Budget: Where does the government get its money from?

by Manshu on February 28, 2011

in Economy

I didn’t plan to do a budget post originally because I didn’t feel anything of great interest has been announced, but then Amit left a comment on the Suggest a Topic page, so I thought I’d do one on it anyway.

Leading economist Bibek Debroy (@bibekdebroy on Twitter) tweeted the following earlier today:

Para 196 of budget speech sums up what entire budget is about.

The para says that as a result of the budget there will be a direct tax loss of Rs. 11,500 crores, and an indirect tax gain of Rs. 11,500 crores, so a net loss of Rs. 200 crores.

I don’t think anything really noteworthy took place, and whatever little did take place has already been reported upon quite extensively, so let me take a look at this budget at a higher level, and see how the numbers look like.

Specifically, for this post, I’ll take you through the revenue side of the budget. The Revenue of the government has three components:

  • Tax Revenue: This is the revenue raised from taxes like your income tax and corporate tax.
  • Non Tax Revenue: This is the revenue the government earns by things like dividends from PSUs, royalty from selling petroleum, spectrum fees etc.
  • Capital Receipts: Includes mostly borrowings

First off, let’s take a look at how the two revenue heads contribute to the government’s coffers.

Tax and Non Tax Revenue

Tax and Non Tax Revenue

As you can see the majority of the revenues are generated through taxes, and here is how they’d look like in absolute numbers.

Total Tax Revenues are expected to be Rs. 9,32,439.88 crores, while Total Non Tax Revenues are expected to be Rs. 1,25, 435.12 crores.

I say expected because that’s what the budget is really – it is an expectation of how much the government will earn and spend in the coming year.

I also use crores because that’s the number used in official documents and makes it slightly easier for me to prepare this post. For simplicity – 1 lakh crore is equal to a trillion rupees.

Now that you know how much taxes contribute to government’s coffers – can you guess how much income tax contributes to the total tax collected?

Here is a pie chart that shows the breakup of various tax heads.

Tax Revenue Breakup

Tax Revenue Breakup

As you can see companies pay the largest share of taxes at 39%, and income tax contributes 18% along with excise duties. The next highest is customs with 16%. What this shows is that income tax paid by individuals is actually quite small when you compare it to the other ways the government collects taxes.

This is probably because a very small percentage of the population pays income tax.

Here are the absolute numbers.

Heads In Cr.
Corp Tax 359,990.00
Total Taxes on Income 172,026.00
Wealth Tax 635.00
Customs 151,700.00
Net Union Excise Duties 164,115.66
Total Service Tax 82,000.00
Total taxes on UT 1,973.22
Total Tax Revenue 932,439.88

Next up is a look at all the heads of the indirect revenues, and here is how that pie chart looks like.

Non Tax Revenue Breakup

Non Tax Revenue Breakup

So, the two biggest contributors are dividends and economic services. Dividends are of course dividends from PSUs like MOIL, and that number will go down in the years to come as disinvestment continues and government continues to reduce their holding in the PSUs. Of course it could happen that some of the loss making PSUs start earning a profit, or that the profit of the existing PSUs become much higher, but I wouldn’t count too much on that.

Economic Services are really dominated by two things – royalty on petroleum products, and spectrum fee that has been generated from the telecom auctions.

So, if you really see the 12% non tax revenue that the government gets is higher this year because of the spectrum auction.

Here are the absolute numbers.

Heads In Cr.
Interest Receipt 19,577.78
Total Dividends and Profits 42,623.68
Total Fiscal Services 127.82
General Services 11,494.36
Total Social Services 2,353.90
Economic Services 45,915.27
Total Grants in Aid 2,172.96
Non Tax Revenue of UT 1,169.35
Total Non Tax Revenue 125,435.12

So, this is how the government “earned” money but like you and me our government has got a credit card as well – that too an international one because it gets money from abroad as well.

The government gets Capital Receipts and this is part of the revenue as well. These are things like short term borrowings, and external debt.

Capital Receipts Breakup

Capital Receipts Breakup

Most of the borrowing is short term in nature, and the external debt forms only 3% of our total capital receipts which is a good thing because we don’t want to borrow in another currency from foreigners.

Here are the absolute numbers for you.

Heads In Crores
Net Recoveries of Loans and Advances 15,020.00
Misc. Capital Receipts 40,000.00
Net Short Term Borrowings 358,000.00
Securities against Small Savings 24,182.46
Net State Provident Funds 10,000.00
Net Other Receipts (Internal Debts) (13,865.89)
Net External Debt 14,500.00
Draw Down of Cash Balance 20,000.00
Net Market Stabilization Scheme 20,000.00

Now, of course you want to see how the capital and revenue receipts are relative to each other.

So, here is that chart.

Capital Receipts and Revenue Receipts

Capital Receipts and Revenue Receipts

They project to earn a lot more in taxes and revenues than they project to do via borrowings.

