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Session Learning Objective

GFS-2001. Session Learning Objective.

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Session Learning Objective

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  1. GFS-2001 Session Learning Objective • At the end of the session, the participants should understand what is budget, types of budget and budgeting system in India, process of preparing budget, why is budget classification system important?, Main features of sound and structured Budget classification, relationship between budget classification and chart of accounts, Critical steps in reform of budget (FRBM). Day 1 Session 2 & 3

  2. GFS-2001 Session Overview and Structure • In these sessions, we will discuss what we mean by budget, types of budget, and budgeting system in India and the related constitutional provisions, rules etc. The instructor will also discuss process of preparing budget, main features of FRBM, and budget classification as per COA. Day 1 Session 2 & 3

  3. GFS-2001 Sessions Structure • What is budget? • Types of budget • Budget system in India • related constitutional provisions and rules • Process of preparing budget • Main features of FRBM • Budget classification as per COA • Exercise Day 1 Session 2 & 3

  4. GFS-2001 What is a Budget ? Meaning and Concept: Government has several policies to implement in the overall task of performing its functions to meet the objectives of social & economic growth. For implementing these policies, it has to spend huge amount of funds on defence, administration, and development, welfare projects & various other relief operations. It is therefore necessary to find out all possible sources of getting funds so that sufficient revenue can be generated to meet the mounting expenditure. Planning process of assessing revenue & expenditure is termed as Budget. The term budget is derived from the French word "Budgette" which means a "leather bag" or a "wallet". It is a statement of the financial plan of the government. It shows the income & expenditure of the government during a financial year, which runs generally from 1stApril to 31st March. Day 1 Session 2 & 3

  5. GFS-2001 Budget is most important information document of the government. One part of the government's budget is similar to company's annual report. This part presents the overall picture of the financial performance of the government. The second part of the budget presents government's financial plans for the period upto its next budget. So, every citizen of a nation from the common man to the politician is eager to know about the budget as they would like to get an idea of the :- Financial performance of the government over the past one year. To know about the financial programmes & policies of the government for the next one year. To know how their standard of living will be affected by the financial policies of the government in the next one year. Definitions of Budget: According to Tayler, "Budget is a financial plan of government for a definite period". According to Rene Stourm, "A budget is a document containing a preliminary approved plan of public revenues and expenditure". Day 1 Session 2 & 3

  6. GFS-2001 Components of Government Budget: The main components or parts of government budget are explained below Day 1 Session 2 & 3

  7. GFS-2001 1. Revenue Budget This financial statement includes the revenue receipts of the government i.e. revenue collected by way of taxes & other receipts. It also contains the items of expenditure met from such revenue. (a) Revenue Receipts ↓ These are the incomes which are received by the government from all sources in its ordinary course of governance. These receipts do not create a liability or lead to a reduction in assets. Revenue receipts are further classified as tax revenue and non-tax revenue. i. Tax Revenue:- Tax revenue consists of the income received from different taxes and other duties levied by the government. It is a major source of public revenue. Every citizen, by law is bound to pay them and non-payment is punishable. Taxes are of two types, viz., Direct Taxes and Indirect Taxes. Direct taxes are those taxes which have to be paid by the person on whom they are levied. Its burden can not be shifted to some one else. E.g. Income tax, property tax, corporation tax, estate duty, etc. are direct taxes. There is no direct benefit to the tax payer. Indirect taxes are those taxes which are levied on commodities and services and affect the income of a person through their consumption expenditure. Here the burden can be shifted to some other person. E.g. Custom duties, sales tax, services tax, excise duties, etc. are indirect taxes Day 1 Session 2 & 3

  8. GFS-2001 ii. Non-Tax Revenue :- Apart from taxes, governments also receive revenue from other non-tax sources. The non-tax sources of public revenue are as follows :- Fees : The government provides variety of services for which fees have to be paid. E.g. fees paid for registration of property, births, deaths, etc. Fines and penalties : Fines and penalties are imposed by the government for not following (violating) the rules and regulations. Profits from public sector enterprises : Many enterprises are owned and managed by the government. The profits receives from them is an important source of non-tax revenue. For example in India, the Indian Railways, Oil and Natural Gas Commission, Air India, Indian Airlines, etc. are owned by the Government of India. The profit generated by them is a source of revenue to the government. Gifts and grants : Gifts and grants are received by the government when there are natural calamities like earthquake, floods, famines, etc. Citizens of the country, foreign governments and international organisations like the UNICEF, UNESCO, etc. donate during times of natural calamities. Special assessment duty : It is a type of levy imposed by the government on the people for getting some special benefit. For example, in a particular locality, if roads are improved, property prices will rise. The Property owners in that locality will benefit due to the appreciation in the value of property. Therefore the government imposes a levy on them which is known as special assessment duties Day 1 Session 2 & 3

  9. GFS-2001 (b) Revenue Expenditure ↓ i. What is Revenue Expenditure ? Revenue expenditure is the expenditure incurred for the routine, usual and normal day to day running of government departments and provision of various services to citizens. It includes both development and non-development expenditure of the Central government. Usually expenditures that do not result in the creations of assets are considered revenue expenditure. ii. Expenses included in Revenue Expenditure :- In general revenue expenditure includes following :- Expenditure by the government on consumption of goods and services. Expenditure on agricultural and industrial development, scientific research, education, health and social services. Expenditure on defence and civil administration. Expenditure on exports and external affairs. Grants given to State governments even if some of them may be used for creation of assets. Payment of interest on loans taken in the previous year. Expenditure on subsidies. Day 1 Session 2 & 3

