Taxation & Public Finance

📊 High-Yield Data & Statistical Fact Sheet

Cue Words	Notes
Consolidated Fund (Art 266(1))	Receives all government revenues, loans, and recoveries. Requires prior Parliamentary approval (Appropriation Bill) for withdrawals.
Contingency Fund (Art 267)	Set at ₹30,000 crore. Managed by Finance Secretary on behalf of President for unforeseen expenditures.
Public Account (Art 266(2))	Holds provident funds, small savings, judicial deposits. Operates like a banking transaction (no prior Parliamentary approval).
Income Tax Act, 2025	Comes into force from 1 April 2026, replacing the 1961 Act (repealed same date, with transitional provisions for pending proceedings). Primarily a **simplification/restructuring exercise** — same tax rates, slabs, and deductions carry over; focus is on removing accumulated provisos/explanations for a cleaner, more readable code. 2026 **Now in force**: the Income-tax Act, 2025 came into effect from **1 April 2026**, replacing the six-decade-old Income-tax Act, 1961. Passed by Parliament on **12 August 2025**; received Presidential assent on **21 August 2025**. 2026 **Income-tax Rules, 2026** notified by **CBDT on 20 March 2026** to operationalise the new Act.
16th FC — Cabinet Approves Terms of Reference (Origin)	2023 **Cabinet approved the ToR for the 16th Finance Commission on 29 Nov 2023** — the origin event, predating constitution of the Commission with members. Recommendations to cover a **5-year period commencing 1 April 2026**, report due by **31 October 2025** (see below for actual submission/award period). **ToR mandate**: (a) distribution of net tax proceeds between Union and States (Art 280, Part XII) and inter-state allocation; (b) principles for grants-in-aid to States under Art 275; (c) measures to augment State Consolidated Funds to supplement Panchayat/Municipality resources; (d) may also review Disaster Management Act 2005 financing arrangements. **Background**: 15th FC was constituted **27 Nov 2017**; after a 2019 ToR amendment it ultimately covered a **6-year period, 2020-21 to 2025-26** — valid till FY2025-26, necessitating the 16th FC's constitution now (Finance Commissions normally take ~2 years to report).
16th FC Devolution Period	Award period 2026-27 to 2030-31, chaired by Dr. Arvind Panagariya. Report submitted to the President on 17 Nov 2025, tabled in Parliament on 1 Feb 2026 (see ToR-approval entry above for the Nov 2023 origin).
16th FC Vertical Devolution	Retained at 41.0% of central divisible pool (same as 15th FC).
16th FC Horizontal Criteria	Income Distance (42.5%), Population 2011 (17.5%), Area (10%), Forest & Ecology (10%), Demographic Performance (10%), GDP Contribution (10% - NEW).
16th FC — Key Reforms & Grants	Marks a shift from **"entitlement-based" to "compliance-driven"** fiscal federalism — new performance/compliance-linked criteria alongside the GDP-contribution weight. **Total grants**: **₹9.47 Lakh Crore** over 5 years, of which **₹8 Lakh Crore** goes to Local Bodies (₹4.4L Cr Rural, ₹3.6L Cr Urban). **Fiscal discipline push**: Caps state deficits at **3% of GSDP**, calls for ending off-budget borrowings, rationalising subsidies, and cautioning against unconditional cash-transfer schemes. **DISCOM privatisation** recommended, with an SPV to warehouse legacy debt (repayable via SASCI funds). **Combined debt-to-GDP** (Centre + States) projected to fall from **77.3% (2026-27) to 73.1% (2030-31)**.
Debt-to-GDP Target	Peaked at 61.38% (2020-21); target <56% by 2030-31.
Fiscal Deficit Target	Budgeted <4.5% of GDP for FY 2025-26.
Unrealized Revenue Gap	CAG reported ₹21.30 Lakh Crore in uncollected central taxes.
NITI Aayog Fiscal Health Index (FHI) 2025 — Inaugural Edition	2025 NITI Aayog launched the **INAUGURAL (1st) edition** of the **"Fiscal Health Index (FHI) 2025"** on **24 January 2025**, launched by **16th Finance Commission Chairman Dr. Arvind Panagariya**. Covers **18 major Indian states** across **5 sub-indices**: Quality of Expenditure, Revenue Mobilisation, Fiscal Prudence, Debt Index, and Debt Sustainability. **Rankings**: **Odisha** topped with a composite score of **67.8**, followed by **Chhattisgarh (55.2)** and **Goa (53.6)**.
NITI Aayog Fiscal Health Index (FHI) 2026 — 2nd Edition	2026 **2nd annual edition** launched **11 March 2026**, benchmarking state-level fiscal performance. **1st edition** (Jan 2025) covered **18 major states**; the **2nd edition adds 10 North-Eastern/Himalayan states**, evaluated and ranked separately given their structural differences. States account for **~1/3rd of India's general government debt**; most of the 18 major states saw **moderated FHI scores in 2023-24** compared to the prior year.

1. DIRECT & INDIRECT TAX ARCHITECTURE

Cue Words	Notes
Minimum Alternate Tax (MAT)	Levied on "zero-tax" corporations whose actual tax is below threshold book profit percentage (set at 15%).
Equalisation Levy (Google Tax)	6% on digital ad services and 2% on foreign e-commerce considerations.
Benami Act 2016	Empowers state confiscation of properties held under fictitious names.
GST Art 246A	Grants concurrent power to Parliament and State Legislatures to levy GST.
GST Art 269A	Governs levy and collection of Integrated GST (IGST) on interstate trade.
GST Art 279A (GST Council)	Chair: Union FM. Voting: Union 1/3rd, States 2/3rd. Decision threshold: 3/4th weighted majority.
GST Exclusions	Crude oil, petrol, diesel, ATF, natural gas, alcohol for human consumption.
Input Tax Credit (ITC)	Tax paid on inputs deducted from tax payable on output.
Inverted Duty Structure	Tax rate on raw inputs is higher than tax rate on finished output goods.
Reverse Charge Mechanism (RCM)	Tax liability shifts from supplier of goods/services to recipient/buyer.

