Sources of Income of Central Government

<<–2/”>a >p style=”font-weight: 400;”>Sources of Income of Central Government

As we all know that India is a democratic country and the main aim of the government here is to increase the welfare of the people not the profit of the government. To increase the welfare of the people the Government of India has to start welfare oriented schemes. Welfare oriented schemes are not guaranteed by the good return to the Government.

Government of India retains a big role in economy. In aftermath of LPG Reforms, it has pulled back substantially from private sector, yet its presence is unquestionable and desirable in social sector, defense and security, provision of public goods and Services etc. It has huge Bureaucracy which consumes enormous national Resources. Further, in line with modern concept of Market Socialism government intervenes in case of market failures for which it needs to provide services or goods significantly below cost. In effect, government’s expenditure generally surpasses its revenue which results into Revenue or Fiscal Deficit. In the first place, major source of government revenue is from Taxation, but there are non-tax sources too. At last, government resorts to Deficit Financing to fulfill its commitments. All this happens under aegis of Finance Ministry.

Finance Ministry

This ministry is biggest subdivision of Government of India and has under it, largest number of departments (5). It also has one Minister of State. Departments under it are –

Economic Affairs
Expenditure
Revenue
Financial Services
Disinvestment

This ministry eclipses whole economic and financial system. All regulatory bodies and attached offices relating to Economics and Finance come under it.

The following points highlight the two main sources of government revenue in India.

Tax Revenue:

Union Excise Duties:

They are, presently, by far the leading source of revenue for the Central Government and are levied on commodities produced within the country, but excluding those commodities on which State excise is levied (viz., liquors and narcotic drugs).

The most important commodities from the revenue point of view are sugar, Cotton, mill cloth, tobacco, motor spirit, matches and cement.

Customs duties include both import and export duties. These are the second-most important source of revenue for the Central Government.

Income tax:

Income tax is at present another important source of revenue for the Central Government. It is levied on the incomes of individuals, Hindu undivided families and unregistered firms.

Corporation Tax:

The income-tax on the net profits of joint stock companies is called corporation tax.

Wealth tax:

It is an annual tax on the net wealth of individuals and Hindu undivided families. It is a progressive tax.

Gift Tax:

It is a tax on gifts of property by an individual in his lifetime to future successors.

Capital Gains tax:

It is applicable to capital gains resulting from the sale, exchange or transfer of capital assets.

Hotel Expenditure Tax:

Recently, a new tax has been levied on those who patronise high class hotels.

Tax on Foreign Travel:

Another new tax levied on foreign travel for conserving Foreign Exchange as well as to raise revenue.

Non-Tax Revenue:

Interest Receipts:

This largest non-tax source of Central Government’s Revenue Receipts is the interest it earns mainly on the loans it has advanced to State Governments, to financial and industrial enterprises in the public sector.

Surplus Profits of the Reserve Bank of India (RBI):

The surplus profits of the RBI is also a part of the revenues of the Central Government. In recent years, these have been quite substantial because of the large borrowing by the Government from the RBI against Treasury Bills for financing the Five-Year Plans.

Currency, Coinage and Mint:

The Government also derives income from running the Currency Note Printing Presses. Moreover, profits are made from the circulation of coins — this profit being the difference between the face value of the coins and their manufacturing cost.

Railways:

The railways in India are owned and run by the Government of India. Accordingly, they pay a fixed dividend to general revenues, i.e., to the Central Government, on the capital invested in the railways. Besides, a part of the net profits made by the railways is also payable to the Central Government.

Profits of Public Enterprises:

Public enterprises owned by the Central Government, e.g., the Steel Authority of India (SAIL), Hindustan Machine Tools (HMT), Bharat Heavy Electricals Ltd. (BHEL), State Trading Corporation (STC). The profits of such Public Sector Units (PSUs) are another source of revenue for the Government of India.

Other Non-Tax Sources of Revenue:

The main source among them is the Departmental Receipts of the various ministries of the Central Government by way of fees, penalties, etc.

The central government of India raises revenue from a variety of sources, including taxes, non-tax revenue, and capital receipts.

Tax revenue is the largest Source Of Income for the central government, accounting for over 60% of total revenue in 2020-21. The main Types of Taxes collected by the central government are income tax, Corporate tax, excise duty, customs duty, and service tax.

Income tax is levied on the income of individuals and businesses. Corporate tax is levied on the profits of companies. Excise duty is levied on goods produced or manufactured in India. Customs duty is levied on goods imported into India. Service tax is levied on services provided in India.

Non-tax revenue is the second largest source of income for the central government, accounting for over 20% of total revenue in 2020-21. The main types of non-tax revenue collected by the central government are interest receipts, dividends and profits, share of Union taxes, grants from the states, and other receipts.

Interest receipts are the interest earned on the government’s loans. Dividends and profits are the dividends and profits earned by the government on its investments. Share of Union taxes is the share of taxes collected by the central government that is allocated to the states. Grants from the states are the grants given by the states to the central government. Other receipts are the receipts from a variety of sources, such as fees, fines, and penalties.

Capital receipts are the third largest source of income for the central government, accounting for over 10% of total revenue in 2020-21. The main types of capital receipts collected by the central government are loans, borrowings, disinvestment proceeds, and other capital receipts.

Loans are the Money borrowed by the government from domestic and foreign sources. Borrowings are the money raised by the government through the sale of Bonds and treasury bills. Disinvestment proceeds are the money received by the government from the sale of its assets. Other capital receipts are the receipts from a variety of sources, such as the sale of land and buildings.

