Tax revenue boost or expenditure cuts can help meet fiscal deficit target

Tax revenue boost or expenditure cuts can help meet fiscal deficit target

Tax revenue boost or expenditure cuts can help meet fiscal deficit target – Today Current Affairs

Context :

With not even the first two months of FY23 over, it is becoming increasingly clear that unless there is a massive boost in tax revenue or major cuts in expenditure, the fiscal deficit target of 6.4 per cent of the GDP is unlikely to be met.

Today Current Affairs


A country’s fiscal balance is measured by its government’s revenue vis-à-vis its expenditure in a given financial year. Fiscal deficit, the condition when the expenditure of the government exceeds its revenue in a year, is the difference between the two. Fiscal deficit is calculated both in absolute terms and as a percentage of the country’s gross domestic product (GDP).
The fiscal deficit of a country is calculated as a percentage of its GDP or simply as the total money spent by the government in excess of its income. In either case, the income figure includes only taxes and other revenues and excludes money borrowed to make up the shortfall.

How is fiscal deficit calculated? The Hindu Analysis

The fiscal deficit, in mathematical terms, is [total revenue generated — total expenditure]. The total revenue is the sum of revenue receipts, recovery of loans and other receipts of the government.

While most countries continue to project a deficit in their economies, a surplus is a rare phenomenon. A high deficit at times also emerges if the government is spending on developmental works like construction of highways, ports, roads, airports which will later generate revenue for the government.

What are components of the fiscal deficit calculation? The Hindu Analysis

The fiscal deficit calculations are based on two components — income and expenditure.
Income component: The income component is made of two variables, revenue generated from taxes levied by the Centre and the income generated from non-tax variables. The taxable income consists of the amount generated from corporation tax, income tax, Customs duties, excise duties, GST, among others. Meanwhile, the non-taxable income comes from external grants, interest receipts, dividends and profits, receipts from Union Territories, among others.
Expenditure component: The government in its Budget allocates funds for several works, including payments of salaries, pensions, emoluments, creation of assets, funds for infrastructure, development, health and numerous other sectors that form the expenditure component.

How is fiscal deficit balanced out? The Hindu Analysis

While a rising deficit is a challenge for the government in the long term, to balance it out in short-term macroeconomics, the government looks at market borrowings by issuing bonds and selling them in through banks. Banks buy these bonds with currency deposits and then sell them to investors. Government bonds are considered an extremely safe investment instrument, so the interest rate paid on loans to the government represents risk-free investment.

WHAT IS TAX REVENUE? The Hindu Analysis

Taxation is the primary source of income for the government. The most important revenue receipts for the government, taxes are involuntary fees levied on individuals and corporations to finance government activities. Revenue receipts can be of two types — non-tax revenue and tax revenue. Tax revenue is the income gained by the government through taxation.
Tax revenue forms a part of the Receipt Budget, which in turn is part of the Annual Financial Statement of the Union Budget.
Tax revenue is the result of the application of a tax rate to a tax base. Total tax revenue as a percentage of GDP indicates the share of the country’s output collected by the government through taxes. Tax revenue can be regarded as one measure of the degree to which the government controls the economy’s resources. The Hindu Analysis
Taxes collected from both direct tax and indirect tax are the government’s tax revenue. It includes collections from income tax, corporation tax, customs, wealth tax, tax on land revenue, etc.
Direct tax is the tax that is paid directly to the government by the person or company on whom it is levied. Income tax, wealth tax, corporation tax and property tax are some examples of direct tax. Indirect taxes are those that are collected by intermediaries from individuals and corporations who bear the burden of the tax and passed on to the government. Goods and Services Tax (GST) is an example of indirect tax. Corporation tax forms a large chunk of the government’s tax revenue.

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