2. THE LOGIC OF PUBLIC FINANCE & TAXES

Cue Words	Notes
Laffer Curve	Inverted U-shaped curve showing tax revenue declines beyond an optimal tax rate.
Tax Buoyancy	**Tax Buoyancy** = [ (**% Change in Tax Revenue**) ÷ (**% Change in Nominal GDP**) ] Responsiveness of tax revenue growth relative to GDP expansion (>1.0 indicates tax collection outpaces economic growth).
Cess Definition	Levied for a specific earmarked purpose (cannot be diverted). Non-shareable with States.
Surcharge Definition	Additional tax levied on tax for general government expenditure. Non-shareable with States.
Angel Tax	Levied on unlisted startup capital raised above Fair Market Value.
Safe Harbour Provision	Tax certainty threshold raised to ₹300 crore for tech/EV exporters.
Deficit Classification & Formulas	**Revenue Deficit (RD)** = **Revenue Expenditure − Revenue Receipts**. **Effective Revenue Deficit (ERD)** = **Revenue Deficit − Grants for Creation of Capital Assets** (introduced in 2011-12). **Fiscal Deficit (FD)** = **Total Expenditure − (Revenue Receipts + Non-Debt Capital Receipts)**. Measures net total government borrowing. **Primary Deficit (PD)** = **Fiscal Deficit − Net Interest Payments**. Reflects current year fiscal stance excluding historical interest burden. **Monetised Deficit**: Portion of government deficit financed directly by borrowing from RBI through currency issuance.
Progressive, Regressive, Ad Valorem & Specific Taxes	**Progressive Tax**: Rate increases as income rises (e.g., Income Tax). Places higher real burden on rich. **Regressive Tax**: Burden falls disproportionately on lower income groups (e.g., indirect consumption taxes). **Ad Valorem Tax**: Levied as a percentage of item value (e.g., GST, Customs Duty). **Specific Tax**: Levied per physical unit, weight, or size (e.g., excise duty on liquor). Inherently regressive.
Abolished Direct Taxes (Historical Timeline)	**Estate Duty** (abolished 1985) | **Gift Tax** (abolished 1998) | **Fringe Benefit Tax (FBT)** & **BCTT** (abolished 2009) | **Wealth Tax** (abolished 2016) | **Dividend Distribution Tax (DDT)** (abolished 2020).
BEPS, DTAA, PoEM & International Tax Frameworks	**BEPS (Base Erosion & Profit Shifting)**: OECD framework curbing MNC tax avoidance through profit shifting to tax havens. **DTAA**: Bilateral treaties preventing double taxation of cross-border income. **Place of Effective Management (PoEM)**: Determines tax residency of foreign companies based on where key commercial decisions are made. **AEOI & Project Insight**: Automatic Exchange of Information and big-data analytics to track undeclared offshore assets.
GST Constitutional Framework & Compensation	**101st Amendment Act (2016)**: Concurrent taxation (Art 246A), IGST distribution (Art 269A), GST Council (Art 279A). **Special Rates**: **0.25%** on rough precious stones; **3%** on gold/silver (retained post-GST 2.0). **State Compensation Guarantee (2017-22)**: Assured 14% annual revenue growth to States over the 2015-16 base for 5 years, funded by Compensation Cess — this arrangement has since **lapsed** (see GST 2.0 below). **National Anti-Profiteering Authority (NAPA)**: Mandated to ensure GST rate reductions and Input Tax Credits are passed on to consumers.
GST 2.0 — Rate Rationalisation (Sep 2025)	**GST Council (3 Sep 2025)** collapsed the old 5-slab structure (0/5/12/18/28%) into **two primary slabs: 5% and 18%**, effective **22 Sep 2025**. **12% and 28% slabs abolished**: items moved down to 5%/18%; a new **40% de-merit rate** created for luxury/sin goods (tobacco, pan masala, etc.). **Compensation Cess scrapped** on nearly all goods from 22 Sep 2025 (retained only on pan masala, gutkha, cigarettes, chewing tobacco/zarda, bidi). **Relief items**: Dairy products, 33 life-saving drugs, and educational materials moved to **nil GST**; individual health/life insurance **exempted**.
Revenue Receipts — Economic Survey 2025-26	2026 **Centre's revenue receipts rose to 9.2% of GDP in FY25** (Provisional Actuals), per the Economic Survey 2025-26.
Growth & Debt Sustainability — Economic Survey 2020-21	2021 Economic Survey 2020-21 argued **growth leads to debt sustainability in India's context** (not vice versa) — driven by a **negative Interest Rate Growth Rate Differential (IRGD)**, i.e. India's growth rate exceeds its interest rate on debt "by norm, not exception." Called for **active, counter-cyclical fiscal policy** rather than fiscal conservatism during downturns. 2021 **Sovereign credit rating critique**: the Survey argued India's rating (**BBB-/Baa3**) does NOT reflect its economic fundamentals — India is a statistical outlier among nations rated A+/A1 to BBB-/Baa3, being the **5th-largest economy** yet at the lowest investment-grade rung (only China similarly downgraded, from A-/A2 in 2005). Called for ratings methodology to be made more transparent/less subjective, citing India's **zero sovereign-default history** as evidence of "willingness to pay."
Fiscal & Debt Snapshot — Economic Survey 2021-22	2022 **Central Government revenue receipts (Apr-Nov 2021)** up **67.2% YoY** (vs a Budget Estimate of just 9.6%); **Gross Tax Revenue** grew **50%+ YoY** over the same period. 2022 **Capex grew 13.5% YoY (Apr-Nov 2021)**; **fiscal deficit contained at 46.2% of Budget Estimate (Apr-Nov 2021)**. 2022 **Central Government debt rose from 49.1% of GDP (2019-20) to 59.3% of GDP (2020-21)**, driven by COVID-related borrowing.
Health Security se National Security (HSNS) Cess Act, 2026	2026 A **new cess** — the **Health Security se National Security (HSNS) Cess** — applies to manufacturers of specified goods (e.g. **Pan Masala** manufacturers named in the official FAQ), enacted by the **Ministry of Finance**. **Registration**: Required via **FORM HSNS REG-01** on the **ACES portal**; **deemed approval** applies if the proper officer doesn't act within **7 working days** (Rule 5(3)), with the Registration Certificate issued in **FORM HSNS REG-02**. **Commencement**: Liability and Act commencement effective **1st February 2026** — a genuinely new sin/cess tax instrument, distinct from the GST Compensation Cess retained on pan masala/tobacco above.
15th Finance Commission Horizonal Criteria (N.K. Singh)	**Vertical Devolution**: **41.0%** of central divisible pool. **Horizontal Formula**: Income Distance (**45%**), Population 2011 (**15%**), Area (**15%**), Forest & Ecology (**10%**), Demographic Performance (**12.5%**), Tax Effort (**2.5%**).
India-France Amending Protocol to DTAC	2026 **Amending Protocol** to the India-France **Double Taxation Avoidance Convention (DTAC)** (original signed 1992) signed **23 February 2026** during the French President's India visit. Full **capital-gains taxing rights** now go to the company's resident jurisdiction; the **Most-Favoured-Nation (MFN) clause** is deleted. **Dividend tax** split from a flat 10% to **5%** (holdings ≥10% of capital) / **15%** (all other cases); **'Fees for Technical Services'** definition aligned with the India-US DTAA. Adds **Service PE** to the Permanent Establishment scope, incorporates **BEPS Multilateral Instrument (MLI)** provisions, and adds a new **Article on Assistance in Collection of Taxes**.
Counter-Cyclical Fiscal Policy	Government increases public spending and cuts taxes during recession (to stimulate demand) and tightens spending during economic boom (to prevent overheating and crowding out).

🧾 Union Budget 2022-23 — Direct Tax Reforms (Origin)

2022

• Presented 1 Feb 2022 by FM Nirmala Sitharaman.
• "Updated Return" provision introduced (origin): taxpayers can file an Updated Return within 2 years of the relevant assessment year to voluntarily declare previously missed income — a distinctive compliance-facilitation reform.
• Scheme for taxation of Virtual Digital Assets (VDAs) introduced (origin of India's crypto tax regime): 30% tax on income from transfer of virtual digital assets (crypto, NFTs); no deduction allowed except cost of acquisition; losses cannot be set off against income from any other source; 1% TDS on VDA transfers above a threshold (see the Money & Banking notes for the later ₹511.8 crore TDS-collection figure, retained under the I-T Act 2025); gifts of virtual digital assets also taxed in the recipient's hands.
• Cooperative societies: Alternate Minimum Tax (AMT) reduced from 18.5% to 15%; surcharge reduced from 12% to 7% for income between ₹1 crore-₹10 crore — brings parity with companies.

🧾 Union Budget 2022-23 — States' Fiscal Space & Capex Support

2022

• Presented 1 Feb 2022 by FM Nirmala Sitharaman (see the "Amrit Kaal" Macro & Fiscal snapshot — growth 9.2%, fiscal deficit 6.4% of GDP for 2022-23 — in the National Income notes).
• States to be allowed 4% of GSDP fiscal deficit in 2022-23, of which 0.5% is tied to power-sector reforms.
• ₹1 lakh crore allocated to assist states via 50-year interest-free loans (over and above normal borrowings), to catalyse investment — the origin of the multi-year interest-free capex-loan-to-states scheme continued in later Budgets (see the 2023-24 and 2024-25 Infrastructure notes for its continuation at higher outlays).
• Scheme for Financial Assistance to States for Capital Investment enhanced from ₹10,000 crore (BE) to ₹15,000 crore (RE) for the then-current year.