The central government uses the revenue it collects to fund a variety of activities, including:

Providing essential services, such as healthcare, Education, and security
Investing in Infrastructure-2/”>INFRASTRUCTURE, such as roads, bridges, and Airports
Promoting Economic Development
Repaying its debts

The central government’s revenue is also used to provide subsidies to various sectors of the economy, such as agriculture, fertilizer, and petroleum.

The central government’s revenue is also used to provide transfers to the states, such as grants-in-aid and shared taxes.

The central government’s revenue is an important source of funding for the country’s economy. It is used to fund a variety of activities that are essential for the country’s development.

What are the sources of income of the central government?

The central government of India has a number of sources of income, including:

Taxes: The central government collects taxes on income, goods and services, and property.
Non-tax revenues: The central government also receives non-tax revenues from a variety of sources, including interest on Government Bonds, dividends from state-owned enterprises, and fees and charges.
Borrowing: The central government can also borrow money to finance its expenditures.

What are the different types of taxes that the central government collects?

The central government collects a variety of taxes, including:

Income tax: Income tax is a tax on the income of individuals and businesses.
Corporate tax: Corporate tax is a tax on the profits of businesses.
Customs duty: Customs duty is a tax on goods imported into India.
Excise duty: Excise duty is a tax on goods produced in India.
Service tax: Service tax is a tax on services provided in India.

What are the different types of non-tax revenues that the central government receives?

The central government receives a variety of non-tax revenues, including:

Interest on government bonds: The central government borrows money by issuing government bonds. The interest that the government pays on these bonds is a source of non-tax revenue.
Dividends from state-owned enterprises: The central government owns a number of state-owned enterprises. The dividends that these enterprises pay to the government are a source of non-tax revenue.
Fees and charges: The central government charges fees for a variety of services, such as issuing passports and driving licenses. These fees are a source of non-tax revenue.

How does the central government borrow money?

The central government can borrow money by issuing government bonds. Government bonds are a type of debt instrument that the government sells to investors. Investors buy government bonds because they are considered to be a safe Investment. The government pays interest on government bonds, and the principal amount is repaid at maturity.

What are the different Types of government bonds?

There are a number of different types of government bonds, including:

Treasury bills: Treasury bills are short-term government bonds that have a maturity of one year or less.
Treasury notes: Treasury notes are medium-term government bonds that have a maturity of two to ten years.
Treasury bonds: Treasury bonds are long-term government bonds that have a maturity of more than ten years.

What are the advantages and disadvantages of borrowing money?

There are a number of advantages and disadvantages of borrowing money. Some of the advantages of borrowing money include:

It can be used to finance capital projects, such as building roads and bridges.
It can be used to cover temporary shortfalls in revenue.
It can be used to stimulate the economy.

Some of the disadvantages of borrowing money include:

It can lead to higher interest rates.
It can increase the national debt.
It can make the government more vulnerable to economic shocks.

What are the challenges facing the central government’s finances?

The central government faces a number of challenges in managing its finances. Some of these challenges include:

The rising cost of healthcare and pensions.
The need to invest in infrastructure.
The need to reduce the national debt.
The need to respond to economic shocks.

The central government is working to address these challenges by implementing a number of reforms, including:

Austerity measures: The central government is implementing austerity measures to reduce its spending.
Tax Reforms: The central government is implementing tax reforms to increase its revenue.
Infrastructure reforms: The central government is implementing infrastructure reforms to stimulate the economy.
Debt reforms: The central government is implementing debt reforms to reduce its national debt.

The largest source of revenue for the central government is:
(a) Income tax
(b) Corporate tax
(c) Excise duty
(d) Custom Duty
The central government’s expenditure is classified into:
(a) Revenue Expenditure
(b) Capital Expenditure
(c) Both revenue and capital expenditure
(d) None of the above
The central government’s revenue expenditure is mainly on:
(a) Defence
(b) Interest payments
(c) Subsidies
(d) All of the above
The central government’s capital expenditure is mainly on:
(a) Infrastructure
(b) Social sector schemes
(c) Defence
(d) All of the above
The central government’s fiscal deficit is defined as:
(a) The excess of its revenue expenditure over its revenue receipts
(b) The excess of its total expenditure over its total receipts
(c) The excess of its capital expenditure over its capital receipts
(d) None of the above
The central government’s Revenue Deficit is defined as:
(a) The excess of its revenue expenditure over its revenue receipts
(b) The excess of its total expenditure over its total receipts
(c) The excess of its capital expenditure over its capital receipts
(d) None of the above
The central government’s Primary Deficit is defined as:
(a) The excess of its fiscal deficit over its interest payments
(b) The excess of its revenue deficit over its interest payments
(c) The excess of its total expenditure over its total receipts excluding interest payments
(d) None of the above
The central government’s debt is defined as:
(a) The total amount of money that it owes
(b) The total amount of money that it has borrowed
(c) The total amount of money that it has borrowed and spent
(d) None of the above
The central government’s debt-to-GDP ratio is defined as:
(a) The ratio of its total debt to its GDP
(b) The ratio of its total debt to its revenue receipts
(c) The ratio of its total debt to its total expenditure
(d) None of the above
The central government’s Fiscal Responsibility and Budget Management Act (FRBM Act) was enacted in:
(a) 2003
(b) 2004
(c) 2005
(d) 2006