Test: Government Budget And Economy - 2 - UPSC MCQ

Capital receipts accrue on realisation of assets which is nothing but source of funds. Further, when we sell any asset it is grouped under non-operating income. But, profit or loss on it would be released to the revenue account which in turn would be transferred to reserves. So, we are unlocking the value of asset i.e. economic benefit on such asset is actually realized. Economic benefit means 'Increase in revenue or decrease in operating cost' which is nothing but revenue in nature. So, it is also the component of government revenue.

 

The budget is divided into two parts — (i) Revenue Budget, and (ii) Capital Budget.

A revenue expenditure is an amount that is expensed immediately—thereby being matched with revenues of the current accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as Repairs and Maintenance Expense.

The budget has two broad components: Revenue budget and Capital budget. The revenue budget includes revenue expenditure and revenue receipts. The capital budget includes capital expenditure and capital receipts.

The major source of Revenue receipts for the government is Tax Revenue.

Here is a detailed explanation:

Tax Revenue:

• Tax revenue refers to the money collected by the government through various taxes imposed on individuals, businesses, and other entities.


• It is the primary source of revenue for the government.


• Tax revenue is collected through direct taxes (such as income tax, corporate tax) and indirect taxes (such as goods and services tax, customs duty).


• Direct taxes are levied on the income and wealth of individuals and businesses, while indirect taxes are imposed on the sale and consumption of goods and services.


• The government uses tax revenue to fund its expenditure on infrastructure development, public services, defense, education, healthcare, and other essential sectors.

Other sources of revenue:

• Profits: While profits generated by government-owned enterprises contribute to the revenue receipts, they are not the major source.


• Non-Tax Revenue: Non-tax revenue includes income from sources other than taxes, such as fees, fines, dividends, and interest on loans. While it contributes to the government's revenue, it is not the primary source like tax revenue.


• Interest: Interest earned by the government on loans and investments also contributes to revenue receipts, but it is not the major source compared to tax revenue.

In conclusion, tax revenue is the major source of revenue receipts for the government. It plays a crucial role in financing the government's expenditure and ensuring the smooth functioning of various sectors in the economy.

Direct Tax: Explanation
Direct tax is a tax that is imposed and paid directly by an individual or organization to the government. It is a tax where the liability to pay and the incidence of the tax fall on the same person. Let's break down the explanation further:
1. Definition of Direct Tax:
- Direct tax is a tax that is directly imposed on individuals or organizations by the government.
- It is levied on income, wealth, property, or any other sources of income or capital.
2. Liability to Pay:
- The liability to pay the direct tax lies on the individual or organization that is earning the income or holding the wealth or property.
- It is their responsibility to calculate and pay the tax to the government.
3. Incidence of the Tax:
- The incidence of the tax also falls on the same person or organization that has the liability to pay.
- The burden of the tax is borne by the individual or organization directly.
4. Example:
- Income tax is a common example of a direct tax.
- Individuals are required to pay income tax on their earnings, and the liability to pay and the burden of the tax fall on them.
5. Contrast with Indirect Tax:
- In contrast to direct tax, indirect tax is imposed on goods and services, and the liability to pay and the incidence of the tax may not necessarily fall on the same person.
- For example, when you purchase a product, you pay the value-added tax (VAT), but the burden of the tax is ultimately passed on to the consumer.
In conclusion, direct tax is a tax where the liability to pay and the incidence of the tax fall on the same person or organization. It is directly imposed on individuals or organizations by the government, and examples include income tax and wealth tax.

Direct Tax:
A direct tax is a tax that is imposed directly on individuals or entities. It is levied on the income, profits, or wealth of the taxpayer. The burden of the tax cannot be shifted to someone else.
Options:
Let's evaluate each option to determine which one correctly describes direct tax:
A. Individuals only:
This option suggests that direct tax is imposed solely on individuals. However, this is not entirely accurate as direct taxes can also be imposed on entities other than individuals.
B. Individuals and corporations:
This option correctly states that direct tax can be imposed on both individuals and corporations. This is the most accurate description of direct tax.
C. Corporations only:
This option suggests that direct tax is imposed exclusively on corporations. While corporations are subject to direct taxes, individuals can also be liable for direct taxes.
D. None of these:
This option implies that none of the given options accurately describe direct tax. However, option B is the correct answer.
Conclusion:
Direct tax is a tax that can be imposed on both individuals and corporations. Therefore, option B, "Individuals and corporations," is the correct answer.