  10. GFS-2001 2. Capital Budget: This part of the budget includes receipts & expenditure on capital account projected for the next financial year. Capital budget consists of capital receipts & Capital expenditure. (a) Capital Receipts ↓ i. What are Capital Receipts ? Receipts which create a liability or result in a reduction in assets are called capital receipts. They are obtained by the government by raising funds through borrowings, recovery of loans and disposing of assets. ii. Items included in Capital Receipts :- The main items of Capital receipts (income) are :- Loans raised by the government from the public through the sale of bonds and securities. They are called market loans. Borrowings by government from RBI and other financial institutions through the sale of Treasury bills. Loans and aids received from foreign countries and other international Organisations like International Monetary Fund (IMF), World Bank, etc. Receipts from small saving schemes like the National saving scheme, Provident fund, etc. Recoveries of loans granted to state and union territory governments and other parties. Day 1 Session 2 & 3

  11. GFS-2001 (b) Capital Expenditure ↓ i. What is Capital Expenditure ? :- Any projected expenditure which is incurred for creating asset with a long life is capital expenditure. Thus, expenditure on land, machines, equipment, irrigation projects, oil exploration and expenditure by way of investment in long term physical or financial assets are capital expenditure. Day 1 Session 2 & 3

  12. GFS-2001 What is a Budget Deficit ? Meaning ↓ When the government expenditure exceeds revenues, the government is having a budget deficit. Thus the budget deficit is the excess of government expenditures over government receipts (income). When the government is running a deficit, it is spending more than it's receipts. The government finances its deficit mainly by borrowing from the public, through selling bonds, it is also financed by borrowing from the Central Bank. Types of Budgetary Deficit ↓ The different types of budgetary deficit are explained in following points :- 1. Revenue Deficit: Revenue Deficit takes place when the revenue expenditure is more than revenue receipts. The revenue receipts come from direct & indirect taxes and also by way of non-tax revenue. The revenue expenditure takes place on account of administrative expenses, interest payment, defence expenditure & subsidies. Table below indicate revenue deficit of the central government of India. Day 1 Session 2 & 3

  13. GFS-2001 2. Budgetary Deficit: Budgetary Deficit is the difference between all receipts and expenditure of the government, both revenue and capital. This difference is met by the net addition of the treasury bills issued by the RBI and drawing down of cash balances kept with the RBI. The budgetary deficit was called deficit financing by the government of India. This deficit adds to money supply in the economy and, therefore, it can be a major cause of inflationary rise in prices. 3. Fiscal Deficit: Fiscal Deficit is a difference between total expenditure (both revenue and capital) and revenue receipts plus certain non-debt capital receipts like recovery of loans, proceeds from disinvestment. In other words, fiscal deficit is equal to budgetary deficit plus governments market borrowings and liabilities. This concept fully reflects the indebtedness of the government and throws light on the extent to which the government has gone beyond its means and the ways in which it has done so 4. Primary Deficit: The fiscal deficit may be decomposed into primary deficit and interest payment. The primary deficit is obtained by deducting interest payments from the fiscal deficit. Thus, primary deficit is equal to fiscal deficit less interest payments. It indicates the real position of the government finances as it excludes the interest burden of the loans taken in the past. Day 1 Session 2 & 3

  14. GFS-2001 5. Monetised Deficit: Monetised Deficit is the sum of the net increase in holdings of treasury bills of the RBI and its contributions to the market borrowing of the government. It shows the increase in net RBI credit to the government. It creates equivalent increase in high powered money or reserve money in the economy. Conclusion ↓ All these budgetary deficit reveal fiscal imbalance. Fiscal imbalance & budget deficit result in harmful consequences like mounting inflation, deficit in balance of payment, etc. It has also adversely affect the growth of the economy. The government must introduce fiscal correction policies to overcome the deficit budget and fiscal crisis. Day 1 Session 2 & 3

  15. GFS-2001 Concerned over the worsening of fiscal situation, in 2000, the Government of India had set up a committee to recommend draft legislation for fiscal responsibility. Based on the recommendations of the Committee, Government of India introduced the Fiscal Responsibility and Budget Management (FRBM) Bill in December 2000. In this Bill numerical targets for various fiscal indicators were specified. The Bill was referred to the Parliamentary Standing Committee on Finance. The Standing Committee recommended that the numerical targets proposed in the Bill should be incorporated in the rules to be framed under the Act. Taking into account the recommendations of the Standing Committee, a revised Bill was introduced in April 2003. The Bill was passed in Lok Sabha in May 2003 and in Rajya Sabha in August 2003. After receiving the assent of the President, it became an Act in August 2003. The FRBM Act 2003 was further amended. The FRBM Bill / Act provides rules for fiscal responsibility of the Central Government. The FRBM Act 2003 (as amended) became effective from July 5, 2004. Under this Act, Rules are framed relating to fiscal responsibility of the Central Government, which came into force on 5th July 2004 Day 1 Session 2 & 3

  16. GFS-2001 Objectives of FRBM Act 2003 ↓ The main objectives of FRBM Bill / Act are :- To reduce fiscal deficit To adopt prudent debt management. To generate revenue surplus. Features of FRBM Act 2003 ↓ 1. Revenue Deficit The first important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the central government should take certain specific measures related with reduction of revenue deficit. Measures relating to reduction of revenue deficits are:- The government should reduce revenue deficit by an amount equivalent to 0.5 percent or more of the GDP at the end of each financial year, beginning with 2004-2005. The revenue deficit should be reduced to zero within a period of five years ending on March 31, 2009. Once revenue deficit becomes zero the central government should build up surplus amount of revenue which it may utilised for discharging liabilities in excess of assets. Day 1 Session 2 & 3

  17. GFS-2001 2. Fiscal Deficit The second important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the central government should take certain specific measures related with reduction of fiscal deficit. Measures relating to reduction of fiscal deficits are:- The government should reduce Gross fiscal deficit by an amount equivalent to 3.3% or more of the GDP at the end of each financial year, beginning with 2004-2005. The central government should reduce Gross Fiscal deficit to an amount equivalent to 2% of GDP upto March 31 2006. 3. Exceptional Grounds The third important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that it clearly stated that the revenue deficit and fiscal deficit of the government may exceed the targets specified in the rules only on the grounds of national security or national calamity faced by the country. 4. Public Debt The fourth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the central government should ensure that the total liabilities (including external debt at current exchange rate) should not exceed 9% of GDP for the financial year 2004-2005. There should be progressive reduction of this limit by atleast one percentage point of GDP in each subsequent year. Day 1 Session 2 & 3

