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How Does The Govt Make Money To Plan A Budget?


When we do think of the expenses that the government undertakes to benefit the people of the country, we often assume that its sole source of revenue is the taxes we pay. While taxes do form a major part of the government's source of income, there is more to it. As the day of the interim budget announcement draws closer, here's an understanding of how the government makes the revenue and allocates it in the budget for the country.

How Does The Govt Make Money To Plan A Budget?
  • Taxes: The obvious source of income for the government includes both direct taxes (income tax, corporate tax) and indirect tax (GST). Now the rates of the taxes charged often fluctuate, for example, GST rates were reduced on many items quite recently. There are multiple reasons for changes in the taxes charged on various items. When taxes are high it does slow down the economic activity in the country as individuals have lesser income with themselves. Businesses also suffer and smaller ones with less profit margins could close down altogether. This is why the government cannot keep the rates high with the sole purpose to make income. It has to make sure that economic activity is not discouraged.
  • Fines and penalties: To ensure that law is not broken and payments are made on time, penalties are imposed on individuals and businesses while helping the government generate income.
  • Licenses: Businesses in India are required to be registered and the government charges a license fee on some of them. For example, broadcasting and telecom businesses require specific licenses to provide certain services and these form as a source of revenue to the government.
  • Bonds and other securities: Governments around the world issue securities with a promise of repayment on maturity. These are bought by institutional investors as well as individuals and helps the government in undertaking specific development projects.
  • Profits from government-run entities: There are multiple state-run businesses in India like the Railways. Government makes profits from these businesses despite the subsidy provided on the services and it forms as a source of income.
  • Investment income: The government also has its money invested in various entities and earns dividend from them.
  • Disinvestment: In the last two years, the government has sold its stake in many state run companies as part of its disinvestment target. In 2017-18, the income from the disinvestments exceeded the target of Rs 72,500 crore and had hit Rs 92,000 crore by February 2018, which helped the government meet the shortfall in non-tax revenues for that fiscal year. Government's sale of its stake in companies like Hindustan Petroleum helped with the fund raising.
  • Loan recoveries: The Union government lends to state government and other countries for various purposes. Recovery of these loans also form a part of its revenue sources.

Before the start of the next fiscal year, in its budget, the government also estimates the revenue it could receive for the year. In the current financial year, the revenue fell short of the estimates without an increase in planned expenditure, causing the government's fiscal deficit to exceed the target much earlier than expected. Tax evasion is one of the problems that has reduced the revenues from taxes.

Read more about: interim budget 2019 budget
Story first published: Thursday, January 17, 2019, 13:09 [IST]
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