🧾 Union Budget 2024-25 — Direct & Indirect Tax Changes

2024

• Presented 23 July 2024 by FM Nirmala Sitharaman (see the Macro & Fiscal snapshot for BE 2024-25 figures — total receipts ₹32.07 lakh crore, total expenditure ₹48.21 lakh crore, fiscal deficit 4.9% of GDP — in the National Income notes).
• Capital gains simplified: Short-term gains on certain financial assets taxed at 20%; long-term gains on all financial/non-financial assets taxed at 12.5% (exemption limit raised to ₹1.25 lakh/year).
• Angel tax abolished for all classes of investors, to boost the startup ecosystem.
• Corporate tax rate on foreign companies reduced from 40% to 35%.
• Standard deduction for salaried employees (new tax regime) raised from ₹50,000 to ₹75,000; family pension deduction raised from ₹15,000 to ₹25,000.
• TDS rate on e-commerce operators reduced from 1% to 0.1%.
• 'Vivad Se Vishwas Scheme, 2024' introduced for resolving pending income-tax disputes in appeal.
• NPS employer-contribution deduction increased from 10% to 14% of employee salary.
• Two tax-exemption regimes for charities merged into one.
• STT on futures/options increased to 0.02%/0.1% respectively (contrast with Budget 2026-27's further hike of STT on futures to 0.05%, noted below).
• Indirect tax/customs: 3 cancer drugs (Trastuzumab Deruxtecan, Osimertinib, Durvalumab) fully exempted from customs duty. Mobile phone/PCBA/charger customs duty reduced to 15%. Gold/silver customs duty reduced to 6%, platinum to 6.4%. 25 critical minerals fully exempted from customs duties. Solar cell/panel manufacturing capital goods exempted from customs duty. Equalization levy of 2% withdrawn.

🧾 Union Budget 2025-26 — Fiscal Parameters, Direct Tax & Customs

2025

• Presented 1 Feb 2025 by FM Nirmala Sitharaman — famous as the "₹12 lakh no-tax budget."
• Fiscal parameters: Total receipts (ex-borrowings) ₹34.96 lakh crore; total expenditure ₹50.65 lakh crore; net tax receipts ₹28.37 lakh crore; fiscal deficit 4.4% of GDP; gross market borrowings ₹14.82 lakh crore; Capex ₹11.21 lakh crore (3.1% of GDP).
• Headline direct-tax relief: NO income tax up to ₹12 lakh income under the new regime (₹12.75 lakh for salaried taxpayers, due to ₹75,000 standard deduction) — revenue forgone ~₹1 lakh crore.
• New tax slabs: 0-4 lakh nil, 4-8 lakh 5%, 8-12 lakh 10%, 12-16 lakh 15%, 16-20 lakh 20%, 20-24 lakh 25%, above 24 lakh 30%.
• TDS/TCS relief: TDS threshold for senior-citizen interest doubled from ₹50,000 to ₹1 lakh; TDS on rent threshold raised from ₹2.4 lakh to ₹6 lakh; LRS (Liberalized Remittance Scheme) TCS threshold raised from ₹7 lakh to ₹10 lakh.
• A new, simplified Income-tax Bill was announced (later tabled as the Income-tax Bill 2025, and enacted as the Income-tax Act 2025, effective 1 April 2026).
• Customs/indirect tax: 7 more customs tariff rates removed (in addition to 7 removed in the 2023-24 budget), leaving only 8 remaining tariff rates including zero. 36 lifesaving drugs/medicines fully exempted from Basic Customs Duty (BCD); 6 more lifesaving medicines get concessional 5% duty. Critical minerals (cobalt powder/waste, lithium-ion battery scrap, lead, zinc, +12 more) made fully BCD-exempt. EV battery manufacturing (35 capital goods) and mobile-phone battery manufacturing (28 capital goods) get customs exemptions.

🧾 Union Budget 2026-27 — Framework & Direct Tax

2026

• First Budget prepared in "Kartavya Bhawan", inspired by 3 Kartavyas: (1) accelerate/sustain economic growth, (2) fulfil aspirations of people and build capacity, (3) aligned with the vision of Sabka Sath, Sabka Vikas.
• New Income Tax Act, 2025 to come into effect from 1 April 2026 (simplified rules/forms to be notified); multiplicity of proceedings to be reduced via penalty/prosecution rationalisation.
• Cooperative societies: Deduction for primary cooperative societies extended to cattle feed and cotton seed.
• IT/ITeS Safe Harbour: Single category of IT services with a common safe harbour margin of 15.5%; threshold raised to ₹2,000 Crore (from ₹300 Crore).
• Foreign cloud service providers given a tax holiday till 2047.
• MAT exemption extended to all non-residents paying tax on a presumptive basis.
• STT on futures raised to 0.05% from 0.02%.
• Basic Customs Duty exemptions extended for capital goods used in lithium-ion cell manufacturing and critical minerals processing.

3. FRBM ACT & UNION BUDGET STRUCTURE

Cue Words	Notes
FRBM Act, 2003 — Origins & Objectives	Enacted 2003, effective 5 July 2004. Primary objectives: achieve long-term macroeconomic stability with budget surpluses, introduce prudential debt management, ensure transparent fiscal management, and provide a medium-term budgetary framework.
FRBM Act — Four Core Requirements	Government must place 3 statements with the Budget: Medium Term Fiscal Policy, Fiscal Policy Strategy, Macroeconomic Framework. Mandates reducing fiscal deficit (Rules prescribe 3% of GDP) and eliminating revenue deficit (original deadline: 31 March 2008). Bans the Centre from borrowing from RBI (no deficit financing via money creation); RBI barred from subscribing to primary issues of G-Secs (temporary Ways & Means Advances permitted). FM must table quarterly implementation reviews in Parliament; deviations need Parliamentary approval.
FRBM Amendments Timeline	**Finance Act 2012** (13th FC recommendation): Added a 4th statement — Medium Term Expenditure Framework (MTEF); introduced **Effective Revenue Deficit (ERD)** concept. **Finance Act 2015**: Extended deadlines to 31 March 2018. **2018-19 Budget FRBM restructuring**: Revenue Deficit and ERD dropped as targeted fiscal indicators; **debt-to-GDP** became the primary anchor (per N.K. Singh Committee). **Covid Escape Clause**: Invoked to raise FY20 fiscal deficit target from 3.3% to 3.8% (RE) under Section 4(2)/4(3), citing structural-reform-driven fiscal implications.
N.K. Singh Committee (2017) — Key Recommendations	Proposed debt-to-GDP of 60% as the primary fiscal-policy target (Centre 40%, States 20%), to be achieved by 2023. Recommended an autonomous Fiscal Council (chairperson + 2 members) to prepare multi-year fiscal forecasts, advise on deviations, and monitor compliance. Permitted deviation from targets (max 0.5% of GDP/year) only for national security/calamities, structural reforms, or a ≥3% real-output growth decline below the 4-quarter average.
Union Budget — Revenue Receipts Components	**Tax Revenue**: Corporation Tax, Income Tax, GST (CGST/IGST/Compensation Cess), Customs, Union Excise Duties, UT taxes. **Net Tax Revenue** = Gross Tax Revenue − NCCD (to NCCF) − States' Share. **Non-Tax Revenue**: Interest Receipts, Dividends & Profits (incl. RBI surplus/PSU dividends), External Grants, UT Receipts. **Total Revenue Receipts** = Net Tax Revenue + Total Non-Tax Revenue.
Union Budget — Capital Receipts & Financing	**Non-Debt Capital Receipts**: Recoveries of Loans & Advances, Disinvestment Receipts. **Debt Receipts**: Market Borrowings (G-Sec + T-Bills), Securities against Small Savings, State Provident Funds, External Debt, Other Internal Debt/Public Account receipts. **Financing of Fiscal Deficit** = Debt Receipts + Drawdown of Cash Balance.

