Gujarat: Public Finance and fiscal Policy | Gujarat State PSC (GPSC) Preparation: All subjects - GPSC (Gujarat) PDF Download

Fiscal Policy

• Fiscal policy is formulated by the government and involves decisions regarding expenditures and revenues. It plays a crucial role in stabilizing the level of output and employment by adjusting government spending and taxes. Through fiscal policy, the government aims to increase output and income while stabilizing economic fluctuations. 
• Depending on the relationship between government receipts and expenditures, fiscal policy can result in a surplus (when receipts exceed expenditures), a deficit (when expenditures exceed receipts), or a balanced budget (when receipts equal expenditures).

Public Policy Goals

Fiscal policy can achieve several important public policy goals, including:

• Promoting growth and equity
• Supporting small-scale industries
• Encouraging agricultural development
• Locating industries in rural areas
• Promoting labor-intensive growth
• Enhancing export promotion
• Developing sound social and physical infrastructure

Instruments of Fiscal Policy

The two main instruments of fiscal policy are:

1. Government Expenditure: Divided into revenue expenditure and capital expenditure.
2. Government Receipts: Divided into revenue receipts and capital receipts.

Tax Revenues and Non-Tax Revenues

• India has a well-developed tax structure with clear authority demarcations between Central, State Governments, and local bodies. 
• Non-tax revenues also play a role in public finance, including profits from public enterprises, fees, and fines.

Public Finance in Gujarat

Fiscal Overview 2015-16

• In 2015-16, Gujarat's total receipts were Rs. 121,094.23 crore, an increase of Rs. 8,800.13 crore compared to 2014-15. Revenue receipts and capital receipts increased by Rs. 5,504.80 crore and Rs. 3,295.33 crore, respectively. The total expenditure for 2015-16 was Rs. 126,817.43 crore, up by Rs. 10,148.85 crore from the previous year. Revenue expenditure increased by Rs. 9,126.84 crore, and capital expenditure by Rs. 1,022.01 crore.
• The provisional accounts for 2015-16 showed that revenue account receipts were Rs. 97,482.58 crore, while revenue account outgoings were Rs. 95,778.54 crore, resulting in a surplus of Rs. 1,704.04 crore. However, under the capital account, there was a deficit of Rs. 7,427.24 crore as total expenditure (Rs. 31,038.89 crore) exceeded capital receipts (Rs. 23,611.65 crore).
• On the capital account, expenditure on internal debt repayment was Rs. 5,534.06 crore, compared to Rs. 4,849.01 crore in 2014-15. The total deficit on both revenue and capital accounts for 2015-16 amounted to Rs. 5,723.20 crore. Despite surpluses in the contingency fund and public accounts, the total net deficit for the year was Rs. 209.63 crore.

Tax Receipts 2015-16

• The provisional accounts for 2015-16 indicated that total tax revenue was Rs. 78,339.85 crore, a 9.36% increase from Rs. 71,636.16 crore in 2014-15. 
• The state's share in central taxes increased by 52.28% to Rs. 15,679.02 crore from Rs. 10,296.26 crore in 2014-15. Sales Tax/VAT proceeds were Rs. 44,091.05 crore, slightly lower by 0.12% compared to Rs. 44,145.26 crore in 2014-15.

State Budget 2016-17

• The budget estimates for 2016-17 projected revenue account receipts at Rs. 116,365.98 crore and revenue account outgoings at Rs. 113,129.90 crore, leaving a surplus of Rs. 3,236.08 crore. Capital account expenditures were estimated at Rs. 36,762.48 crore against receipts of Rs. 29,796.90 crore, resulting in a deficit of Rs. 6,965.58 crore. 
• The total deficit of revenue and capital accounts for 2016-17 was projected to be Rs. 3,729.50 crore, with an overall surplus of Rs. 245.49 crore considering the net surplus of the public account.

Goods and Services Tax (GST)

• GST is a unified indirect tax for the entire nation, aimed at creating a single common market across India. It is designed to subsume most indirect taxes into one taxation system. GST will replace various state and central taxes, establishing a national market and a single tax regime in the country. The bill seeks to combine all central indirect levies like excise duty, countervailing duty, and service tax, along with state taxes such as value-added tax (VAT), entry tax, and luxury tax, into a single, pan-India market.
• GST is applied to the supply of goods and services, from the manufacturer to the consumer. Credits for input taxes paid at each stage are available at the next stage of value addition, making GST effectively a tax on value addition at each stage. Consequently, the final consumer will only bear the GST charged by the last dealer in the supply chain, with set-off benefits from all previous stages. This approach is expected to broaden the tax base, enhance tax compliance, and reduce economic distortions caused by inter-state tax variations.
• The Indian Constitution empowers the Central Government to levy excise duty on manufacturing and service tax on services, while State Governments are authorized to levy sales tax or VAT on the sale of goods. This exclusive division of fiscal powers has resulted in a complex indirect tax structure, with multiple taxes at both the state and central levels, leading to hidden costs for trade and industry.
• To simplify and rationalize the indirect tax structure, the Government of India has introduced various tax policy reforms over time. A system of VAT on services at the central level was introduced in 2002, followed by state-level VAT on intrastate trade and CST on interstate trade in 2005. Despite these changes, the overall taxation system remained complex and included various exemptions.
• This complexity led to the concept of "One Nation, One Tax" and the introduction of GST into the Indian financial system. GST is similar to VAT, which is already in place in most states, but with the key difference that GST applies to both goods and services, and the tax rates for both are generally the same.