Direct Tax:
- A direct tax is a type of tax that is levied directly on individuals or entities and cannot be passed on to someone else.
- It is imposed on the income, wealth, or property of the taxpayer.
- Direct taxes are typically progressive in nature, meaning that the tax rate increases as the taxpayer's income or wealth increases.
Examples of Direct Taxes:
- Income Tax: This is a tax imposed on individuals or entities based on their income or profits. It is usually calculated based on the income brackets and tax rates set by the government.
- Corporate Tax: This is a tax imposed on the profits of corporations or businesses. It is usually calculated based on the company's net income after deducting expenses and allowances.
- Capital Gains Tax: This is a tax imposed on the profit earned from the sale of an asset, such as stocks, bonds, or real estate. It is calculated based on the difference between the purchase price and the sale price of the asset.
- Property Tax: This is a tax imposed on the value of real estate or other properties owned by individuals or entities. It is usually calculated based on the assessed value of the property.
- Wealth Tax: This is a tax imposed on the net wealth or assets of individuals or entities. It is calculated based on the total value of assets minus any debts or liabilities.
Answer:
- Income Tax is an example of a direct tax because it is imposed directly on individuals or entities based on their income or profits.

Wealth tax is not the major source of revenue receipts for the government because it is not typically a significant contributor to the government's total revenue. Wealth tax is a tax levied on the net wealth or assets of individuals, such as real estate, cash, bank deposits, investments, and businesses. However, the revenue generated from wealth tax is often relatively low compared to other forms of taxation such as income tax, corporate tax, and indirect taxes like GST (Goods and Services Tax). Therefore, while wealth tax is one of the sources of revenue for the government, it is not considered a major contributor to government revenue when compared to other taxes.

Indirect taxes are taxes where the person who bears the ultimate economic burden of the tax (the incidence) is different from the person who initially pays the tax to the government (the liability to pay).

Introduction:
Reducing inequalities of income is an important goal for policymakers as it promotes social cohesion and economic stability. There are several policies that can be useful in achieving this objective. Among these, budgetary policies play a significant role.
Explanation:
Budgetary policies refer to the use of government spending, taxation, and borrowing to influence the level of economic activity and achieve specific economic objectives. In the context of reducing income inequalities, the following reasons explain why budgetary policies are useful:
1. Progressive taxation:
- Progressive taxation is a key component of budgetary policies aimed at reducing income inequalities.
- It involves imposing higher tax rates on individuals with higher incomes and lower tax rates on individuals with lower incomes.
- By implementing progressive taxation, the government can redistribute income from high-income earners to low-income earners, thereby reducing income inequalities.
2. Social welfare programs:
- Budgetary policies can be used to allocate funds for social welfare programs such as education, healthcare, and social security.
- These programs provide essential services and support to individuals with lower incomes, helping to reduce income inequalities.
- By investing in education and healthcare, for example, the government can improve the skills and productivity of individuals from disadvantaged backgrounds, enabling them to earn higher incomes.
3. Income support programs:
- Budgetary policies can also include income support programs such as unemployment benefits, food stamps, and housing assistance.
- These programs provide financial assistance to individuals and families with low incomes, helping to alleviate poverty and reduce income inequalities.
- By ensuring a basic standard of living for those in need, income support programs can contribute to a more equitable distribution of income.
4. Investment in infrastructure:
- Budgetary policies can prioritize investment in infrastructure such as transportation, housing, and utilities.
- This can create job opportunities and stimulate economic growth, benefiting individuals from all income levels.
- By providing access to better infrastructure, the government can reduce the income disparities that arise from unequal access to essential services and opportunities.
Conclusion:
Budgetary policies are essential tools for reducing income inequalities. Through progressive taxation, social welfare programs, income support programs, and investment in infrastructure, the government can promote a more equitable distribution of income and ensure that all individuals have access to essential services and opportunities.