  18. GFS-2001 5. Borrowing from the RBI The fifth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with borrowings done by central government from R.B.I. The Amended FRBM bill 2000 or FRBM Act 2003 clearly states that the central government shall not normally borrow from the R.B.I. However the central government may borrow from R.B.I. by way of advances to meet temporary excess of cash payments over the cash receipts during any financial year in accordance with the agreements which may entered into by the government with the R.B.I. 6. Fiscal Transparency The sixth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with fiscal transparency. The Amended FRBM bill 2000 or FRBM Act 2003 clearly stated two important measures to ensure greater transparency in fiscal operations of the government. These two important features are as follows:- The central government should minimize as far as possible secrecy in preparation of annual budget. The central government at the time of presentation of the annual budget shall disclose the significant changes in accounting standards, policies and practices likely to affect the computation of fiscal indicators. 7. Limit On Guarantees The seventh important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that it restricts the guarantees given by the central government to 0.5% of GDP in any financial year beginning with 2004-2005. Day 1 Session 2 & 3

  19. GFS-2001 8. Medium term fiscal policy statement The eighth important feature of amended FRBM bill 2000 or FRBM Act 2003 is that the central government should present medium term fiscal policy statement in both houses of parliament along with annual financial statement. The medium term fiscal policy statement should project specifically for important fiscal indicators. These fiscal indicators are as follows :- Revenue deficit as percentage of GDP. Fiscal deficit as percentage of GDP. Tax revenue as percentage of GDP. Total outstanding liabilities as percentage of GDP. 9. Compliance of rules Finally the ninth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with measures to enforce compliance of rules. Day 1 Session 2 & 3

  20. GFS-2001 10. Task force on implementation of FRBM Act Following the enactment of FRBM Act, Government constituted a Task Force headed by Dr. Vijay Kelkar for drawing up the medium term framework for fiscal policies to achieve the FRBM targets. The task force proposed the following measures :- Widening the tax base through removal of exemptions. An All-India goods and service-tax (GST) on the basis of a "grand bargain" with States, whereby States will have the concurrent powers to tax service, subject to certain principles that will help foster a national common market. Income tax exemption limit to be increased to Rs.1,00,000. A two-tire rate structure of 20 percent tax for income of Rs. 1,00,000 to Rs. 4,00,000 and 30% for income above Rs. 4,00,000 for individuals and elimination of standard deduction available to the salaried taxpayer. A reduction in the corporate income tax to 30% for domestic companies and the reduction in depreciation rates from 25 to 15%. A 3-tier custom duty rates of 5, 8 and 10% to bring down tariffs to ASEAN levels. Allocation of greater portion of expenditure to legitimate public goods by revisiting the classification of expenditure. Empowering panchayats / local bodies through reserve transfer. Day 1 Session 2 & 3

  21. GFS-2001 The task force stated that under the reforms measures recommended by it, tax GDP ratio of the central government should be raised from 9.2% in 2003 to 13.2% of GDP in 2008-09. A revenue surplus of 0.2% of GDP is estimated to emerge in 2008-09. Fiscal deficit estimated to fall from 4.8% of GDP in 2003-04 to 2.8% of GDP in 2008-09. The above features of Amended FRBM bill 2000 or Fiscal Responsibility and Budget Management Act 2003 clearly points out that the government intends to create a strong institutional mechanism to restore fiscal discipline at the level of the central government. Similarly the government wants to introduce greater transparency in fiscal operations of the central government. Criticism / Limitations of FRBM Act 2003 ↓ Though the Fiscal Responsibility and Budget Management Act 2003 or Amended FRBM bill 2000 is a credible effort by the government to fix responsibility on the government to reduce fiscal deficit and bring transparency in fiscal operations of the government it has certain limitations. Day 1 Session 2 & 3

  22. GFS-2001 These limitations of Amended FRBM Bill 2000 or FRBM Act pointed out by various economists are as follows :- 1. Target regarding GFD very stringent The Bill stipulates that by March 31, 2006, the Gross Fiscal Deficit (GFD) as a proportion of GDP must be 2%. This, of course, means that the government can borrow from the economy only to the extent of 2% of GDP, whatever be the level of savings. Given the present need of government borrowings, 2% limit is very low. The increase in public investment helps to increase the level of effective demand and increases private investment in the economy. According to Dr. Raja Chelliah the ratio of Gross Fiscal Deficit (GFD) to GDP should be 4% to 5% of GDP as public investment on infrastructure sector is essential to boost economic growth. 2. Neglect of equity and growth According to critics the Amended FRBM Bill 2000 or FRBM Act 2003 is heavily loaded against investment in both human development and infrastructure sector. One of the major ommission of amended FRBM Bill 2000 or FRBM Act 2003 was complete absence of any target for time bound minimum improvement in areas of power generation, transport, etc. which is very important both from the point of equity and higher economic growth. Day 1 Session 2 & 3

  23. GFS-2001 3. Non-Coverage of State Governments The provisions of the bill impose restrictions on only the central government but state governments are out of its scope. But, deficits of state governments are as much or even a greater problem. For instance, the State of Maharashtra has already crossed the deficit of Rs. 1 lakh crore as on December 2004 (the second State after Up to cross deficit of Rs. 1 lakh crore). Therefore, there is a need for fiscal responsibility legislation for the State Governments as well. 4. Neglect of Development Needs Today, the levels of capital expenditures by the government are miserably low in India. These capital expenditures increase the efficiency and productivity of private investment and thus contribute to the development process in the country. If Revenue Deficit is to be reduced to zero and GFD to be 2% of GDP as per the requirement of FRBM Bill, it is the capital expenditure which will be sacrificed and thus will hinder further development of the country. 5. Need to Increase Revenue Revenue deficits are determined by the interplay of expenditure and revenues, both tax and non-tax. Too often, attention gets focused only on the expenditure side of the identity to the neglect of the revenue side. Increasing non-tax revenue requires that public sector services be appropriately priced, which may be difficult as the present society has got used to the subsidised education, health, food items, etc. Day 1 Session 2 & 3

