A Beginner’s Guide to the Union Budget (Part 1)

The first part of the Beginner’s series would explore the structural design of the union budget.

Budget, in the simplest sense, is the activity of planning on how much to spend, when to spend, and where to spend based on the income in hand. Every month we plan our expenses (expenditure) based on the salary that is being credited to our bank account (revenue). While we do it on a monthly basis, the government tends to do the same activity on an annual basis.

So, in the most elementary form, Union Budget = Revenue — Expenditure.

The revenue for the government refers to the money that the government is planning to earn in the consecutive year. This money can be driven through two major channels — Tax based Revenue and Non tax-based Revenue.

The tax-based revenue can further be classified into Direct-tax revenue and Indirect tax revenue.

Direct Tax Revenue: This revenue includes the income that the government earns through Income tax, corporate tax, house tax, etc. This tax is being calculated and filed by every individual on an annual basis

Indirect Tax revenue: This revenue includes the income that the government generates through the likes of GST, Custom Duties, and Excise Duty. This tax is also being paid by the user of the commodity, however, the vendor collects this tax from the user as an additional amount above and beyond the maximum retail price of the product and files it on behalf of the user.

While each of the above taxes (Direct tax and indirect tax) are being paid from your pockets, the key difference between the two is that the direct taxes are calculated and filed by you while the indirect taxes are collected and filed by the vendor on the behalf of all the users using the specified product or service.

Shifting to the non-tax based revenue, it mainly constitutes Divestments, Dividends, and other minor revenues sources. While the government derives the major chunk of its revenue through taxes, it also generates revenue through other activities.

Divestments: It refers to the money that the government is raising through the sales of its shares. There are a lot of enterprises in India where the government is an owner and hold the majority number of stakes (more than 50%) and such enterprises are known as Public Sector Undertaking (PSUs), some prominent examples being IOCL, ONGC, GAIL, etc. When the government decides to sell a certain amount of its stakes (let's say around 5 to 8%) in such companies to individuals in form of shares, it generates revenue, which is then termed as Divestments. Within the non-tax revenue, Divestment is one of the major sources of income for the government.

Dividends: At the financial year in March, each company calculates its profits by subtracting the expenses from the revenue earned during the year. Once the profit is calculated, the company subtracts the tax paid to the government from this value in order to calculate the net profit to the company, also termed as Profit After Tax (PAT). The company then distributes this net profit amongst all the stakeholders. This money that each shareholder receives during this distribution process is called Dividends. The government, being a major stakeholder in all the PSUs, also earns revenue in form of dividends from these companies.

The government of India also imposes a tax on the distribution of these dividends, known as the Dividend Distribution Tax (DDT), which is to be paid by the company when it is distributing the dividend to its shareholders.

Others: It could be used to categorize the revenue generated from all the miscellaneous activities and sources apart from taxes, divestments, and dividends. This could include royalties, donations, penalties, and fines.

The entire revenue structure for the government can be summed up in the flow chart given above.

Expenditure refers to the money that the government is planning to spend in a consecutive year. While the government can earn money through multiple sources, its expenditure is driven under two main headers including — Revenue Expenditure and Capital Expenditure.

Revenue Expenditure: It includes the money that the government set-asides for various schemes/funds as well as the wages being paid to the government employees. It is a regular and ongoing expenditure for the government.

Capital Expenditure: It refers to the money that the government spends on the creation of assets including roads, railways, highways, and seaports. This expenditure results in the creation of physical assets for the country.

To conclude, the budget presented by the government at the beginning of each financial year is simply an estimate of how much the government is expecting to earn in the coming year compared to what is planning to spend in the same year. The entire budget structure can be summarized in the flow chart above.

Since budget is an estimated value of the revenue that will be earned and the expenditure will be made in the upcoming financial year, the real values may vary from what was estimated at the beginning of the year.

In case a country earns less than the estimated revenues however its expenditure is the same as expected, i.e., where the expenditure is more than the revenue earned, the country is said to be a Fiscal Deficit. Most of the countries today including India are a fiscal deficit and only a few countries are earning more than what they are spending. Such countries are known as Fiscal Surplus with Qatar being one such example of a Fiscal Surplus country.