Budgetary policies relate to taxes and public expenditures.
- Budgetary policies refer to the government's decisions and actions regarding the allocation of financial resources.
- These policies play a crucial role in determining the overall economic direction of a country.
- Budgetary policies encompass both taxation and public expenditure measures.
- Taxes are a major component of budgetary policies as they provide the government with the necessary revenue to finance public expenditures.
- Different types of taxes, such as income tax, sales tax, and corporate tax, are used to generate revenue for the government.
- The government uses public expenditures to allocate resources to various sectors such as education, healthcare, infrastructure, defense, and social welfare.
- Budgetary policies aim to achieve various economic objectives, such as promoting economic growth, reducing income inequality, and maintaining price stability.
- Governments use budgetary policies to influence aggregate demand and stimulate or restrain economic activity.
- These policies can also have an impact on income distribution, as tax rates and public expenditure allocations can affect different income groups differently.
- Budgetary policies are typically formulated through the annual budgeting process, where the government sets its revenue and expenditure targets for the fiscal year.
- The effectiveness of budgetary policies depends on various factors, including the government's fiscal discipline, the efficiency of tax collection, and the alignment of public expenditure priorities with the country's economic needs.

The government makes agreements on budgetary policy when it takes office. Budgetary policy is determined by the government's expenditures and revenues plans and expected national and international economic developments over the next four years.

Revenue Receipts: Do not create liability for the government
Revenue receipts are the income generated by the government through various sources. These receipts do not create any liability for the government. Let's explore this further:
1. Definition of revenue receipts:
- Revenue receipts refer to the income earned by the government through its normal operations, such as taxes, fees, fines, and grants.
- These receipts are recurring in nature and are used to meet the day-to-day expenses of the government.
2. Characteristics of revenue receipts:
- They do not create any obligation or liability for the government.
- They are generated from regular activities of the government and are not associated with borrowing or repayment.
- Revenue receipts are used to fund the government's current expenditures like salaries, infrastructure maintenance, and welfare programs.
3. Examples of revenue receipts:
- Tax revenue: Income tax, corporate tax, sales tax, and customs duty collected by the government.
- Non-tax revenue: Fees charged for providing government services, fines imposed for violations, and grants received from other countries.
4. Impact on government liabilities:
- Revenue receipts do not create any liability for the government because they are not associated with borrowing or repayment.
- The government is responsible for managing its expenditure within the limits of its revenue receipts.
- If the revenue receipts exceed the government's expenditures, it can result in a surplus budget.
In conclusion, revenue receipts do not create any liability for the government. They are the income generated through regular activities and are used to meet the government's current expenses. These receipts do not involve borrowing or repayment and are not associated with any obligations for the government.

Capital Receipts
Capital receipts are the funds received by the government from various sources that lead to an increase in its liabilities. These receipts are used to finance capital expenditure or to repay loans and borrowings. Here is a detailed explanation of capital receipts:
A: Do not create liability for the private sector
- Capital receipts do not create any liability for the private sector.
- Private sector entities do not bear any responsibility for the capital receipts received by the government.
B: Create liability for the government
- Capital receipts create liabilities for the government.
- The government is obligated to repay the capital receipts it receives, either through repayment of loans or meeting other financial obligations.
C: Do not create liability for the government
- This statement is incorrect. Capital receipts do create liabilities for the government.
D: Create liability for the private sector
- This statement is incorrect. Capital receipts do not create any liability for the private sector.
In conclusion, the correct answer is B: Create liability for the government. Capital receipts are funds received by the government that result in increased liabilities and obligations for the government. Private sector entities are not responsible for these liabilities.

