FISCAL POLICY

BY: ABHINAV ABHISHEK HARSHAJIT DASH MD. MUMTAZ HUSSAIN ROHIT SINGH VIGNESHWARAN MFM 1st SEM 2011-2013

MEANING OF FISCAL POLICY

The Word Fisc means state treasury so Fiscal Policy refers to policy concerning the use of state treasury or the Govt. Finances to achieve the macro economic goals DEFINITION : Fiscal Policy is defined as the govt. Programme of taxation, expenditure, & other financial operation to achieve national goals

OBJECTIVES
FISCAL POLICY HAS TWO MAJOR OBJECTIVES
General Objectives - Aimed at achieving macroeconomic goals Specific Objectives Related to any typical problems of economy

GOALS OF FISCAL POLICY

ECONOMIC GROWTH : By creating conditions for increase in savings & interest EMPLOYMENT : By encouraging the use of labour and technology STABILIZATION : Fight with deflessionary trends & booming indications in the economy ECONOMIC EQUALITY : By reducing the Income & wealth gaps between the rich & poor PRICE STABILITY : Employed to contain Inflationary & Deflationary tendencies in the Economy
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INSTRUMENTS OF FISCAL POLICY

Budgetary Surplus & Deficit

Govt. Expenditure
Taxation Direct & Indirect Public Debt Deficit Financing
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HOW DOES FISCAL POLICY AFFECT THE ECONOMY ? Aggregate demand which is the total demand for goods and services in the economy depends on three main variables : Consumption Private investment & Government Spending When the Govt. Increases its expenditure then it spurs the aggregate demand in the economy. A higher aggregate demand in turn will stimulate output, growth & employment. Whereas if the govt. Lowers its spending then it decreases the aggregate demand & hence slow down the growth of economy 6

TERMS RELATED TO FISCAL POLICY

FISCAL DEFICIT
It is an economic phenomenon where the govt.s expenditure surpasses the revenue generated It is the difference between the govts Total receipts excluding the borrowing & Total expenditure i.e. Total govt expenditure Revenue receipt + Non - Debt capital receipt
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GOVERNMENT RECEIPT
Total Government Receipt

Revenue Receipt

Capital Receipt

Tax Revenue

Non Tax Revenue

Recovery Of Loans

Public sector Disinvestment

CAPITAL RECEIPT
A capital receipt is a receipt which is derived from sale or purchase of capital assets like plant & machinery, furniture ,investment (long-term) etc . which shall not be occurring all the time

REVENUE RECEIPT
It consists of tax collected by the govt. & other receipts consisting of interest & dividend on investment made by govt. & other receipts for services referred by govt. Revenue Receipt includes: Tax Revenue Receipt Non tax revenue receipt
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DIFFERENCE BETWEEN CAPITAL RECEIPT & REVNUE RECEIPT

The main difference between CR & RR is that revenue receipt are recurring in nature, which the government can expect to receive year after year whereas capital receipt are a kind of one time income

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GOVERNMENT EXPENDITURE
Revenue Expenditure

Planned Expenditu re

Government Expenditure

Non Planned Expenditur e

Capital Expenditure

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PLANNED EXPENDITURE
It refers to the expenditure incurred by the government on programmes/projects which are recommended by the planning commission

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NON PLANNED EXPENDITURE

It is a generic term used to cover all expenditure of government not included in the plan. For example Interest payment, pensionery charges, expenditure on external affairs, currency & mint etc.

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REVENUE EXPENDITURE (REVEX)

Revenue expenditure is a expenditure concerned with costs of doing business on a day to day business

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CAPITAL EXPENDITURE (CAPEX)

Capital expenditure are expenditures creating future benefits. A CAPEX is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable income

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MEASURES OF DEFICIT Revenue Deficit = Expenditure Receipt

Fiscal Deficit = (Total Expenditure) (Revenue Receipt + Non Debt Capital Receipts) Primary Deficit = Fiscal Deficit Interest Payment

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TAXATION
It is the act of levying taxes

A tax is a compulsory charge on payment

imposed by Govt. On Individuals or Corporation

The most important source of Revenue of the

Govt.

The tax may be imposed on the Income & wealth

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OBJECTIVES OF TAXES
Raising Revenue Encouraging Domestic Industry Reducing Income Inequalities Promoting Economic Growth Development Of Backward region Ensuring price stability
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CLASSIFICATION OF TAXES
On the basis of form, nature & method the most common & traditional classification is to classify tax into
Direct tax Indirect tax

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DIRECT TAX
Direct tax is that tax whose burden is borne by the same person on whom it is levied . It is based on the Income & property of a person

Example Income tax , Corporation tax , tax on companys profit , Property tax , Wealth tax etc

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INDIRECT TAX
Indirect tax is that tax which is initially paid by one individual but the burden of which is passed over to some other individual who ultimately bears it

Example- excise duty , sales tax, entertainment tax , custom duty etc.

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ON THE BASIS OF DEGREE OF PROGRESSION TAXES ARE CLASSIFIED INTO :

Progressive tax

Regressive tax

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PROGRESSIVE TAX
When the rate of taxation increases as the payers income increases , it is called a progressive tax
In this system the rate of tax goes on increasing with every increase in income

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REGRESSIVE TAX
A Regressive tax is one in which the rate of taxation decreases as the tax payers income increases. Lower income is taxed at a higher rate whereas higher income is taxed at a lower rate

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 SURCHARGE
It is basically an additional sum(tax) added to the usual amount or cost(tax) CESS It is an alternative term for tax

For example Road cess, Oil cess, Education cess, water cess
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DEDUCTION FROM TAXABLE INCOME

Under section 80C Under section 80D (Medical Insurance premium) Under section 88 of Income Tax Act (1961) rebate on certain investment Interest on Housing loan

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CONCLUSION
We can say that the instrument of Taxation is of great significance on : Increasing the level of economic activity Reducing income inequalities Promoting economic growth Social welfare objectives (i.e.. tax payment helps reduce the gap between the have & have not as it helps in mobilizing the surplus income from the haves & reinvesting them for public welfare , it helps these surplus funds to reach the haves not)
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REFERENCES :
D N DWIVEDI : Managerial Economics

http://finance.indiamart.com/taxation/income_tax/rate s http://en.wikiprdia.org/wiki/income_tax.india

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THANK YOU

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