4. TAX PRINCIPLES & BUDGETARY PROCEDURE

Cue Words	Notes
Incidence vs Impact of Tax	**Incidence of Tax**: The point where a tax is imposed (the event of imposition). **Impact of Tax**: The point where the tax's burden is actually felt (the after-effect). Direct tax = incidence and impact at the **same point**; Indirect tax = incidence and impact at **different points**.
Progressive, Regressive & Proportional Taxation Methods	**Progressive**: Rate rises with rising value/volume taxed (e.g., Indian income tax) — pro-poor but can dampen higher earnings. **Regressive**: Rate falls as value/volume taxed rises (historically used for small-scale industry excise slabs) — rewards higher producers, criticised as anti-poor. **Proportional**: Fixed rate regardless of level; used as a complementary "cap" so progressive taxes don't spiral up or regressive taxes fall to zero.
Five Principles of a Good Tax System	**Fairness** (horizontal equity: similar taxpayers pay similar tax; vertical equity: better-off pay more), **Efficiency** (least distortion to resource allocation — "double dividend" taxes like pollution/sin taxes raise revenue *and* serve social goals), **Administrative Simplicity** (easy computation/filing/collection; recommended by Chelliah Committee), **Flexibility** (scope for modification), **Transparency** (taxpayers can see what they pay vs. public services received).
Collection Rate & Tax Expenditure	**Collection Rate**: Ratio of actual revenue collected (customs/CVD/SAD) to aggregate import value — a trade-weighted effective tariff distinct from nominal/statutory rates; gap reflects exemptions. **Tax Expenditure**: Revenue foregone due to exemptions/deductions (e.g., accelerated depreciation, SEZ export profit deductions, Sec 80C) — the divergence between official and effective tax rates.
Golden Rule of Public Finance	Government should borrow only to invest (capital/plan expenditure), never to finance current spending (revenue expenditure) — valid only if the "investment" label is honest and doesn't crowd out private investment.
Balanced Budget	Total public-sector spending equals total revenue receipts (taxes + service charges) in the same period — equivalently, a budget with zero revenue deficit.
Charged Expenditure (Art 112(3) & Art 113)	Expenditure "charged" on the Consolidated Fund of India — beyond the voting power of Parliament, directly withdrawn without an Appropriation Bill vote (only discussed, not voted). Covers emoluments of the President, Speaker/Deputy Speaker (Lok Sabha), Chairman/Deputy Chairman (Rajya Sabha), and Judges of the Supreme Court/High Courts. Contrast with Voted Expenditure (rest of the Budget, requires Parliamentary vote via Demands for Grants under Art 113).
Cut Motion — Four Types (Art 113)	**Token Cut**: Reduces a demand by ₹100 (symbolic disapproval of a specific policy detail). **Economy Cut**: Reduces a demand by a specified amount (opposing wasteful expenditure). **Disapproval of Policy Cut**: Reduces a demand to ₹1 (rejects the underlying policy entirely). **Guillotine**: Undiscussed demands are directly put to vote at the end of allotted time — most radical form; can effectively become a confidence test (never triggered a government fall in India).
Zero-Base Budgeting (ZBB)	Originated in US private sector (1960s, Peter Phyrr); first applied to a national budget by President Jimmy Carter (1979). Each agency justifies its entire budget from a hypothetical "zero base" every cycle (not just incremental changes), answering: Should we spend? How much? Where? Key limitation: Charged Expenditure is outside Parliament's/ZBB's scrutiny power.
Article 292 — Union Borrowing Limit	Empowers Parliament to impose a statutory limit on the Centre's borrowing power; the provision exists but has never been invoked/mandated by any government — a key gap the FRBM Act (2003) was designed to functionally fill.

5. GLOSSARY: BUDGETING TOOLS, TAX-SIDE EFFECTS & SUB-NATIONAL FINANCE

Cue Words	Notes
Outcome Budget	A budget document (introduced for Union ministries from FY 2006-07) that measures the physical/development outcomes of expenditure — not just outlays sanctioned — linking money spent by each ministry to results delivered, coordinated jointly by the Finance Ministry and the erstwhile Planning Commission.
Fiscal Drag & Fiscal Neutrality	**Fiscal Drag**: the restraining effect progressive taxation has on demand — as incomes rise with inflation, people move into higher tax brackets (also called **Bracket Creep**), depressing real disposable income and total demand; governments offset this by raising personal tax allowances. **Fiscal Neutrality**: a policy stance where the net effect of taxation and public spending is neither expansionary nor contractionary (e.g., a strictly balanced budget).
Crowding-Out Effect	Public-finance concept: a rise in government expenditure (financed by borrowing) pushes up interest rates/absorbs loanable funds, thereby reducing private-sector investment expenditure.
Stealth Tax & Withholding Tax	**Stealth Tax**: an obscure tax hike (e.g., stamp duty, property tax) implemented quietly so it fades from public memory before backlash. **Withholding Tax**: tax deducted on income from foreign portfolio investment — discourages foreign inflows, nudges domestic investment, and raises government revenue.
Assigned Revenue	Tax/duty/cess/surcharge proceeds (e.g., entertainment tax, stamp-duty surcharge, land-revenue cess, mining lease amounts) traditionally collected by the State Government on behalf of Panchayati Raj Institutions/local bodies and subsequently devolved to them — devolution criteria recommended by State Finance Commissions.
Debt Swap Scheme (2003) & States' Market Borrowing	**Debt Swap Scheme**: allowed states to prepay high-cost (≥13%) Central Plan loans from the 1990s using lower-cost fresh debt (small savings via NSSF + market borrowings), cutting debt-servicing cost without changing total debt stock. **States' Market Borrowing**: post-1990s shift from RBI-managed, pre-determined-rate "tap issues" to auction-based market borrowing; Twelfth Finance Commission delinked the 70:30 loan-grant Plan-assistance ratio, pushing states toward independent, credit-rating-linked market access.

6. BUDGET TYPES, PARLIAMENTARY PROCEDURE & FINANCE COMMISSION GRANT MECHANICS

Cue Words	Notes
Full Budget vs Interim Budget vs Vote-on-Account	**Full Budget**: Complete receipts/expenditure estimate for the entire financial year. **Interim Budget**: In an election year, a complete set of accounts (both receipts and expenditure) but only for part of the year — no constitutional obligation, purely a political convention. **Vote-on-Account**: Covers only the **expenditure side**; Lok Sabha grants an advance sum (typically 2 months, ~1/6th of estimated annual expenditure) pending full Appropriation Bill passage.
Budget Procedure — DRSCs, Guillotine & Bill Sequence	**Detailed Discussion**: Ministry-wise Demands for Grants examined by **24 Departmentally Related Standing Committees (DRSCs)** (~100 ministries, ~5 ministries per DRSC) before Lok Sabha votes; Rajya Sabha only holds General Discussion, does not vote on Demands for Grants. **Guillotine**: On the last allotted day, Speaker puts all undiscussed Demands for Grants directly to vote — concludes discussion without ministry-by-ministry debate. **Appropriation Bill (Art 114)**: Authorises withdrawal from CFI after Demands for Grants are voted. **Finance Bill (Art 110)**: Gives effect to tax proposals, introduced same day as the Budget, must be passed within **75 days**; fresh/varied duty rates take effect immediately via the Provisional Collection of Taxes Act, 1931. Both are Money Bills — Rajya Sabha recommendations are optional for Lok Sabha. **Supplementary Demand for Grants**: Presented *before* the financial year ends, when sanctioned funds prove insufficient or a new service arises. **Demand for Excess Grants**: Presented *after* the year ends, once CAG's Appropriation Accounts report flags actual overspend; examined by the Public Accounts Committee.
Gender Budget Statement (since 2005-06) — Two Parts	**Part A**: Schemes with 100% allocation for women (Beti Bachao Beti Padhao, Ujjawala, Mahila Shakti Kendra, Anganwadi). **Part B**: Schemes allocating ≥30% of funds for women (Mid-Day Meal, PM POSHAN).
Fiscal Council — Rationale, For & Against	**Rationale**: Chronic tendency to overstate GDP/revenue and understate expenditure, off-budget financing (e.g., FCI borrowing from NSSF for food subsidy), and CAG's purely *ex-post* audit role (no forecasting/verification function) motivate an independent forecasting body; XIV FC recommended one. ~50 countries (per IMF) have fiscal councils. **For**: Better-anchored budget forecasts, "comply-or-explain" discipline on lawmakers, informed parliamentary debate. **Against**: NSO/RBI already publish forecasts — a fiscal council's estimates aren't inherently more credible; risks diluting the Finance Ministry's own accountability by letting it blame an external body if projections go wrong.
Finance Commission Grants-in-Aid (Art 275) — Five Categories (XV FC)	**Revenue Deficit Grants**: Post-devolution top-up for states still in deficit (17 states in 2021-22, down to 6 by 2025-26) — calibrated to avoid rewarding poor revenue effort/excess spending. **Local Body Grants**: ₹4,36,361 crore over 5 years to Panchayats/ULBs — 60% earmarked (drinking water, sanitation), 40% untied; rural:urban inter-se ratio shifting from 67.5:32.5 toward 65:35 (90% population/10% area weighted). **Disaster Management Grants**: Centre:State funding ratio 75:25 (90:10 for NE states); State Disaster Risk Management Fund split 80% SDRF : 20% SDMF (mitigation). **Sector-Specific Grants**: Performance-linked, covering health, school/higher education, judiciary, statistics, PMGSY road maintenance, agricultural reforms (land-lease, water-use efficiency, export promotion, oilseeds/pulses self-reliance), and Aspirational Districts/Blocks. **State-Specific Grants**: Tailored to individual state needs outside the above categories.
Faceless Assessment/Appeal & Taxpayers' Charter	**Faceless Assessment/Appeal**: Cases/appeals randomly computer-allotted across the country; officer identity concealed; no physical taxpayer-official interface — replaces the earlier face-to-face scrutiny regime prone to harassment (Income Tax Act 1961 amended to enable this). **Taxpayers' Charter**: Two-way statutory commitment — Department promises fair/courteous treatment, timely decisions, privacy, and appeal mechanisms; taxpayer is obligated to be honest, keep accurate records, and respond/pay on time.
RoDTEP & GST Composition Levy	**RoDTEP** (2021, WTO-compliant replacement for MEIS): Refunds embedded taxes/duties (VAT on transport fuel, mandi tax, electricity duty) that survive outside GST and aren't otherwise creditable on exports — credited to exporters' customs ledger against future Basic Customs Duty. **Composition Levy**: Optional flat-rate GST scheme for small taxpayers (goods: turnover ≤₹1.5 crore, pay 1% flat; services: turnover ≤₹50 lakh, pay 6%) — no Input Tax Credit, simplifies compliance for MSMEs. **GST Compensation Cess extension**: Though the 5-year compensation guarantee (2017-22) ended, the Cess itself continues till **31 March 2026** solely to repay the principal/interest on the Covid-period back-to-back loan Centre extended to states (not a fresh 5-year compensation cycle).