  24. GFS-2001 6. Neglect of Social Sector The FRBM bill does not mention anything relating to social sector development. However, investment in social sector such as health, education, etc is very vital for the economic development of the nation. 7. Problem of Subsidies The government may be able to reduce revenue deficit by reducing subsidies. However, it is quite likely that the government will be under severe pressure to continue the subsidies. It means the expenditure on the productive areas may be reduced due to subsidies. 8. Stable Growth Deficit Chelliah points out that given the household financial savings in India, the overall fiscal deficit termed as stable growth deficit of the government sector as a whole should be pegged at 6% of GDP with revenue deficit being gradually phased out. Thus, the target of 2% of fiscal deficit GDP ratio stated in FRBM bill is not desirable from the point of view of productive investment according to Chelliah. Day 1 Session 2 & 3

  25. GFS-2001 9. False Assumptions The FRBM Bill is based on the following assumptions :- Lower fiscal deficit lead to higher growth. Larger fiscal deficit lead to higher inflation Larger fiscal deficit increase external vulnerability of the economy. These assumptions have been rejected by C.P. Chandrashekhar and Jayanti Ghosh who have given the following arguments :- If the deficit is in the form of capital expenditure it would contribute to future growth. Fiscal deficit is not only the cause for higher inflation. During the late 1990s the rate of inflation has fallen even when the fiscal deficit was as high as 5.5% of GDP. Higher fiscal deficit need not necessarily cause external crisis. The external vulnerability depends more on capital and trade account convertibility. In India we have managed to build large foreign exchange reserves, though fiscal deficit has not come down. Conclusion on FRBM Act 2003 The Amended FRBM Bill 2000 or FRBM Act 2003 despite above criticism can play a very important role in controlling fiscal deficit and in bringing transparency in fiscal operation of the government if it is implemented effectively in letter and spirit by the concerned government. Day 1 Session 2 & 3

  26. GFS-2001 INTRODUCTION: (as per Budget Manual of GOI): 'Budget System' was introduced in India on 7th April, 1860. James Wilson the first Indian Finance Member delivered the budget speech expounding the Indian financial policy as an integral whole for the first time (Principles of Civil Government: Akshaya K. Ghosh). Post independence, the first budget was presented on November 26, 1947 by India's first Finance Minister Sri R.K. Shanmugham Chetty. The national independence brought about budgeting reforms with the Government of India primarily through the launching of comprehensive socio­economic development through five year plans, divided into Annual Plans. A sound system of sharing of resources with the States was also established through the successive Finance Commissions. By and large the system in place at present has evolved over a period of time. The annual exercise of budgeting is a means for detailing the roadmap for efficient use of public resources. Although the Indian Constitution does not mention the term 'Budget', it provides that the President shall in respect of every financial year cause to be laid before both the Houses of Parliament, the House of People (Lok Sabha) and the Council of States (Rajya Sabha), a statement of the estimated receipts and expenditure of the Government for that year. This statement known as the 'Annual Financial Statement' is the main fiscal or budgetary document of the Government. Day 1 Session 2 & 3

  27. GFS-2001 • The financial year for the Union and the State Governments in India is from April to March. Each financial year is, therefore, spread over two calendar years. The period of financial year as from April to March was introduced in India from 1867. Prior to that, the financial year in India used to commence on 1st May and ended on 30th April (L.K. Jha Committee's Report of the Committee On Change in Financial Year). • L.K. Jha Committee was appointed in May, 1984 to look into the issue of financial year. The Committee while recommending the commencement of financial year from January mainly with reference to the impact of South West monsoon on the economy, had mentioned in their Report that if for any reason, a changeover to the calendar year is not acceptable despite its many advantages, then on balance, it might be best to live with the existing financial year and avoid the problems of transition. • Government of India did not favour any change in the financial year for some of the reasons which are brought out below,- • i. The advantages arising out of the change • would only be marginal in view of the • innumerable considerations in the formulation of budget policies; • (ii) Change in the financial year would upset the collection of data and it might take a long time to return to normalcy in this regard; and • The change would create a large number of problems, as extensive amendments to tax laws and systems, financial procedures relating to expenditure authorization and other matters would become necessary and in that process the administrative machinery would get diverted to problems of transition instead of concentrating on improving the tax collection machinery. Day 1 Session 2 & 3

  28. GFS-2001 MEANING AND SCOPE OF THE BUDGET: Meaning: A government budget is defined as a legal document that is passed by the legislature, and approved by the chief executive-or President. The two basic elements of any budget are the revenues and expenses. Unlike a pure economic budget, Government Budget is designed for optimal allocation of scarce resources taking into account larger socio­political considerations. The main objective of Government financial management is to determine how well the financial and resource management responsibilities have been discharged. This is based amongst others, on a comparison of accomplishments against the fiscal policies and the time bound Government programmes. These fiscal policies and programmes determine the Budget of the Government, through which the amounts of revenue to be raised and the allocation of sums for the respective Government programmes and purposes are set. Budgeting therefore, involves determining for a future time period on what is to be done and achieved, the manner in which it is to be done and the resources required for the same. It requires the broad objectives of the Government to be broken down into detailed work plans for each programme and sub-programme, activity and projects for each unit of the Government organization. Day 1 Session 2 & 3

  29. GFS-2001 The Union Budget of India, also referred as the General Budget, is presented each year on the last working day of February by the Finance Minister of India to the Parliament. Article 112 of the Constitution of India stipulates that Government should lay before the Parliament an Annual Financial Statement popularly referred to as 'Budget'. The Union Budget is currently presented through 14 documents, some of which are mandated by the Constitution while others are Explanatory documents. Budget preparation in India is an iterative process between the Ministry of Finance/Planning Commission and the spending Ministries. It is a combination of top down approach with the Ministry of Finance and the Planning Commission issuing guidelines or communicating instructions to spending Ministries, and a bottom-up approach, wherein the spending Ministries present requests for budget allocation. Some of the salient features of Union Budget are as follows- Day 1 Session 2 & 3

