is the biggest source of revenue for the government, but the amount of
tax collection may vary due to the employment situation, consumption levels etc, which the
non-tax revenues somewhat balanced with low, but steady flow of revenue from a wide
number of sources. Apart from a source of earning for the government, non-tax revenues
also help in recovering the cost of services offered.
Sources of Non-Tax revenue of State Government

Like the central government, the state governments also provide various services such

as: Police services

Home guards

Electricity

Administrative services

Municipal services

Jobs through state public services

boards Sale of stationery

Gazettes
The above-mentioned sources become sources of non-tax revenue for the respective
state governments.

Difference between Tax Revenue and Non-Tax Revenue

Tax revenue is charged on income earned by an individual or an entity (direct tax) and on
the value of transaction of goods and services (indirect tax). On the other hand, non-tax
revenue is charged against services provided by the government. It also includes interest
charged on loans advanced by the government for various purposes. Note that it is compulsory
to pay a part of the income earned/generated and amount of goods and services consumed as
tax. However, non-tax revenue becomes payable only when services offered by the government
are availed.

Revenue Expenditure and Capital Expenditure of India!

Expenditure means spending on something. This can be a payment is cash or can also be
the exchange of some valuable item in exchange for goods or services. It is the process of
causing a liability by a commodity. Receipts and invoices keep the records of expenditures. An
expense is
a word very similar to expenditure but expense shows the deduction in the value of the
asset while expenditure simply denotes the obtaining of assets. Two types of expenditures are
present on the basis of time durations, that is:

Capital expenditures

Revenue expenditures

An expenditure that neither creates assets nor reduces a liability is categorised as

revenue expenditure. If it creates an asset or reduces a liability, it is categorised as capital
expenditure. Simply put, an expenditure which neither creates assets nor reduces liability is
called Revenue Expenditure, e.g., salaries of employees, interest payment on past debt,
subsidies, pension, etc. These are financed out of revenue receipts. Broadly, any expenditure
which does not lead to any creation of assets or reduction in liability is treated as revenue
expenditure.

Generally, expenditure incurred on normal running of the government departments

and maintenance of services is treated as revenue expenditure. Examples of revenue
expenditure are
salaries of government employees, interest payment on loans taken by the
government, pensions, subsidies, grants, rural development, education and health services, etc.

It is a short period expenditure and recurring in nature which is incurred every year (as
against capital expenditure which is long period expenditure and non recurring in nature). The
purpose of such expenditure is not to build up any capital asset, but to ensure normal
functioning of government machinery. Traditionally, all grants given to state governments
are treated as revenue expenditure even though some of the grants may before creation of
assets.

Capital Expenditure

The Union government defines capital expenditure as the money spent on the acquisition
of assets like land, buildings, machinery, equipment, as well as investment in shares.
Capital expenditure is the part of the government spending that goes into the creation of
assets like schools, colleges, hospitals, roads, bridges, dams, railway lines, airports and
seaports. Capital expenditure also covers the acquisition of equipment and machinery by
the government,
including those for defence purposes. Capital expenditure also includes investment by
the government that yields profits or dividend in future.

Why is Capital Expenditure important?

1. High capital expenditure usually means more investment by the government towards
the creation of infrastructure and other assets that are crucial for rapid economic growth.

2. Capital expenditure means construction of roads, highways, dams, bridges, ports,

airports and railway lines.

3. India experienced low growth rates for decades as it failed to develop physical and
social infrastructure, the key to achieving high economic growth.
Revenue Expenditure Capital Expenditure Capital Receipts

Neither Creates Any Either Creates Assets or Either creates liabilities

Assets nor reduces any Reduces Liabilities or reduces
liability for the assets.
government

The revenue The fiscal deficit is the

deficit happens difference between the
when revenue receipts government’s total
fall short of revenue expenditure (both
expenditure. revenue and capital)
RD = Revenue and its total
Expenditure – Revenue receipts excluding borrowings.
Receipts FD= Total
Expenditure- (Revenue
Receipts+ Non- Debt
Creating Capital Receipts)
Revenue expenditure exceeds the total revenue receipts. Revenue deficit includes
those transactions that have a direct impact on a government’s current income and
expenditure. This represents that the government’s own earnings are not sufficient to
meet the day-to-day operations of its departments. Revenue deficit turns into borrowings
when the government spends more than what it earns and has to resort to the external
borrowings.

