Updated June 25, 2022
Broadly, sources of Income for Govt of India includes: Tax Revenue, Non-Tax Revenue and Capital Receipts from where Government gets money. And, yes, Income to govt. assumes usually two terminologies: Revenue and Receipts. While the media and intelligentsia keep discussing the budget, fiscal deficit, monetary policy, GDP and the things alike, the basic question as to how Government of India (GOI) gets the money to keep country going, gets least mentions. In the instant post we will discuss about Sources of Income for Govt of India. Please read on.
Sources of Income for Govt of India
The central government of India gets money from various taxes source such as Income Tax, Wealth Tax, Corporate Tax, Excise duty etc. It also gets it’s from non-taxes sources such as fines, interest, fees, and money generated from services offered. It also earns money from capital receipts such as asset sale, disinvestment and borrowings.
(I) Sources of Income for Govt of India Before 2017 (Pre-GST era )
While It is important to know the current mechanism as to how the govt gets money, it is even more important to know how it got previously. The sources of the Income of Govt. of India Looked like:
(a)Tax Revenue: As First Pillar to Govt’ Income
Union Excise Duties- as the sources of Income for Govt of India
Excise duty is basically a production tax. The Central government levies tax on production stage for most of the commodities in the form of Union excise duties. In simple, excise duty is a type of indirect tax levied on goods manufactured in India for domestic consumption. The most important goods from the revenue point of view are sugar, cotton, mill cloth, tobacco, motor spirit, matches and cement.
The Union Excise Duty not payable on the goods exported from India. This burden of taxation is, however, passed on to the consumers by the manufacturers. But all excise duties are not levied by the Central government like production of items that include, alcohol, alcoholic preparations, and narcotic substances are collected and imposed by the State Government.
It is one of the largest revenue sources for the central government. It was the largest revenue sources for the union government from 1947 to 2007 until it was replaced by the corporate income and personal income tax. Now it is the third-largest revenue source. Union excise duties are levied in accordance with the rates mentioned in Schedule I and II of the Central Excise Tariff Act, 1985. The taxable event here is the ‘Manufacture’.
Customs Duties: as the sources of Income for Govt of India
It is one of the largest sources of revenue for the Government of India. Customs duty is a tax levied on imports and exports of commodities between the countries. Customs duty is necessary for many reasons. For Instances, it ensures a country’s economic stability, jobs, environment, keeps check on restricted items and many more.
Customs Duties may also be levied to protect the domestic industry from foreign competition. Every country levies Customs Duties on commodities that are imported into or exported out of that nation. Overall levy of Customs Duties levy could be seen as follows:
(a) Basic Customs Duty (BCD)
(b) Additional Customs Duty or Special CVD
(c) Protective Duty
(d) Countervailing Duty (CVD)
(e) Anti-dumping Duty
(f) Education Cess on Custom Duty
These goods are valued in accordance with Rule 3(i) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.
Income Tax: as the sources of Income for Govt of India
Income tax is a type of tax that government imposes on income generated by individuals, Hindu undivided families and unregistered firms. The government of India decides the rate of income tax as well as income tax slabs on which individuals are taxed. The rate of income tax depends on the earning of the individual or entities. The earning may be actual and notional. Those individuals who are under the higher income slab are taxed at higher income rates.
Income tax is a direct tax on the earnings or income in the financial year. There are some types of incomes on which income tax is applied in India: (a) Income from Salary/Pension (b) Income from Business/Profession (c) Revenue or Income from house party (d) Income from Lottery, Betting, Horse Race etc. (e) Capital gain. Income taxes are an important source of revenue for the government. The government spends this money on public services, pay government obligations, and provide goods for citizens.
Corporation Tax: One of the sources of Income for Govt of India
The corporate tax is a direct tax levy on the net income of the company by the government of India. It is one of the main sources of revenue of the government. Income-tax on the net profits of joint-stock companies is called corporation tax. Foreign companies, as well as Domestic companies, are liable to pay corporate tax under the Income-tax Act.