  30. GFS-2001 • Budget is prepared on Cash Basis: • Whatever is expected to be actually received or paid under proper sanction during a financial year (including arrears of the past years) should be budgeted in that year. • Rule of Lapse: All appropriations granted by the Parliament expire at the end of financial year and no deduction of unspent budget can be appropriated for meeting the demands in the next financial year. Thus, all unutilized funds within the year 'lapse' at the end of the financial year. • Realistic Estimation: It is essential that the provisions in the budget should be restricted to the amount required for actual expenditure. The Finance Ministry is interested in seeing that the Departments do not obtain more/less money than what they really need. If a Department is allotted funds which it does not need, it will deprive some other Department from getting the required resources. • Budget to be on Gross/Net Basis: Budget is prepared both on the gross basis and net basis. The gross figures of receipts and expenditure of the Government are reflected separately for voting by Parliament and the Departments/Ministries are normally not permitted to utilize the receipts or deduct expenditure in their budget proposals. Net basis of budgeting is done in case of some Grants e.g. Defence Ordnance Factories, and Department of Posts wherein the departmental receipts are allowed to be utilized and outlays on gross as well as net basis are reflected. Day 1 Session 2 & 3

  31. GFS-2001 Form of Estimates to Correspond to Accounts: It is essential that the form in the budget estimates correspond to that of Government accounts as it is from these accounts, that the performance of the Government is judged and the estimation for subsequent year made. If these are prepared in different forms, financial control will also become difficult. 6. Estimates to be on Departmental Basis: Each Department prepares estimates for receipts and expenditure separately. Generally one Demand or Grant is allocated in respect of each Ministry/Department. In case of certain large Departments/Ministries more than one Demands for Grants is allocated in terms of General Financial Rules. Day 1 Session 2 & 3

  32. GFS-2001 The Budget is presented to the Parliament in such form as the Finance Ministry may decide after considering the suggestions, if any, made by the Estimates Committee. Broadly the Budget documents depict information relating to receipts and expenditure for three years i.e.­i. Through Budget Estimates (BE) of receipts and expenditure in respect of Budget year (current financial year); For the year preceding the Budget year (current year) through Revised Estimates (RE); and Actuals of the second year proceeding the Budget year. Budget thus sets forth the receipts and the expenditure of the Government for three consecutive years. The Annual Financial Statement shows the receipts and expenditure of Government in three separate parts under which Government accounts are maintained viz. (i) Consolidated Fund of India (ii) Contingency Fund of India and the (iii) Public Account. As per Constitutional provisions (Article 112) the Annual Financial Statement has to distinguish expenditure on revenue account from other expenditure. It, therefore, comprises of (i) Revenue budget and (ii) Capital Budget. Broad break-up of expenditure on Plan and Non Plan i.e. expenditure which is part of normal activities of the Government or maintenance expenditure, sectoral allocation of Plan Outlays, details of resources transferred to States and Union Territory Governments are also reflected in the budget documents. Day 1 Session 2 & 3

  33. GFS-2001 The expenditure of certain categories, charged on the Consolidated Fund of India and not being subject to the Vote of Parliament are also indicated separately in the Budget. The Demands for Grants show separately the revenue and capital, and the charged and voted expenditure. Similarly, estimates of receipts are classified in the tax and non-tax receipts and also those which are on revenue account and others which are on capital account. The Union Budget is presented to Parliament in two parts i.e. Railway Budget pertaining to Railway Finance and General Budget which gives an overall picture of financial position of the Government of India including the effect of Railway Budget. The three Statements presented to the Parliament viz. the Macroeconomic Framework Statement, the Medium Term Fiscal Policy Statement and the Fiscal Policy Strategy Statement Under the FRBM mandate, has further enhanced the scope of Budget to provide an assessment of the growth prospects of the economy, indicate the rolling targets for specific fiscal indicators as well as outline the strategic priorities of the Government in the fiscal area for the ensuing year Day 1 Session 2 & 3

  34. GFS-2001 IMPORTANT CONSTITUTIONAL PROVISIONS RELATED TO BUDGET: Financial business in Parliament consists of the Budget comprising of General Budget and Railway Budget, Demands for Grant, Vote on Account, Supplementary Demands for Grant, Appropriation Bill and the Finance Bill. The salient Constitutional provisions that shape and guide the budgeting systems and process are outlined in brief as under- Article 112- Annual Financial Statement: It provides that in respect of every financial year the President shall cause to be laid before both the Houses of Parliament a statement of the estimated receipts and expenditure of the Government of India for that year, referred to as the "annual financial statement''. The estimates of expenditure shall show separately expenditure charged upon the Consolidated Fund of India; and other expenditure (voted) proposed to be made from the Consolidated Fund of India. The statement shall also distinguish expenditure on revenue account from other (capital) expenditure. Article 113- Procedure in Parliament with respect to Estimates: It provides that estimates relating to expenditure charged upon the Consolidated Fund of India shall not be submitted to the vote of Parliament, even though these can be discussed in either House of Parliament. The estimates relating to the 'voted' portion shall be submitted in the form of demands for grants, and the House of the People shall have power to assent, refuse or reduce the amount specified therein. No demand for a grant shall be made except on the recommendation of the President. Day 1 Session 2 & 3

