Complete  Notes on Public Finance  for BPSC and Other Competitive Exams in 2025

Complete  Notes on Public Finance  for BPSC and Other Competitive Exams in 2025

Economics- 5

Here are detailed notes on Public Finance covering key topics: Union Budget, Fiscal Deficit, FRBM Act, and Taxation (Direct & Indirect including GST

Public Finance

Public Finance deals with income and expenditure of the government and their impact on the economy. It helps in resource mobilization, redistribution of income, and economic stability.

Union Budget

Definition:

The Union Budget is an annual financial statement presented by the Finance Minister under Article 112 of the Constitution.

It includes:

• Estimated Receipts and Expenditures of the Government of India for a financial year (April 1 – March 31).
• Divided into:
  • Revenue Budget: Revenue receipts (tax and non-tax) and revenue expenditure.
  • Capital Budget: Capital receipts (borrowings, disinvestment) and capital expenditure.

Types of Budget Based on Deficit:

• Balanced Budget: Revenue = Expenditure
• Deficit Budget: Expenditure > Revenue
• Surplus Budget: Revenue > Expenditure

Recent Budget Focus:

• Infrastructure spending
• Green energy
• Fiscal consolidation
• Employment & digitization

Fiscal Deficit

Definition:

Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-debt Capital Receipts)

• It shows how much the government needs to borrow to meet its expenditure.
• Measured as a percentage of GDP.

Implications:

• High deficit → More borrowing → Higher debt servicing → Reduced future spending capacity.
• But sometimes necessary to stimulate growth (during slowdown or crisis).

FRBM Act (Fiscal Responsibility and Budget Management Act), 2003

Objective:

To institutionalize fiscal discipline, reduce fiscal deficit, and improve macroeconomic stability.

Key Features:

• Set targets:
  • Fiscal Deficit: Max 3% of GDP.
  • Revenue Deficit: Aim to eliminate.
• Mandates Medium Term Fiscal Policy Statement with every budget.
• Escape Clause: Allows breach in times of war, national calamity, structural reform.

Amendments:

• 2018 Committee (N.K. Singh) recommended:
  • Debt-to-GDP ratio: 40% (Centre), 20% (States) by FY2023.
  • Fiscal Deficit to be reduced to 2.5% gradually.

Taxation – Direct and Indirect

Taxation is the main source of government revenue and a powerful tool for redistribution and economic policy.

1. Direct Taxes

Taxes paid directly by individuals or organizations to the government.

Examples:

• Income Tax
• Corporate Tax
• Capital Gains Tax
• Wealth Tax (abolished in 2015)

Features:

• Based on ability to pay (progressive nature).
• Helps in reducing inequality.

Income Tax Slabs: Progressive rates (0% to 30%).

2. Indirect Taxes

Taxes levied on goods and services; paid indirectly by consumers.

Examples:

• GST (Goods and Services Tax)
• Excise Duty (abolished post-GST)
• Customs Duty

Goods and Services Tax (GST)

Introduced: 1 July 2017

Under 101st Constitutional Amendment Act.

Definition:

A single indirect tax levied on supply of goods and services from manufacturer to consumer.

Features:

• Destination-based tax.
• Dual structure: CGST (Centre) + SGST (State) or IGST (Inter-State).
• Eliminated multiple cascading taxes.

GST Council:

• Chaired by: Union Finance Minister
• Members: State Finance Ministers
• Decides tax rates, exemptions, policies.

Tax Slabs:

0%, 5%, 12%, 18%, 28%

Benefits:

• One Nation, One Tax
• Simplified compliance
• Broader tax base
• Boost to formal economy

Objective Questions

1. The Union Budget is presented under which Article of the Constitution?
A) Article 110
B) Article 112
C) Article 117
D) Article 280
Answer: B

2. Fiscal Deficit means:
A) Revenue > Expenditure
B) Total Borrowings
C) Total Expenditure – Total Receipts (excluding borrowings)
D) Direct Tax + Indirect Tax
Answer: C

3. The FRBM Act was enacted in which year?
A) 1991
B) 1999
C) 2003
D) 2015
Answer: C

4. Which tax is NOT a direct tax?
A) Income Tax
B) Capital Gains Tax
C) GST
D) Corporate Tax
Answer: C

5. GST was introduced through which Constitutional Amendment?
A) 99th
B) 100th
C) 101st
D) 102nd
Answer: C

6. GST is administered by:
A) RBI
B) Finance Commission
C) GST Council
D) SEBI
Answer: C

7. Which of the following is a revenue receipt?
A) Borrowing from RBI
B) Income Tax
C) Sale of PSU shares
D) Loan repayment by state
Answer: B