While a domestic company would have to pay on its universal income, a foreign company would only pay on the income earned within India i.e. is being accrued in India. It is taxed at a specific rate as prescribed by the income tax act subject to the changes in the rates every year by the IT department.
Here, we should learn about the types of income which a company earns: (a) Profits earned from the business (b) Capital Gains (c) Income from renting property (d) Income from other sources like dividend, interest etc. Companies, both public and private which are registered in India under the Companies Act 1956, are liable to pay corporate tax.
Wealth Tax: One of the sources of Income for Govt of India
Wealth tax is a tax imposed on the richer section of the society. The intention of doing so is to reduce the unequal amongst the taxpayer. However, the Finance Minister had shunned the wealth tax in the budget of 2015. It was abolished because the cost incurred for recovering taxes was more than the benefit is derived.
Instead, the Finance Minister hiked the surcharge from 2% to 12% for the rich section. Individuals with an income of above Rs.1 crore and companies with an income of over Rs.10 crore fall under the ambit of the super-rich segment.
It is an annual tax on the net wealth of individuals and Hindu undivided families and companies. The deciding factor for the applicability of wealth tax is the residential status. The residents of India are subject to wealth tax on their global assets.
Gift Tax: as the source of Income for Govt of India
It is a tax levied on the gifts of money or other items of value, such as property that one living person gives to another. However, items received upon the death of another come under the inheritance tax.
The Indian legislative system sought to levy a tax on gifts in the hands of the donor by enacting the Gift Tax Act, 1958. This legislation was shunned in 1998. But, after six years, the Finance Act 2004 introduced section 56(2)(v) for taxing gifts in the hands of the recipient.
Service Tax: As One of the sources of Income for Govt of India
Service tax is a tax levied on service providers on certain service transactions, but the burden of taxation was passed on to the customers. It is categorized under Indirect Tax and came into existence under the Finance Act, 1994.
(B) Non-Tax Revenue: As another Pillar to Govt. Income
Interest Receipts: It is the largest non-tax source of Union Government’s revenue. This includes the interest earned by the Union receipts on the loans it has advanced to State Governments, to financial and industrial enterprises in the public sector, interest payable by the Railways and several other smaller loans advanced by the Union.
Surplus Profits of the RBI: The surplus profits of the RBI are also a part of the revenue of the Union Government.
Profits of Public Enterprises: The public Sector Enterprises owned by the Union government of India. So, the profits of such Public Sector Units are another source of revenue for the central government of India. The public sector enterprise comprises of the Steel Authority of India (SAIL), Hindustan Machine Tools (HMT), Bharat Heavy Electricals Ltd. (BHEL), State Trading Corporation (STC).
General Services – The central government derives fees or other revenue through various general services that it provides. E.g., Central police forces supplied by the Union to States etc.
Social and Community Services – The central government of India gets fees and receipts through social and community services. E.g., entry fees collected at museums.
Currency, Coinage and Mint: The central government also derives money from running the Currency Note Printing Presses. Moreover, profits are made from the circulation of coins — this gain or profit being the difference between the face value of the coins and their manufacturing cost.
Non-Tax revenue of Union Territories – The receipts of the Union Territories (without legislature) mainly relate to administrative services; sale of timber and forest produce mainly in Andaman and Nicobar Islands; receipts from Chandigarh Transport Undertaking and receipts from Shipping; Tourism and Power.
(C) Capital Receipts: Third Pillar to Income of Govt.
Non-Debt Capital Receipts:
Non-debt capital receipts comprise;
(a) Recoveries of loans and advances- The central government also derives income and money through recovering the loan from the states and union territories.
(b) Miscellaneous Capital receipts – The government gets receipts on account of disinvestment of part of its equity in central Public sector Enterprises.
Debt receipts are those receipts that the Union receives for the current year under the explicit assumption that it is a temporary receipt which acts as a liability on the part of the government.