7. GLOSSARY: FISCAL STANCE, TAX-BASE & GST PROCEDURAL TERMS

Cue Words	Notes
Fiscal Dominance	Central bank uses its monetary tools to support government-security prices and hold interest rates low, cutting the government's debt-servicing cost — implies fiscal considerations constrain independent, prudent monetary policy.
Fiscal Slippage	Missing budgeted fiscal targets — expenditure, receipts, or deficit — relative to what was announced in the Budget.
Tax Base	Total value of income/assets/transactions on which a tax can be imposed (e.g., taxable income for income tax, value of services for service tax/GST); lowering the exemption threshold widens the base, raising it narrows the base.
Tax Elasticity	Ratio of % change in tax revenue to % change in the tax rate — measures how responsive collections are to a rate change (distinct from Tax Buoyancy, which measures responsiveness to GDP growth).
Revenue Neutral Rate (RNR), under GST	The tax rate at which revenue collected under a new tax regime equals what was collected under the previous regime — new GST rate slabs are calibrated around this benchmark so the reform doesn't erode government revenue.

8. FUNDAMENTALS CHECK — DIRECT/INDIRECT TAX, BUDGET TYPES & GST STRUCTURE

Cue Words	Notes
Direct Tax — Basic Definition & Examples	Levied directly on the income/wealth of a person or entity; **liability and burden fall on the same person** (cannot be shifted). **Examples**: Income Tax, Corporate Tax, Capital Gains Tax.
Indirect Tax — Basic Definition & Examples	Levied on goods/services; collected by an intermediary (seller) from the consumer, so the **burden can be shifted** to another party. **Examples**: GST, Customs Duty, Excise Duty (on the few items still outside GST).
Revenue Budget vs Capital Budget	**Revenue Budget**: Comprises Revenue Receipts (tax + non-tax, no matching liability/asset created) and Revenue Expenditure (routine running costs — salaries, interest, subsidies) — does not create or reduce government assets/liabilities. **Capital Budget**: Comprises Capital Receipts (loans, disinvestment — create liability or reduce assets) and Capital Expenditure (asset creation — roads, buildings, loans given) — builds or liquidates long-term assets/liabilities.
GST — CGST / SGST / IGST Structure	**CGST (Central GST)**: Levied by the Centre on intra-state (within one state) supply of goods/services. **SGST (State GST)**: Levied by the State Government on the same intra-state supply, simultaneously with CGST. **IGST (Integrated GST)**: Levied by the Centre on inter-state supply and imports; collected amount is apportioned between Centre and destination State (Art 269A).

9. TAXATION TYPES, IMPACT vs INCIDENCE & RESIDENCE-BASED TAXATION

Cue Words	Notes
Three Taxation Types (source formulation)	**Progressive**: taxes based on the taxable income of the individual — rate increasing with income. **Regressive**: low-income individuals pay a higher share of their incomes compared to high-income earners. Government assesses tax as a **% of the value of the asset the taxpayer owns**; the tax *rate* itself does not decrease for the low-income person — the tax has **no correlation with the individual's income**. **Proportional**: flat tax system — same tax rate on everyone regardless of income or wealth.
Impact vs Incidence of Tax (⚠ conflicting definitions)	**Per this source**: **Impact of Tax** = the *original imposition point* of the tax — on whom it is *first* imposed. **Incidence of Tax** = where the tax *finally settles* — on the one who actually bears it. *(Note: this is the reverse of the mapping given in Section 4 above, which labels "Incidence" as the point of imposition and "Impact" as where the burden is felt. The formulation in this row — Impact = imposition, Incidence = final resting place — is the standard public-finance usage; treat Section 4's labelling as the alternative/older series wording.)*
Residence-Based Taxation	**Resident Indian Citizen** → Income tax applies to **worldwide income**. **NRI** → Income tax applies **only to income earned from within India**.

10. UNION BUDGET — RECEIPTS & EXPENDITURE COMPOSITION

Cue Words	Notes
Budget Expenditure — Major Heads (older series figures)	Salary and Pension — **₹3.1 lakh crore** | Interest payment — **₹6.6 lakh crore** | Capital Expenditure — **₹3 lakh crore** | Explicit subsidies — **₹3.5 lakh crore**. **Interest Payment has the highest share** of budget expenditure. *(Figures are from an older Budget series — retained for the relative ordering; current-year absolute numbers differ.)*
Budget Receipts — Descending Order (older series)	**Borrowings & Other Liabilities > Corporate Income Tax > GST > Personal Income Tax.**

11. INDIA'S TAX REVENUE PROFILE & TAXES NOT SUBSUMED UNDER GST

Cue Words	Notes
Composition of Gross Tax Revenue	Source: Union Budget Documents & CGA. **GTR** = Gross Tax Revenue; **CIT** = Corporation Tax; **ToI** = Taxes on Income other than Corporation Tax (includes **STT**); **C** = Customs; **UED** = Union Excise Duties; **GST** = Goods and Services Tax. **Direct Tax > Indirect Tax** in India's tax mix. **Corporate Income Tax (CIT) = largest single source of revenue** (per this older series; in later years personal income tax collections have overtaken corporation tax).
GST as a Destination-Based Tax	GST is a destination-based tax ⇒ in inter-state transactions, manufacturing states lose and consuming states gain.
Taxes NOT Subsumed Under GST	**Customs Duty**; **Anti-dumping duty**; **Central excise on petroleum products**; **VAT on alcohol** (states still levy this); **Real Estate**; **Electricity**; **Stamp Duty**; **Property tax** (levied by local bodies); etc.

12. POST-GST TAX STRUCTURE, ZERO-RATING & RESIDUAL CASCADING

Cue Words	Notes
GST Slabs (older 4-slab structure)	GST levied on every product except petroleum products, alcohol, real estate and electricity, in 4 slabs — 5%, 12%, 18%, 28%. (Per older series; superseded by GST 2.0 of 3 Sep 2025, which collapsed the structure into two primary slabs of 5% and 18% plus a 40% de-merit rate — see Section 2.)
Zero-Rated Exports	**No GST on exports** ⇒ hence called **zero rated**. Mechanism: first taxes are imposed, and then the government **credits back all taxes**.
IGST Coverage	**Exports, Imports & Interstate supplies ⇒ IGST is levied.**
Residual Cascading via Customs	**Customs Duty is still levied on imports ⇒ some cascading effect remains**, since customs duty is imposed first and then **IGST is imposed on top of it**.