  35. GFS-2001 Article 114- Appropriation Bills: After the passing of the demands under Article 113, Appropriation Bill is introduced in the Lok Sabha to provide for the appropriation out of the Consolidated Fund of India to meet the requirements relating to (a) the grants so made by the House of the People; and (b) the expenditure charged on the Consolidated Fund of India but not exceeding in any case the amount shown in the statement previously laid before Parliament. Further, subject to the provisions of articles 115 and 116, no money shall be withdrawn from the Consolidated Fund of India except under appropriation made by law passed in accordance with the provisions of this article. Article 115- Supplementary, Additional or Excess Grants: If the amount authorized through appropriations for a particular service is found to be insufficient for the purposes of that year or when a need has arisen during the current financial year for supplementary or additional expenditure upon some new service not contemplated in the annual financial statement for that year, a supplementary demands for grants proposal shall be made before parliament. However, if any money has been spent on any service during a financial year in excess of the amount granted for that service and for that year, demand for such excess, as the case may be is to be laid before both the Houses of Parliament for authorizing (subject to the report of the Public Accounts Committee) the expenditure incurred in excess. Day 1 Session 2 & 3

  36. GFS-2001 Article 116- Vote on account, Vote of credit and Exceptional Grant: The House of the People shall have power relating to Vote on Account- to make any grant in advance in respect of the estimated expenditure for a part of any financial year pending the completion of the parliamentary procedure. Vote of Credit- to make a grant for meeting an unexpected demand upon the resources of India when on account of the magnitude or the indefinite character of the service the demand cannot be stated with the details ordinarily given in an annual financial statement; Exceptional Grant- to make provision for an exceptional grant that does not form part of the current service of any financial year; Parliament shall have power to authorize by law the withdrawal of moneys from the Consolidated Fund of India for the above purposes. Article 117- Special provisions as to Financial Bills: A Bill or amendment making provision for any of the matters specified in sub-clauses (a) to (f) of clause (1) of article 110 shall not be introduced or moved except on the recommendation of the President and a Bill making such provision shall not be introduced in the Council of States. Day 1 Session 2 & 3

  37. GFS-2001 Article 265- Taxes not to be imposed save by authority of law: No tax shall be levied or collected except by authority of law. Article 266- Consolidated Funds and Public Accounts of India and of the States: Subject to the provisions of article 267 and to the provisions of this Chapter with respect to the assignment of the whole or part of the net proceeds of certain taxes and duties to States, all revenues received by the Government of India , all loans raised and all moneys received by that Government in repayment of loans shall form one consolidated fund to be entitled "the Consolidated Fund of India", and all revenues received by the Government of a State, all loans raised and all moneys received by that Government in repayment of loans shall form one consolidated fund to be entitled "the Consolidated Fund of the State". All other public moneys received by or on behalf of the Government of India or the Government of a State shall be credited to the public account of India or the public account of the State, as the case may be. No moneys out of the Consolidated Fund of India or the Consolidated Fund of a State shall be appropriated except in accordance with law and for the purposes and in the manner provided in this Constitution. Day 1 Session 2 & 3

  38. GFS-2001 Article 267- Contingency Fund: Parliament may by law establish a Contingency Fund in the nature of an imprest to be entitled "the Contingency Fund of India" into which shall be paid from time to time such sums as may be determined by such law, and the said Fund shall be placed at the disposal of the President to enable advances to be made by him out of such Fund for the purposes of meeting unforeseen expenditure pending authorization of such expenditure by Parliament by law. under article 115 or article 116. Similarly, the Legislature of a State may by law establish a Contingency Fund in the nature of an imprest to be entitled "the Contingency Fund of the State". Article 275- Grants from the Union to certain States: Such sums as Parliament may by law provide shall be charged on the Consolidated Fund of India in each year as grants-in-aid of the revenues of such States as Parliament may determine to be in need of assistance, and different sums may be fixed for different States. Provided, that after a Finance Commission has been constituted no order shall be made under this clause by the President except after considering the recommendations of the Finance Commission. Day 1 Session 2 & 3

  39. GFS-2001 Article 280- Finance Commission: The President shall, within two years from the commencement of this Constitution and thereafter at the expiration of every fifth year or at such earlier time as the President considers necessary, by order constitute a Finance Commission. It shall be the duty of the Commission to make recommendations to the President relating to— The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under this Chapter and the allocation between the States of the respective shares of such proceeds; The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India; (bb) the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats in the State on the basis of the recommendations made by the Finance Commission of the State; The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State; Any other matter referred to the Commission by the President in the interests of sound finance. The Commission shall determine their procedure and shall have such powers in the performance of their functions as Parliament may by law confer on them. Day 1 Session 2 & 3

  40. Article 281- Recommendations of the Finance Commission: The President shall cause every recommendation made by the Finance Commission under the provisions of this Constitution together with an explanatory memorandum as to the action taken thereon to be laid before each House of Parliament. Article 292- Borrowing by the Government of India: The executive power of the Union extends to borrowing upon the security of the Consolidated Fund of India within such limits, if any, as may from time to time be fixed by Parliament by law and to the giving of guarantees within such limits, if any, as may be so fixed. Article 150- Form of accounts of the Union and of the States: The accounts of the Union and of the States shall be kept in such form as the President may, on the advice of the Comptroller and Auditor-General of India, prescribe. Article 151- Audit reports: The reports of the Comptroller and Auditor- General of India relating to the accounts of the Union shall be submitted to the President, who shall cause them to be laid before each House of Parliament. Article 109- Special procedure in respect of Money Bills: A Money Bill shall not be introduced in the Council of States. After a Money Bill has been passed by the House of the People it shall be transmitted to the Council of States for its recommendations and the Council of States shall within a period of fourteen days from the date of its receipt of the Bill return the Bill to the House of the People with its recommendations and the House of the People may thereupon either accept or reject all or any of the recommendations of the Council of States. GFS-2001 Day 1 Session 2 & 3

