Important concepts/terms related to Government revenue

In simpler terms, revenue receipts are like everyday income, while capital receipts involve more substantial financial activities that impact the government’s overall financial situation.

Revenue Receipts

Revenue Receipts refer to the money that the government earns currently. It’s like the income the government receives on an ongoing basis. These receipts are classified into:

Tax Revenue and
Non-tax Revenue

Tax Revenue

Taxes are like the bills we all have to pay to support the government, sort of like our contribution to the greater good. The government collects funds through various taxes, making contributions more personal and relatable. There’s income tax, a share from those who earn money; sales tax, a small extra amount when we make purchases; service tax, a fee for using services like our phone service; excise duty, a tax on the producers creating goods; and custom duty, a charge when items come in or leave the country. These taxes have been the main way the government gets its money for a long time. So, every time we earn, spend, or use something, a bit of it goes to support the government and the things it does.

All taxes are of two kinds:

(a) Direct taxes and

(b) Indirect Taxes.

This distinction between taxes depends on the liability of payment of tax to government and the actual burden of tax. In case of direct taxes, the liability of payment and the burden of the tax falls on the same person. For example, income tax is a direct tax because the person who is liable to pay it also bears the burden of the tax; The burden of the tax cannot be shifted on others. But this does not happen in case of indirect taxes

Non-Tax Revenue

The money that the government earns from things other than taxes is called non-tax revenues. In India, the central government gets this money from various sources. Some of the main ways they make money, without relying on taxes, include:

(i) Commercial Revenue: It is received by government in the form of prices paid by people for goods and services that government provides e.g., people pay for electricity and for services of Railways, postal stamps, toll etc.

(ii) Administrative Revenue: It arises on account of administrative services of the government.

They are as follow:

(a) fees in the form of passport fees, government hospital fees, education fees, court fee, etc.

(b) fine and penalties: charged by government on law-breakers for disobeying rules and regulations.

(d) Escheat: Income that government get by taking possession of property which has no legal claimant or legal heir.

(e) Interest receipts.

(f) profits of public sector undertakings.

Capital Receipts

Capital Receipts for the government are like financial transactions that either make the government owe money or lead to a decrease in its assets. The big sources of these capital receipts for the central government include:

Borrowings
Recovery of Loans and
Disinvestment – Resale of shares of public sector undertakings

Borrowings: There are two sources from which the central government borrows. They are:

Domestic Borrowings: The government raises money within the country by issuing things like securities and treasury bills. It’s like asking for a bit of help from the folks here. They also borrow money from us, regular people, through different deposit plans such as Public Provident Fund, Small Savings Schemes, and National Savings Scheme. It’s kind of like us chipping in to support our government.
External Borrowings: Besides borrowing domestically, the government also reaches out to foreign countries and international groups like the International Monetary Fund (IMF) and the World Bank. It’s like extending the borrowing circle to friends from other parts of the world. When the government borrows from abroad, it brings in foreign currency. It’s almost like a friend giving you a bit of their currency to help out your own.

Recovery of Loans: Sometimes, state and local governments need extra funds, so they borrow money from the central government. When the central government gets back the money it lent to state and local governments, it’s considered a “capital receipt” in the budget. This loan recovery is important because it helps in reducing the amount of money that others owe (debtors) to the central government, which is seen as a positive in the budget.

Disinvestment – Resale of shares of public sector undertakings: Before 1991, the central government owned all the shares of public sector undertakings. However, since then, there has been a significant shift in how the government raises financial resources. A recent source of capital receipts involves the government selling its shares in public sector undertakings, a process known as ‘disinvestment‘. This move towards privatization began in 1991, with the government selling shares to both the general public and financial institutions. In essence, this strategy marks a departure from the earlier scenario where the government retained 100 percent ownership of these enterprises.

Expenditure

Government expenditure is classified in two ways: capital expenditure and revenue expenditure.

When the government invests in building schools, hospitals, roads, bridges, canals, and railways, or repaying loans, it’s known as capital expenditure. It’s like investing in long-term assets for the benefit of the public.

On the other hand, when the government spends money on things that don’t create assets or reduce debts, it’s called revenue expenditure. This includes paying salaries to government employees, taking care of public property, and offering free education and health services to people. These expenses don’t result in the creation of new assets but are important for running day-to-day operations and providing essential services to the community.