13. GST COMPENSATION CESS & THE GST COUNCIL

Cue Words	Notes
Compensation Cess — Basis	Collected on "sin" and luxury goods. To provide relief to states for loss of revenue (2015-16 as base year) from the promised 14% growth.
Compensation Cess — Year-wise Compensation Schedule	Year since GST implementation → % of revenue loss to be compensated: **1st year — 100%** | **2nd year — 100%** | **3rd year — 100%** | **4th year — 75%** | **5th year — 50%**. *(Per older series; the compensation arrangement lapsed in 2022 and the Cess itself was scrapped on nearly all goods from 22 Sep 2025 — see Sections 2 and 6.)*
Compensation Cess — Fund Routing	Flows into the **Consolidated Fund of India** and is then transferred to the **Public Account of India**, where a separate **GST compensation cess account** has been created. **States are compensated bi-monthly** from these funds.
GST Council — Composition & Voting	**Constitutional body (Article 279A)** ⇒ makes recommendations to the Union and State governments on GST issues. **Chairman — Finance Minister**. Decisions taken by **75% majority**; weightage: **Centre 1/3rd, States 2/3rd**.

🧾 GST 2.0 — Next-Generation GST Reforms (56th GST Council Meeting)

2025

Cue Words	Notes
Announcement & Structural Change	Announced by PM Modi from the **Red Fort on 15 August 2025**; formally recommended by the **GST Council (56th meeting), chaired by FM Nirmala Sitharaman, on 3 September 2025**. Rationalised the previous **4-tier structure (5%/12%/18%/28%)** into a simplified **2-rate structure**: **Standard Rate 18%** and **Merit Rate 5%**, plus a **special de-merit rate of 40%** for select luxury/sin goods and services. GST rate changes on **services took effect from 22 September 2025**.
Insurance — Full Exemption	GST **exempted entirely** on all **individual life insurance** policies (term life, ULIP, endowment) and all **individual health insurance** policies (including family floater and senior citizen policies), plus their **reinsurance**. Aimed at making insurance affordable and boosting coverage.
Common-Man Items & Food	**18%/12% → 5%**: Hair oil, soap bars, shampoo, toothbrushes, toothpaste, bicycles, tableware/kitchenware. **Nil rate**: UHT milk, pre-packaged paneer/chena (from 5%); all Indian breads — chapati, roti, paratha, parotta. **12%/18% → 5%**: Packaged namkeens, sauces, pasta, instant noodles, chocolates, coffee, butter, ghee.
Consumer Durables, Autos & Agriculture	**28% → 18%**: ACs, TVs (all sizes, incl. >32 inch), dishwashers, small cars, motorcycles ≤350cc, buses/trucks/ambulances, three-wheelers. **Uniform 18%** on all auto parts regardless of HS code. **12% → 5%**: Tractors and agricultural/horticultural/forestry machinery (soil prep, harvesting, threshing, balers, mowers).
Healthcare	**33 lifesaving drugs**: 12% → **nil**; **3 lifesaving cancer/rare-disease drugs**: 5% → **nil**. All other drugs/medicines: 12% → **5%**; medical devices/apparatus: 18% → **5%**; medical supplies (bandages, diagnostic kits, glucometers): 12% → **5%**.
Industry Inputs & Services	**Cement**: 28% → **18%**. Inverted duty structure corrected in **man-made textiles** (manmade fibre 18%→5%, manmade yarn 12%→5%) and **fertilizers** (Sulphuric acid/Nitric acid/Ammonia 18%→5%). Renewable energy devices & manufacturing parts: 12% → **5%**; labour-intensive goods (handicrafts, marble/granite blocks, intermediate leather goods): 12% → **5%**. **Hotel accommodation ≤₹7,500/day**: 12% → **5%**; **beauty/wellness services** (gyms, salons, barbers, yoga centres): 18% → **5%**.
Institutional & Administrative	**GSTAT** recommended for operationalization — appeals acceptance to begin **before end of September 2025**, hearings to commence **before end of December 2025**. GST now levied on **Retail Sale Price (RSP)** instead of transaction value for **Pan Masala, Gutkha, Cigarettes, unmanufactured/chewing tobacco (e.g., Zarda)**.

14. GST OPERATIONAL MACHINERY — E-WAY BILL, GSTN, GSTAT, COMPOSITION SCHEME

Cue Words	Notes
E-Way Bill	Document required to be carried during conveyance of goods worth more than ₹50,000 for sales beyond 10 km in the GST regime.
National Anti-profiteering Authority (NAPA) & Reverse Charge Mechanism	**Reverse Charge Mechanism** ⇒ introduced to **widen the scope of levy of taxes on unorganised sectors**; the liability to pay tax is on the **receiver (not the supplier)** in certain categories of goods.
GST Network (GSTN)	**Restructured into a 100% government-owned entity (50% Centre, 50% States)**. Earlier it was a **non-government entity**.
National Bench of the GST Appellate Tribunal (GSTAT)	Will expedite resolution of disputes under GST laws and prevent unwarranted delays in future. **Forum for the 2nd appeal** in GST laws, and the **first common forum for Centre and States**. **Situated in New Delhi**.
Composition Scheme	Those with turnover < ₹1.5 crore can directly pay GST on turnover (will not get Input Tax Credit) ⇒ less paperwork and simpler compliance.
GST on Chit Funds & Merchanting Trade	**GST is levied on Chit Funds.** **Merchanting Trade** (buyer from one foreign country, seller from another foreign country, intermediary Indian) is **exempt from GST**.

15. PRE-GST TAX ARCHITECTURE & THE CASCADING PROBLEM

Cue Words	Notes
Central Taxes Before GST	**Customs Duty** — on imports and exports (exempted for exports mostly). **Service Tax** — on services. **Central Sales Tax** — on interstate transactions (**collected by the origin state**).
State Taxes Before GST — VAT and the Sales Tax Repeal	**VAT replaced Sales Tax in 2005**. Sales tax was levied on **intrastate** transactions. Sales Tax was repealed because it created a **cascading effect of taxes** (the *effective* tax rate was higher than the *official* tax rate), since tax was levied on the **selling price of each seller**. **VAT is levied on the value addition of each seller ⇒ no cascading effect at state level.** Other state levies: **Luxury Tax, Entertainment Tax, Entry Tax, Stamp Duty**; **Property Tax** — while *holding* real estate, levied by local bodies; **Capital Gains Tax** — when real estate is *sold*.
Two Challenges Before GST	**(1)** Centre imposed its own taxes (excise, service tax, Central sales tax) while States imposed VAT ⇒ **cascading effect**. Even after VAT the problem persisted because the Centre levied excise and customs duty **at the production stage** while States levied VAT **at the destination stage**. **(2)** In **interstate transactions, VAT was not creditable across states**. **So GST was brought in** — it is itself a Value Added Tax, **levied once and later split between Centre and State ⇒ no cascading effect**.

16. BUDGET TYPES — OUTCOME, PERFORMANCE, ZERO-BASED & GENDER BUDGETING

Cue Words	Notes
Outcome Budget vs Performance Budget (scale contrast)	**Outcome Budget**: presented by **different departments of a ministry or government**; a **micro-level** process related to separate departments and ministries. **Many outcome budgets sit inside one performance budget.** **Performance Budget**: presented by the **Ministry of Finance on behalf of the government**; a **macro-level** process involving the whole government machinery.
Zero Based Budgeting — Core Idea	**All expenses are evaluated each time a budget is made** and expenses must be **justified for each new period**. Starts from a **zero base**; then every function is analysed on its **needs and cost**.
Gender Budgeting, 2005	**Budgeting for gender equity** — adopted in 2005.