  41. GFS-2001 Article 110- Definition of "Money Bills'': A Bill shall be deemed to be a Money Bill if it contains only provisions dealing with all or any of the following matters, (a) the imposition, abolition, remission, alteration or regulation of any tax; (b) the regulation of the borrowing of money or the giving of any guarantee by the Government of India, or the amendment of the law with respect to any financial obligations undertaken or to be undertaken by the Government of India; (c) the custody of the Consolidated Fund or the Contingency Fund of India, the payment of moneys into or the withdrawal of moneys from any such Fund; (d) the appropriation of moneys out of the Consolidated Fund of India; (e) the declaring of any expenditure to be expenditure charged on the Consolidated Fund of India or the increasing of the amount of any such expenditure; (f) the receipt of money on account of the Consolidated Fund of India or the public account of India or the custody or issue of such money or the audit of the accounts of the Union or of a State; or (g) any matter incidental to any of the matters specified in sub­clauses (a) to (f). If any question arises whether a Bill is a Money Bill or not, the decision of the Speaker of the House of the People thereon shall be final, and the certificate of the Speaker of the House of the People signed by him that it is a Money Bill, shall be endorsed on every Money Bill when it is transmitted to the Council of States under article 109, and when it is presented to the President for assent under article 111. Day 1 Session 2 & 3

  42. GFS-2001 BUDGET FORMULATION AND IMPLEMENTATION (AS PER GFR 2005) Rule 42.(GFR-2005) Financial Year : Financial year of the Government shall commence on the 1st day of April of each year and end on the 31st day of March of the following year. Rule 43 (GFR -2005). Presentation of Budget to Parliament : (1) In accordance with the provisions of Article 112 (1) of the Constitution, the Finance Minister shall arrange to lay before both the Houses of Parliament, an Annual Financial Statement also known as the `Budget' showing the estimated receipts and expenditure of the Central Government in respect of a financial year, before the commencement of that year. (2) A separate statement of estimated receipts and expenditure relating to the Railways shall similarly be presented to the Parliament by the Ministry of Railways in advance of the Annual Financial Statement. As the receipts and expenditure of the Railways are the receipts and expenditure of the Government, the figures relating to these are included in lump in the Annual Financial Statement. (3) The provisions for preparation, formulation and submission of budget to the Parliament are contained in Articles 112 to 116 of the Constitution of India. (4) The Ministry of Finance, Budget Division, shall issue guidelines for preparation of budget estimates from time to time. All the Ministries / Departments shall comply in full with these guidelines. Day 1 Session 2 & 3

  43. GFS-2001 Rule 44 (GFR -2005). The budget shall contain the following :- (i) Estimates of all Revenue expected to be raised during the financial year to which the budget relates. (ii) Estimates of all Expenditure for each programme and project in that financial year. (iii) Estimates of all interest and debt servicing charges and any repayments on loans in that financial year. (iv) Any other information as may be prescribed. Rule 45 (GFR -2005). Receipt Estimates : The detailed estimates of receipts will be prepared by the estimating authorities separately for each Major Head of Account in the prescribed form. For each Major Head, the estimating authority will give the break up of the Minor / Subhead wise estimate along with actuals of the past three years. Where necessary, itemwise break up should also be furnished so as to highlight individual items of significance. Any major variation in estimates with reference to past actuals or / and Budget Estimates will be supported by cogent reasons. Day 1 Session 2 & 3

  44. GFS-2001 Rule 46 (GFR -2005). Expenditure estimates : (1) The expenditure estimates shall show separately the sums required to meet the expenditure Charged on the Consolidated Fund under Article 112 (3) of the Constitution and sums required to meet other expenditure for which a vote of the Lok Sabha is required under Article 113(2) of the Constitution. (2) The estimates shall also distinguish provisions for expenditure on revenue account from that for other expenditure including expenditure on capital account, on loans by the Government and for repayment of loans, treasury bills and ways and means advances. (3) The detailed estimates of expenditure will be prepared by the estimating authorities for each unit of appropriation (Sub or Detailed or Object head) under the prescribed Major and Minor Heads of Accounts separately for Plan and Non-Plan expenditure. Estimates should include suitable provision for liabilities of the previous years left unpaid during the relevant year. (4) The estimates of Plan expenditure will be processed in consultation with the Planning Commission in accordance with the instructions issued by them. (5) The Revised Estimates of both Plan and Non-Plan expenditure and Budget Estimates for Non-Plan expenditure after being scrutinized by the Financial Advisers and approved by the Secretary of the Administrative Ministry or Department concerned will be forwarded to the Budget Division in the Ministry of Finance in such manner and forms as may be prescribed by them from time to time. Day 1 Session 2 & 3

  45. GFS-2001 Rule 47 (GFR -2005). Demands for Grants : (1) The estimates for expenditure for which vote of Lok Sabha is required shall be in the form of Demand for Grants. (2) Generally, one Demand for Grant is presented in respect of each Ministry or Department. However, in respect of large Ministries or Departments, more than one Demand is presented. Each Demand normally includes provisions required for a service, i.e. provisions on account of revenue expenditure, capital expenditure, grants to the State and Union Territory Governments and also Loans and Advances relating to the service. (3) The Demand for Grants shall be presented to Parliament at two levels. The main Demand for Grants are presented to Parliament by the Ministry of Finance, Budget Division along with the Annual Financial Statement while the Detailed Demands for Grants, after consideration by the “Departmentally Related Standing Committee” (DRSC) of the Parliament, are laid on the Table of the Lok Sabha by the concerned Ministries/Departments, a few days in advance of the discussion of the respective Ministry’s/ Departments' Demands in that House. Day 1 Session 2 & 3