(b) Securities against Small Savings
(c) State Provident Fund
(d) Other Receipts
(e) External Debt
(II) Sources of Income for Govt of India After July, 2017(GST Era)
With the implementation of GST, 2017 saw a complete change in the way we used to pay taxes. After the introduction of GST, the government’s revenues are undergoing a makeover as all indirect taxes (with the exception of customs duties) are now decided by the GST council and not the government of India. Here, we will discuss how the central government of India gets money after GST came into effect.
(a)Tax Revenue: The First Pillar to Govt.’s Income
Corporate Tax Revenue– This revenue is derived from the company profits by the Central government of India. It is one of the major sources of revenue of the central government of India.
Personal Income Tax– This is the proportion of tax revenue that comes from the incomes of an Indian citizen. It is a direct tax collected by the Union government.
Custom Duties– Revenues from import duties are the only major indirect tax that the Government of India still controls after the introduction of GST in July 2017.
GST (Goods and Service Tax)– Goods and Service Tax (GST) is an Indirect tax that levied on the supply of goods and services. This single GST subsumed several taxes which included central excise duty, services tax, additional customs duty, surcharges, state-level value-added tax and Octroi. It is the major source of revenue of the Union government of India.
(b)Non- Tax Revenue: The 2nd Pillar to Govt.’s Income
The revenue receipts that are not earned by the public taxing is called non-tax revenue receipts. This is the revenue that the government earned through the profits and dividends from the public enterprises. The Non-Tax revenue receipts comprise Interest revenue, Surplus Profits of RBI, General Service, Currency, coinage and Mint, Social and community service etc.
(c) Capital Receipts: The 3rd Pillar to Govt’s Income
Capital receipts refer to those receipts which either create liability or cause a reduction in the assets of the government. They are non-recurring and non-routine in nature. It is categorized into Non-Debt Receipts and Debt capital Receipts
How Does the State Government Under the Union of India Get Money?
Like levying and collection has changed for Union govt of India in GST era. It will be important to note the way and mechanism of income and sources thereof in pre and post GST era
(I) States’ Income Sources in Pre GST era: Before 2017
There were many sources of revenue for the state government
Property taxes are collected by the state government of India. It is levied on the ‘real property’. This includes improvement made to land like buildings, godowns, factories, shops, residential houses etc. The property tax is not liable to be taxed over the vacant plot of land without any adjoining construction. However, in some states, property tax is levied on the vacant plot of land E.g. Mumbai, Delhi, Bangalore, Chennai, Kolkata etc. Property tax is also called house tax. It is the duty of the municipality of an area to determine and assess the tax.
Value Added Tax is the major source of revenue of all Indian State and Union Territories except Andaman and Nicobar island and Lakshadweep. VAT is an Indirect tax. VAT was introduced in the Indian taxation system to replace the existing general sales tax. It is levied on every commodity passes through different stages of production and distribution before finally reaching the consumer. Some value is added at each stage of production and distribution chain. It is a consumption tax, as it is borne by the final consumer.
It is a tax imposed on the movement of goods from one state to another by the state governments in India. Entry Tax is levied by the recipient state to protect its tax base. This tax was introduced on 1 September 2000. Entry Tax is imposed by States under the provisions of Entry 52 of the State List and Article 304 of the Indian Constitution. It will help meet ‘cost of facilitating trade and Industry in the state’. It is one of the sources of revenue or income of the Indian state of government.
Stamp and Registration Duty:
It is the duty charged on the sale and transfer of property and is referred to as Stamp Duty. It is a major source of tax revenue for most State Government of India.
The state government gets its revenue from the electricity service.
State Excise Tax-
Unlike the Union Excise Duty or CENVAT, the State Excise Duty is imposed on the alcohol, alcoholic preparations, and narcotic substance. This duty is collected by the State government of India. It is the major source of revenue of State govt.
Motor Vehicles Tax-
It is a tax levied on every motor vehicle by the state under the respective State Motor Vehicles Taxation Act. The state government has the power to increase or decrease the rate of tax from time to time.
(b)Non- Tax Revenue
It is the major source of revenue of the state government. Non-tax Revenue refers to sources of revenue which are outside the purview of what is levied on wealth, income or property. States that are rich in natural resources tend to raise revenues from non-tax sources like mining minerals and metals, etc. Other main sources are Interest Receipts, Dividends and Profits from State Public Sector Enterprises as well as returns from user charges on general, social and economic services.