Revenue Deficit Formula:

Here’s how the revenue deficit is calculated:

Revenue Deficit: Total revenue receipts – Total revenue expenditure.

Revenue Deficit deals only with the government’s revenue receipts and revenue expenditures.

Note that revenue receipts are receipts which neither create liability nor lead to a reduction in
assets.

It is further divided into two heads:

  Receipt from Tax (Direct Tax, Indirect Tax)

 Receipts from Non-Tax Revenue

Revenue Expenditure is referred to as the expenditure that does not result in the
creation of assets reduction of liabilities. It is further divided into two types

 Plan revenue expenditure

 Non-plan revenue expenditure

Effective revenue deficit

 Effective Revenue Deficit is the difference between revenue deficit and grants for creation
of capital assets.
 The concept of effective revenue deficit has been suggested by the Rangarajan
Committee on Public Expenditure. It is aimed to deduct the money used out of
borrowing to finance capital expenditure. The concept has been introduced to ascertain
the actual deficit in the
 revenue account after adjusting for expenditure of capital nature. Focusing on this will
help in reducing the consumptive component of revenue deficit and create space for
increased capital spending.
 Revenue deficit is “the difference between revenue expenditure and revenue receipts
which indicates increase in liabilities of the Central Government without increase in the
assets of that Government”(emphasis added). An additional fiscal indicator, namely,
effective revenue deficit, has been prescribed by an amendment to the FRBM Act by
the Finance Act, 2012. Effective revenue deficit has been defined as the difference
between “the revenue deficit and the grants for creation of capital assets”.
 Grants for creation of capital assets are defined as “the grants-in-aid given by the
Central Government to the State Governments, constitutional authorities or bodies,
autonomous bodies and other scheme implementing agencies for creation of capital
assets which are owned by the said entities”. The amendment confers a statutory status
on the concept of effective revenue deficit which had already featured in the
Central Budget 2011-12.
 Against the FRBM Act target of elimination of revenue deficit by March 2009,
the proposed amendment seeks to eliminate effective revenue deficit by 2015.

Fiscal Deficit

The difference between the total revenue and the total expenditure of the government is
termed as fiscal deficit. Generally, fiscal deficit takes place either due to revenue deficit or a
major hike in the capital expenditure.

So, what constitutes the government's total income? It has two components revenue receipts
and non-tax revenues. Revenue receipts of the government include corporation tax,
income tax, customs duties, Union excise duties and GST or the taxes of union territories.

Non-tax revenues include interest receipts, dividends and profits, external grants, other non-
tax revenues and receipts of the Union Territories.
So, what constitutes the government's expenditure? Now, while the government's
expenditure includes revenue expenditure, capital expenditure, interest payments and
grants in aid for creation of capital assets. The government has estimated the fiscal
deficit for the current financial year,2021 at 7.03 lakh crore rupees while aiming to restrict
the deficit at three point three percent of the GDP, as provided in the FRBM Act.

“Primary Balance” is one of the terms which are often used in the context of debt
sustainability. Technically, a primary balance means government budget balance excluding
interest payments on the debt stock.

“Interest payment” is the payment that a government makes on it borrowings to the Creditor.

“Interest rate” is a rate charged for the Money used or invested. From Borrower perspective,
an interest payments means rate charged for the money lent. For an Investor, interest payments
are an earned income on cash accounts or fixed and variable rate.
“Debt-to-GDP” or “Debt/GDP” ratio is a comparative measure of countries debt burden (to
the GDP). It is a measure which shows the capacity of a countries debt sustainability
(including all taxes to pay off the debt).

“Outstanding interest payments” means the interest payments which are need to paid for
the money borrowed or to be received for the money earned/ lent.

“Primary Deficit” is fiscal deficit minus interest payments. A primary deficit needs to
be financed by further borrowing.

“Fiscal Deficit” shows the requirement of borrowing (or) borrowing requirements of

the Government to finance the expenditure including the interest payments. Fiscal deficit
includes interest payments

An illustration to understand the difference is – If primary deficit is zero (0), then fiscal deficit
is equal to interest payment (0+i). If primary deficit is one (1) the fiscal deficit is one plus
interest payments (1+i).