Disinvestment is a Capital Receipt
Disinvestment refers to the sale or liquidation of government assets or investments. It can take various forms such as selling shares of public sector enterprises, privatization of government-owned companies, or divestment of government stakes in joint ventures. In the context of government finances, disinvestment is considered a capital receipt.
Here's why disinvestment is classified as a capital receipt:
Capital Receipts:
- Capital receipts are those receipts that create a liability or reduce financial assets. They are not generated through regular operational activities.
- Disinvestment involves the sale of government assets or investments, which results in an inflow of funds for the government.
- The funds received from disinvestment are used to finance capital expenditure or reduce borrowings.
- Disinvestment is a one-time receipt and not a regular source of revenue.
Revenue Receipts vs. Capital Receipts:
- Revenue receipts are generated from day-to-day operations and are recurring in nature, such as taxes, fees, and fines.
- Capital receipts, on the other hand, are non-recurring and usually associated with capital transactions, such as disinvestment, loans, and borrowings.
Impact on Government Finances:
- Disinvestment helps the government raise funds without resorting to borrowing or increasing taxes.
- The proceeds from disinvestment can be used for infrastructure development, reducing fiscal deficit, or investing in priority sectors.
- By divesting its holdings in public sector enterprises, the government aims to improve efficiency, promote competition, and attract private investment.
In conclusion, disinvestment is classified as a capital receipt because it involves the sale of government assets or investments, which leads to a one-time inflow of funds and is not generated through regular operational activities.

Capital receipts are a non-recurring incoming cash flow into your business, which leads to the creation of a liability (a debt to be paid in the future) and a decrease in company assets (resources that lead to capital gain)

Revenue Expenditure

Revenue expenditure refers to the expenses incurred by the government that do not create assets or increase the government's net worth. These expenditures are typically recurring in nature and are incurred to maintain the day-to-day operations of the government.

Characteristics of Revenue Expenditure:

• Does not create assets for the government


• Does not increase the government's net worth


• Typically recurring in nature


• Incurred to maintain day-to-day operations

Now, let's evaluate the statements given and identify the correct answer:

Statement A:

Do not create assets for the government

Statement B:

Creates assets for the private sector

Statement C:

Create liability for the private sector

Statement D:

Create assets for the government

Explanation:

Based on the characteristics of revenue expenditure, we can conclude that Statement A is correct, as revenue expenditure does not create assets for the government. The other statements are incorrect because revenue expenditure is not aimed at creating assets for the private sector (Statement B) or creating liabilities for the private sector (Statement C). It also does not create assets for the government (Statement D).

Therefore, the correct answer is A: Do not create assets for the government.

Capital Expenditure

Capital expenditure refers to the funds that are used by a company or government to acquire, upgrade, or maintain physical assets. These assets are intended to provide long-term benefits and are not meant for immediate consumption. Capital expenditure can be categorized into two main types: those that create assets for the government and those that create assets for the private sector.
A. Create assets for the government:
- Governments allocate capital expenditure to invest in infrastructure projects such as building roads, bridges, airports, and public transportation systems.
- Capital expenditure may also be used to construct government facilities like schools, hospitals, and administrative buildings.
- The creation of these assets aims to improve public services, promote economic development, and enhance the overall quality of life for citizens.
B. Create assets for the private sector:
- Private companies utilize capital expenditure to acquire or upgrade physical assets necessary for their business operations.
- This may include purchasing manufacturing equipment, constructing or expanding production facilities, or acquiring vehicles for transportation.
- By investing in these assets, private companies aim to increase productivity, expand their operations, and generate higher profits.
C. Do not create assets for the private sector:
- Capital expenditure is not directly used to create assets for the private sector as it is primarily focused on government infrastructure and public services.
D. Do not create assets for the government:
- This statement is incorrect as capital expenditure is specifically used by the government to create assets for public benefit.
Therefore, the correct answer is A: Create assets for the government.

Transfer payment. In economics, a transfer payment (or government transfer or simply transfer) is a redistribution of income and wealth (payment) made without goods or services being received in return. These payments are considered to be non-exhaustive because they do not directly absorb resources or create output.

Repayment of loan is also capital expenditure because it reduces liability. These expenditures are met out of capital receipts of the government including capital transfers from rest of the world.