17. 15th FINANCE COMMISSION — DIVISIBLE POOL, CRITERIA & GRANT CATEGORIES

Cue Words	Notes
15th FC — Administration & Tenure	Recommendations of the Finance Commission are **implemented by the Department of Expenditure, Ministry of Finance**. **Chairman — N.K. Singh.** **Tenure increased to 6 years**: for **2020-21** ⇒ report in February; for **2021-26** ⇒ report in October 2020.
Divisible Pool — Exclusions	The divisible pool excludes: cost of collecting taxes; cess & surcharge (including GST compensation cess); tax revenue of UTs; transfers from the National Calamity Contingency Fund (NCCD) & NDRF.
Devolution Criteria — 14th FC vs 15th FC (2020-21)	**Income Distance**: 14th FC **50.0** | 15th FC **45.0** **Population (1971)**: 14th FC **17.5** | 15th FC **—** **Population (2011)**: 14th FC **10.0** | 15th FC **15.0** **Area**: 14th FC **15.0** | 15th FC **15.0** **Forest Cover**: 14th FC **7.5** | 15th FC **—** **Forest and Ecology**: 14th FC **—** | 15th FC **10.0** **Demographic Performance**: 14th FC **—** | 15th FC **12.5** **Tax Effort**: 14th FC **—** | 15th FC **2.5** *(14th FC period 2015-20; 15th FC column is the 2020-21 award. Both superseded for 2026-31 by the 16th FC criteria in the fact sheet above.)*
What Each 15th FC Criterion Measures	**Income Distance (45%)** — gap between the per capita income of that state and the **highest per capita income (HARYANA)**. **Population 2011 (15%)**; **Area (15%)**. **Demographic Performance (12.5%)** — introduced since 1971 population was removed as a criterion; based on **TFR of the state**. **Forest & Ecology (10%)** — **dense forest share** of the state. **Tax Effort (2.5%)** — higher **tax collection efficiency** is rewarded.
15th FC — Types of Grants-in-Aid (interim/2020-21 detail)	**Revenue Deficit Grants** — if states didn't get the revenue they expected (e.g., GST compensation). **Grant to Local Bodies** — **4.31% of the divisible pool (₹90,000 crore)**, rural:urban = **67.5 : 32.5**. *(2020-21 interim figure; superseded by the ₹4,36,361 crore 5-year award noted in Section 6.)* **Disaster Management Grants** — **Mitigation (20%) & Response (80%)**; **National Disaster Risk Management Fund (NDRMF)** covers **both** disaster response and mitigation. **Sector Specific Grants** — for 2020-21: **Nutrition ₹7,000 crore**. In the final report, grants provided for **health, pre-primary, education, judiciary, rural connectivity, housing, railways, statistics and police training**. **Performance Grants** — to be present in the final report: **agri reforms, development of Aspirational Districts, power sector reforms, education, enhancing exports, tourism**, etc. **State Specific Grants** — **Karnataka, Mizoram and Telangana ⇒ ₹6,000 crore**, since the sum of devolution and revenue deficit grant was estimated to decline for these 3 states in 2020-21.

18. DIRECT TAX MISCELLANY — EQUALISATION LEVY, BUYBACK TAX, CAPITAL GAINS, ANGEL TAX

Cue Words	Notes
Google Tax / Equalisation Levy — Statutory Basis	Under the **Finance Act, 2016** — **6% for B2B transactions**. Under the **Finance Act, 2020** — new equalisation levy of **2% on the revenue of e-commerce operators** who sold **more than ₹2 crore** of goods & services and who **do not have a tangible presence in India** (B2C). Applies to payments for **online ads** made by Indian business entities to non-residents (Google, Yahoo, Twitter, FB) where the **aggregate payment in a financial year to a non-resident exceeds ₹1 lakh** ⇒ charged at **6%**. **India became the first country to impose an equalisation levy** ⇒ hence "Google Tax". Imposed on **Revenue, NOT profit** (estimating profit for a firm like Amazon would be hard). The **foreign firm will not get tax credit in its home country** for the equalisation levy paid in India, since that income is not subjected to income tax.
Buyback Tax	Government proposed to tax **buyback of shares by companies at 20%**. **Buyback** = scheme by which a company repurchases a certain amount of its outstanding shares ⇒ companies used this route to **avoid paying DDT**. *(Per older series — a Budget 2019 proposal; DDT itself was abolished in 2020 and buyback taxation has since been restructured.)*
Capital Gains Tax — Holding Period Split	**Direct tax** that applies on sale of **all assets if a profit has been made** ⇒ tax on the gains one gets by selling assets. **Short Term Capital Gain** — if the asset is sold **within 36 months** of owning it. **Long Term Capital Gain** — if sold **after 36 months**. *(Per older series; holding-period thresholds have since been revised and differ by asset class.)*
Angel Tax — Rationale & Exemptions	Levied on angel investments **more than the fair market valuation of the company** — objective is **to check money laundering**. **Exemptions**: startups/companies with **turnover < ₹100 crore** and **less than 10 years old**.
Infrastructure Debt Fund — Tax Status	**IDF income is exempt from Income Tax.** Bonds floated by an IDF can be subscribed in **$ or ₹**.

19. INTERNATIONAL TAXATION — BEPS/MLI, TIEA, ADVANCE RULING & TRANSFER PRICING

Cue Words	Notes
BEPS & the MLI	India ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) of the OECD/G-20.
Tax Information Exchange Agreement (TIEA)	India **notified a TIEA with the Marshall Islands**. **TIEAs are non-binding agreements.** Provide for **tax transparency and sharing of information twice a year**. A country **can undertake tax examination in the other country**.
Advance Ruling (AAR / AAAR)	**Written interpretation of tax laws** issued by tax authorities to corporations and individuals who **request clarification**. **Binding ruling** given by the **Authority for Advance Ruling (AAR)** and the **Appellate AAR (AAAR)**, constituted under the **State GST Act**. **AAR and AAAR have the powers of a Civil Court.**
Advance Pricing Agreement / Transfer Pricing	Agreement between taxpayer and tax authority fixing the transfer pricing methodology to decide the pricing of future international transactions of the taxpayer. Provides tax certainty to MNCs and is in line with the government's commitment towards a non-adversarial tax regime.

20. CESS & SURCHARGE — CONSTITUTIONAL BASIS & FUND ROUTING

Cue Words	Notes
Surcharge — Articles 270 & 271	**Discussed in Art 270 & Art 271.** An **increase in any of the taxes** ⇒ i.e., a **tax on tax**. **Whole proceeds of a surcharge form part of the Consolidated Fund of India.** **Surcharge cannot ordinarily be imposed over and above GST.** **Unlike a Cess**, there is **no need to stipulate the purpose at the time of levy** ⇒ the Union can utilise it whichever way it deems fit.

🧾 Pradhan Mantri Swasthya Suraksha Nidhi (PMSSN) — Cabinet Approval

2021

• Cabinet approved creation of the Pradhan Mantri Swasthya Suraksha Nidhi (PMSSN), a single non-lapsable reserve fund for Health in the Public Account, funded by the health-share of proceeds from the Health and Education Cess (levied under Section 136-B of the Finance Act, 2007).
• Key feature: proceeds credited to PMSSN do not lapse at year-end — a major departure from typical budget allocations.
• Funds flagship MoHFW schemes: Ayushman Bharat-PMJAY, Ayushman Bharat Health & Wellness Centres, National Health Mission, Pradhan Mantri Swasthya Suraksha Yojana (PMSSY), emergency/disaster health-response preparedness, and any future SDG/National Health Policy 2017-aligned programme.
• Ministry of Health & Family Welfare administers/maintains the fund; in any financial year, scheme expenditure is first drawn from PMSSN, then supplemented by Gross Budgetary Support (GBS).
• Background: the Health and Education Cess (4%, replacing the earlier 3% Education Cess) was announced in the 2018 Budget speech alongside the Ayushman Bharat scheme announcement.
• Cited economic rationale: one extra year of population life expectancy raises GDP per capita by ~4%; health investment creates jobs (especially for women) via health-workforce expansion.