  46. GFS-2001 Rule 48 (GFR -2005).. Form of Annual Financial Statement and Demands for Grants : (1) The form of the Annual Financial Statement and Demands for Grants shall be laid down by the Finance Ministry and no alteration of arrangement or classification shall be made without the approval of that Ministry. (2) The sub-heads under which provision for expenditure will be made in the Demands for Grants or Appropriation shall be prescribed by the Finance Ministry in consultation with the Administrative Ministry or Department. The authorised sub-heads for expenditure in a year shall be as shown in the Detailed Demands for Grants passed by Parliament and no change shall be made therein without the formal approval of the Finance Ministry. Rule 49 (GFR -2005).. Acceptance and inclusion of estimates : (1) The estimates of receipts and expenditure of each Ministry / Department will be scrutinized in the Budget Division of the Ministry of Finance. Finance Secretary or Secretary (Expenditure) may hold meetings with Secretaries or Financial Advisers of Administrative Ministries or Departments to discuss the totality of the requirements of funds for various programmes and schemes, along with receipts of the Ministries or Departments. (2) The estimates initially submitted by the Departments may undergo some changes as a result of scrutiny in the Budget Division, Ministry of Finance and deliberations in the pre-budget meetings between the Finance Secretary or Secretary (expenditure) and the Secretary or Financial Adviser of the Department concerned. The final estimates arrived at on the basis of scrutiny and pre-budget meetings will be accepted by the Budget Division, Ministry of Finance and incorporated in the Budget documents Day 1 Session 2 & 3

  47. GFS-2001 Rule 50 (GFR -2005).. Vote on Account : (1) The Budget is normally presented to the Parliament on the last day in the month of February but the corresponding Appropriation Bill seeking authorization of the Parliament to make expenditure in consonance with the Budget proposal is introduced and passed much later i.e. after due deliberation and approval by the Parliament. (2) Pending the completion of the procedure prescribed in Article 113 of the Constitution for the passing of the Budget, the Finance Ministry may arrange to obtain a `Vote on Account’ to cover expenditure for one month or such longer period as may be necessary in accordance with the provisions of Article 116 of the Constitution. Funds made available under Vote on Account are not to be utilized for expenditure on a `New Service’. Rule 51 (GFR -2005).. Communication and distribution of grants and appropriations : After the Appropriation Bill relating to Budget is passed, the Ministry of Finance shall communicate Budget provisions to the Ministries / Departments which, in turn, shall distribute the same to their subordinate formations. The distribution so made shall also be communicated to the respective Pay and Accounts Officers who shall exercise check against the allocation to each subordinate authority. Rule 60 (GFR-2005). Supplementary Grants : If savings are not available within the Grant to which the payment is required to be debited, or if the expenditure is on “New Service” or “New Instrument of Service” not provided in the budget, necessary Supplementary Grant or Appropriation in accordance with Article 115 (1) of the Constitution should be obtained before payment is authorized Day 1 Session 2 & 3

  48. GFS-2001 "CONTROL OF EXPENDITURE AGAINST BUDGET" Rule 52 (GFR -2005).. Responsibility for control of Expenditure : (1) Departments of the Central Government shall be responsible for the control of expenditure against the sanctioned grants and appropriations placed at their disposal. The control shall be exercised through the Heads of Departments and other Controlling Officers, if any, and Disbursing Officers subordinate to them. (2) A Grant or Appropriation can be utilised only to cover the charges (including liabilities, if any, of the past year) which are to be paid during the financial year of the Grant or Appropriation and adjusted in the account of the year. No charges against a Grant or Appropriation can be authorized after the expiry of the financial year. (3) No expenditure shall be incurred which may have the effect of exceeding the total grant or appropriation authorized by Parliament by law for a financial year, except after obtaining a supplementary grant or appropriation or an advance from the Contingency Fund. Since voted and charged portions as also the revenue and capital sections of a Grant / Appropriation are distinct and reappropriation inter se is not permissible, an excess in any one portion or section is treated as an excess in the Grant / Appropriation. Day 1 Session 2 & 3

  49. GFS-2001 To have effective control over expenditure by the Departments, Controlling and Disbursing Officers subordinate to them shall follow the procedure given below :- (i) For drawal of money the Drawing and Disbursing Officer shall :- (a) Prepare and present bills for "charged" and "voted" expenditure separately. (b) Enter on each bill the complete accounts classifications from major head down to the object head of account. When a single bill includes charges falling under two or more object heads, the charges shall be distributed accurately over the respective heads. (c) Enter on each bill the progressive total of expenditure up-to-date under the primary unit of appropriation to which the bill relates, including the amount of the bill on which the entry is made. (ii) (a) All Disbursing Officers shall maintain a separate expenditure register in Form GFR 9, for allocation under each minor or sub-head of account with which they are concerned. (b) On the third day of each month, a copy of the entries made in this register during the preceding month shall be sent by the officer maintaining it, to the Head of the Department or other designated Controlling Officer. This statement shall also include adjustment of an inward claim, etc., communicated by Pay and Accounts Officer directly to the DDO (and not to his Grant Controlling Officer). If there are no entries in the register in any month, a 'nil' statement shall be sent. Day 1 Session 2 & 3

  50. GFS-2001 (a) The Controlling Officer will maintain a broadsheet in Form GFR 10 to monitor the receipt of the return prescribed in the foregoing sub-clause; (b) On receipt of the returns from Disbursing Officers, the Controlling Officer shall examine them and satisfy himself :-(aa) that the accounts classification has been properly given; (bb) that progressive expenditure has been properly noted and the available balances worked out correctly; (cc) that expenditure up-to-date is within the grant or appropriation; and (dd) that the returns have been signed by Disbursing Officers Where the Controlling Officer finds defects in any of these respects, he shall take steps to rectify the defect. (iv) When all the returns from the Disbursing Officers for a particular month have been received and found to be in order, the Controlling Officer shall compile a statement in Form GFR 11, in which he will incorporate - (a) the totals of the figures supplied by Disbursing Officers; (b) the totals taken from his own registers in Form GFR 9; (c) the totals of such adjustments under the various detailed heads as communicated to him by the Accounts Officer on account of transfer entries and expenditure debited to the grant as a result of settlement of inward account claims and not reckoned by his DDOs. (v) If any adjustment communicated by the Accounts Officer affects the appropriation at the disposal of a subordinate Disbursing Officer, the fact that the adjustment has been made shall be communicated by the Controlling Officer to the Disbursing Officer concerned. (vi) On receipt of all the necessary returns, the Head of the Department shall prepare a consolidated account in Form GFR 12, showing the complete expenditure from the grant or appropriation at his disposal upto the end of the preceding month. Day 1 Session 2 & 3

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