A quick word about these capital receipts is that they include miscellaneous receipts of Rs. 40,000 crores which is really the disinvestment target for the coming year. So, expect to see more PSU IPOs in the coming year.

I have taken all these numbers from the Budget website, which is really fabulous. The website itself is easy to navigate, and the documents are very easy to read as well.

Let me make an honest admission and say that if I were to guess any of these numbers or percentages I would have never been able to guess them correctly. I had vague numbers in my heads, but they were not accurate at all. So, this has been a really good if a very time consuming exercise for me.

How about you? Which of these numbers surprised you the most? I think a lot of people are going to find this information useful, so I’ll request you to share this post on Facebook, Twitter and email, and of course I’m really looking forward to comments on this one, and if you have any specific budget related questions then those are welcome as well!

 

{ 8 comments… read them below or add one }

Ams February 28, 2011 at 9:07 pm

Thanks a lot Manshu.

I never knew corporate pays more money to goverment, I was always under the belief that it is we the common man which pays more.

I was curious about one thing in this budget. The finance minister opened his speech with inflation and it seems he has done nothing about the crude oil, petrol and diesel charges. I thought diesel was the one to contribute to higher inflation in food and most other items.

I am curious to know, what is the goverment going to do to curb inflation ?

Thanks again for the this post really a eye opener.

Reply

Manshu March 1, 2011 at 3:11 pm

One of the things he mentioned in his speech about inflation was the flaws in the distribution and marketing system of agriculture produce and the huge difference between retail and wholesale prices of food items. There was also something about the need for state governments to ensure mechanisms that address this flaw but I don’t know if there was anything concrete there.

The FM mentioned monetary policy, and expected that to help moderate inflation a bit.

I don’t think he mentioned anything about doing anything for crude in particular, and since it’s all dependent on international factors there isn’t much that can be done. I guess long term you could look at developing electric vehicles like US and China.

There were bits about promoting palm oil and some other food crops by allocating money to them – I guess that’s one way of tackling inflation.

Can’t think of anything else really, and maybe I’m just missing them or failing to see them.

Reply

Samantha February 28, 2011 at 10:54 pm

True the BIG question is where the Government is going to get its money from and as rightly pointed out with higher tax slabs the Income Tax will be less than the 18% this fiscal. However we forget we still are dealing with the Government and rest assured with PSU divestment there could be another 3G or something on the lines already thought of by the Government that will keep the coffers going. It is the target of 4.6% fiscal deficit the harder part to understand, because there are no roll-backs of stimulus it could mean there could be a phased manner of roll-backs in the coming fiscal as the Government hopes the volatile stiuation in the international markets comes to an end.

Reply

Manshu March 1, 2011 at 3:13 pm

Yeah 4.6% looks a bit ambitious given the fact that there aren’t going to be any 3G auctions next year.

Reply

Vishal Kumar Saxena February 28, 2011 at 11:15 pm

Why can’t we say good buy to Individual Income Tax in India. Its only 18 % of out total Income…

where as to avoid paying Income tax , every one is trying to save the Tax by differnent meaning like not showing full Sale to avoid profit etc. resulting other important Taxes like Sales / Service Tax are not being collected in full…

It will finish the problem of Black money india… When there is no Income Tax… Means not need to give Data of your Income … hence every money in your possession will become white and then people will not need to deposit this money in Swiz Banks…

Reply

Manshu March 1, 2011 at 3:15 pm

I mean unless you can think of a way of raising that money from some other source, you can’t really say good bye to taxes. All this defense spending, road building and other schemes have to be paid for somehow.

Reply

Ams March 2, 2011 at 12:45 am

Yes I agree to what Manshu has to say.

Saying good bye to taxes is not the way to tackle black money problem. I feel the core principle behind this is corruption at every level. Unless this comes down black money problem is there to hound us.

Reply

vishwanath kaushik October 8, 2012 at 9:00 pm

We have a tota revenue collection of around 10.5 lakh crores + 3 lakh at States level totalling 13 lakh crores. I suggest that we can have one single revenue collection wherein we can raise around 15 to 20 lakh crores per annum. The amount spent (expenditure) incurred by the individual(s)/business for one’s own BENEFIT as represented by the amount one withdraws from the Banks. After all we withdraw amounts for spending it on BENEFITS/SERVICE&GOODS. In simple words when I withdraw money for personal BENEFIT, I should pay a percentage of that money as TDS for the GENERAL BENEFIT of the Society which I would like to call कल्याण कर (benefit tax). The total annual withdrawal from the bank is around 200 lakh crores plus. A 10% TDS it should give an yield of Rs.20 lakh crores. For detailed proposal/scheme (which needs to be fine tuned by experts) it will be my privilege to share my detailed proposal on being contacted on sviss38@yahoo.com. I have tried to suggest graded TDS. Thanks and well wishes to all my country men/women.

Reply

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