How Does The Government Earn Money?

Budget is an annual financial statement of the government. It is about how the government earns and how it spends and whether there is shortfall between the two. As a taxpayer, it is important to know whether the government is able to perform the way it promises.

The government earns money primarily through two ways: Total income generated, generally referred to as Total Receipts in government parlance, and Government Borrowings.


Total receipts: This includes income through Tax and Non-tax revenue and is inclusive of all the states’ share of taxes and duties. For the fiscal year 2012-13, the central government is expected to generate total receipts of only Rs 8,71,828 crore as against the target of Rs 9,35,685 crore.

• Income through taxes: This category includes taxes earned from Direct taxes (such as income tax, corporation tax) as well as Indirect taxes (including customs and excise duties and service tax). The government expects to generate 60% of total receipts through various direct and indirect taxes for 2012-13, which is targeted to go up to 61% for 2013-14, according to budget estimates. This means, the government is targeting higher tax revenue next year.
• Non-tax income: The government generates non-tax income in several ways. One source of income is in the form of dividends from public sector or state-owned companies. For the year ending March 2013, this contribution was higher at Rs 55,443 crore against Rs 50,153 crore expected. Asset sale or disinvestment is another method of enhancing revenue in a year. The government also receives revenue from activities such as auction of licences, for e.g. for telecom spectrum or FM radio, which typically are one-off events. The non-tax revenue from these auctions fell short of expectations in 2012-2013 at Rs 53,790 crore against an expectation of Rs 91,207 crore. This was because the government could not sell telecom spectrum as planned.

Government Borrowing: Under Government Borrowing, the government raises money from various sources including the market and the RBI to make up for the shortfall in income vis a vis expenditure. The government expects to receive 29% i.e. almost one –third of the total receipts as borrowing for 2012-13. Following the pressure to reduce the borrowing so that the pressure on interest rates is eased, the government in 2013-14 has targeted borrowing at 27% of the total receipts. . This could provide the necessary fiscal headroom to Reserve Bank of India to bring down key interest rates and thus will hopefully boost economic growth.
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Source : .franklin templeton