Capital Receipts of the government lead to either a reduction in the assets or an increase in the liabilities of the government. They also refer to incoming cash flows. Capital receipts can be both non-debt and debt capital receipts. Loans from the general public, foreign governments and the Reserve Bank of India (RBI) form a crucial part of capital receipts. Capital Receipts for government need not come periodically in every Budget.
(II) States’ Income Sources in GST era: After 2017
Major changes in Tax imposition and collection after implementation of GST 2017 was that many of the state taxes were subsumed into the new Tax i.e, GST.
State Own’s Tax Revenue
(a) State GST- It is one of the major sources of revenue of the State government of India.
(b) VAT (mainly Fuel)
(c) Excise (mainly Liquor)- Manufacture and sale of liquor are major sources of revenue for states. The excise duty on liquor is levied by the respective state governments in India. State excise duty on alcohol is the second or third largest contributor to the own tax revenue of states. It accounts for 10-15% of the tax receipts for a majority of the states. License to sell alcohol, fines and confiscation of alcoholic products also add to the exchequer of states.
(d) Property and Capital Transactions (Land revenue, stamps and Registration fees)
(e) Taxes on Income (taxes on Professions, Trades, calling, unemployment)
(f) Share in Central Taxes- State Governments also get their share of Income Tax and Excise duty from Central Government as per the recommendations of Finance Commissions constituted by Central Government.
(b) Non- Tax Revenue
Collected by the governments for providing/facilitating any goods and service.
The Indian state government also gets revenue from the capital receipts.
What Difference GST Has Made in Levying and Collection of Taxes?
It basically has reduced the number of taxes applicable on goods and services consumed in India. Any tax not related to Consumption of Goods & Services remained unaltered. Accordingly, a couple of taxes collected by Union Govt. on Goods and services were subsumed into GST and likewise, other Couple of State taxes levied and collected by the States also got subsumed in GST. The GST further has three distinctions so CGST, SGST & IGST so as to ease the division of Tax collected between Centre and State.
Expenditure of the Govt Has to Be Seen as Necessary Evil
Yes, together Expenditure and Income both makes the economic activity complete. No expenditure means no outgo in the market or less cash in people’s hand, meaning lesser spending which means lesser tax collection or less Income to Govt. So, both go hand in hand for a country to move on and progress. Expenditures seems evil but is necessary. Of course, way higher expenditure than receipts puts govt. into Fiscal Deficits- an undesirable financial condition for the govt.
The government has to spend revenue on various things like- to supply good and service, roads and bridges, hospitals, schools and welfare payments and benefits including unemployment and disability benefit; to provide subsidies to industries that may need financial support for either their operation or expansion.
Here, the public sector plays a crucial part in lending necessary support. In a democratic country, the main aim of the government is to increase the welfare of the people and not the profit of the government. So, like any other democratic country, the main aim of the government of India is to provide the services and provisions to the needy people. This eventually puts money in hands of common man, who when spends on things large industries flourish and govt revenue goes up.
Sources of Income for Govt of India- In Conclusion
To conclude by, the Indian government, like most other govts around the globe, gets its money or income broadly through two sources: Non-Tax sources and Tax sources. It is pretty much obvious that tax sources include taxing citizens, corporations, goods and services. Non-Tax sources might include anything and everything that use a taxing mechanism.
However, even more fundamental question would be as to what are the major concerns for which govt needs money to spend on. Every country has some uncompromising regular expenditures apart from the expenses which can be compensated against each other. And, this is a broad explanation of the need for money by a country. Get a larger view on what are the major concerns/heads Govt of India had to spend money on between FY 2004-05 to 2018-19.
Budget is the key to understand the income vs Expenditure of a Government: The Government revenue as well as government expenditures are components of the government budget and form important tools of the government’s fiscal policy. The revenue or receipt component of the budget shows the record of its source of earnings while the Expenditures show the proposed out of the income envisaged.
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