21. FRBM ESCAPE CLAUSE, TWIN DEFICIT & FISCAL BEHAVIOUR CONCEPTS

Cue Words	Notes
FRBM, 2003 — Escape Clause Mechanics	The **term "escape clause" is NOT mentioned in the FRBM Act** itself. The FRBM Act provides **4 grounds for the Centre triggering the escape clause**: **National security | National calamity | Collapse of Agriculture | Structural reforms**. **States can also use the Escape Clause**, but **FRBM has not well defined the escape clause for states**. **Buoyancy Clause** — to be invoked if there is a **sharp decline in real output growth of 3 percentage points below the average of the previous 4 quarters** ⇒ the government can then **exceed Fiscal Deficit targets**.
Twin Deficit	When a nation has **both a Current Account Deficit and a Budget Deficit** — importing more than exporting **plus** spending more than generating. **In the long run ⇒ the nation's currency devalues.**
Ricardian Equivalence	In the face of high deficits, people save more. Argues that taxation and borrowing are equivalent means of financing expenditure: government borrows today ⇒ it will be repaid by taxes tomorrow, which is the same as government expenditure financed by a tax increase today.
Fiscal Performance Index	By CII (Confederation of Indian Industry) ⇒ assesses the quality of budgets presented by states and the Centre.

22. PUBLIC DEBT, WMA, CMB & GOVERNMENT ACCOUNT MECHANICS

Cue Words	Notes
Government Debt — Roll Over Risk	**Roll Over Risk** = risk associated with **refinancing of debt** ⇒ interest charged on the new loan will be higher than on the old. **Shorter-term debt ⇒ greater borrower's rollover risk.** Thus the Government **consciously issued 70% of total securities during 2018-19 in the maturity bracket of >10 years**, since **elongating maturity reduces rollover risk**.
Ways and Means Advances (WMA)	RBI gives **temporary loan facilities to the Centre and State governments** under WMA. **Introduced in 1997** (before that, **ad-hoc T-Bills** were used). Loan for **3 months / 90 days**, charged at the **Repo Rate**; if extended beyond 90 days it is treated as an **overdraft** (interest rate **2% higher**, and permitted for a **maximum of 10 consecutive days** only). **Limits for WMA are mutually decided by Government and RBI** (were increased by **60% due to COVID-19**).
Cash Management Bills (CMBs) vs WMA	Issued by the government to meet **temporary cash-flow mismatches** — similar function to Ways & Means Advances, but: **WMA is a loan facility (not tradeable)** | **CMBs are bonds (tradeable)**. **WMA is for both Centre + States** | **CMBs are only for the Centre**. **Non-standard, discounted instruments with maturity < 91 days** ⇒ issued at a discount and redeemed at face value on maturity. **Eligible as G-Sec for SLR purposes.**
T-Bills & the Consolidated Fund	Treasury Bill proceeds are **credited to the Consolidated Fund of India (NOT the Public Account)**. **Short-term liquidity instrument — up to 364 days**; the government issues **bonds** when it needs long-term money (e.g., 5 years).
Market Stabilisation Scheme — Account Treatment	**Amount raised under MSS does NOT get credited to the Government account.** It is maintained in a **separate cash account with RBI**, used only for **buyback of T-Bills / dated securities issued under the scheme**.
Consolidated Sinking Fund (CSF)	Set up in **1999-2000 by RBI** to meet **redemption of market loans of states**. **Maintained in the Public Account of the state (outside the Consolidated Fund of the state)** ⇒ **NOT used for any other purpose**. **State government contributes 1-3% of outstanding market loans to the CSF each year.**

23. DISINVESTMENT, NATIONAL INVESTMENT FUND & PRIVATISATION

Cue Words	Notes
Minority Stake Disinvestment — Routes	**IPO**; **FPO (Follow-on Public Offering)**; **Offer for Sale**. **CPSE Exchange Traded Fund (ETF)** — government can divest its stake in various PSUs across diverse sectors through a **single offering**. **Cross Holdings** — one listed PSU takes up the government's stake in another listed PSU.
Majority Stake Disinvestment — Strategic Sale & Alternative Mechanism	**Strategic Sale** — sale of a substantial portion of government holding **+ management control** (strategic disinvestment). PSUs identified **jointly by DIPAM & NITI Aayog** ⇒ proceeds go into the **NIF**, professionally managed to provide sustainable returns to government **without depleting the corpus**. **Alternative Mechanism** — panel **headed by the Finance Minister** ⇒ to speed up the strategic disinvestment process. **Privatization** — **entire shareholding divested to a private entity + management control**.
National Investment Fund (NIF)	**Established in 2005** ⇒ **all disinvestment funds go here**. A **fund of permanent nature**, professionally managed by some **public sector Mutual Funds**, to provide sustainable returns to government; the **corpus should not be depleted**. **Maintained outside the Consolidated Fund of India ⇒ in the Public Account.** **Earlier split**: **75%** used for social sector schemes; **25%** for capital investment requirements of **revivable PSUs**. **In 2013 these restrictions were relaxed**: disinvestment proceeds would go into the **"Public Account"**, and NIF could then be used for — purchasing shares of CPSEs to **maintain 51% ownership**; **recapitalisation of PSBs**; investment by Government in **RRBs / IIFCL / NABARD / EXIM Bank**; **equity infusion in Metro projects**; investment in **Bhartiya Nabhikiya Vidyut Nigam Ltd and Uranium Corporation of India Ltd**; **investment in Railways towards capital expenditure**.
NITI Aayog's PSU Classification for Disinvestment	**NITI Aayog identifies PSUs for strategic disinvestment** and has classified PSUs into **high priority** and **low priority** (the latter for disinvestment), based on — **National Security**; **Sovereign Function at Arm's length**; **Market imperfections and public purpose**.

24. SUBSIDIES — FARM, FERTILISER & FOOD SUBSIDY MECHANICS

Cue Words	Notes
Farm Subsidies — Direct vs Indirect	**Direct Subsidies** — direct cash incentives paid to the farmer to make the product more competitive in global markets ⇒ provide the right amount of **purchasing power** to the farmer. **Indirect Subsidies** — provided in the form of **cheap credit facilities, farm loan waivers, fertilizer and seeds subsidy, reduction in electricity bills**, etc.
Subsidy Ranking & Fertiliser Subsidy	**Subsidy size: Food > Fertiliser > Fuel.** **Fertilizer subsidy is the 2nd largest subsidy after food** ⇒ started in **1977** (no fertiliser subsidy before 1977). **Nutrient Based Subsidy** — fixed rate of subsidy (**₹ per kg**) on each nutrient of subsidized **P&K fertilizers** ⇒ applicable to **22 fertilizers (NOT Urea)**, for which MRP is decided taking into account international and domestic prices of P&K fertilizers, **exchange rate**, and **inventory level** in the country. **Urea** is the only fertilizer whose **import is still canalized and restricted** ⇒ **statutorily controlled price**.
Food Subsidy — Economic Cost & Central Issue Price	**Economic Cost** = Acquisition cost @ MSP + Procurement incidentals (labour and transport, godown rentals etc.) + Distribution cost (freight handling, storage and interest charges, losses during storage etc.). **Operational Loss of FCI** = (Economic Cost) − (Central Issue Price under schemes like NFSA) ⇒ **reimbursed by GoI as food subsidy**. **Central Issue Price (CIP)** — price at which the central government issues food grains to state and UT governments at rates fixed by GoI ⇒ **less than Economic Cost**. **Economic Cost − CIP = Consumer Subsidy (borne by the Central Government)**. CIP of wheat and rice is fixed by **MoConsumerAffairs** ⇒ **uniform throughout the country**. Under **Decentralised Procurement**, the difference between the **economic cost of states and the Central Issue Price** is passed to states by GoI as **subsidy**.

25. CUSTOMS, TRADE-RELATED DUTIES & EXPORT TAX-REFUND SCHEMES

Cue Words	Notes
RoDTEP — Additional Operational Detail	Replaces the existing **Merchandise Exports from India Scheme (MEIS)**, which was found to **violate WTO rules as it was export-focussed** ⇒ RoDTEP complies with WTO rules since **indirect taxes on inputs are consumed in the production process**. **Fully automated route for Input Tax Credit in GST** to help increase exports ⇒ will **reimburse all taxes and duties paid on inputs consumed in exports**. **Additional ₹10,000 crore of revenue will be forgone.** **RoDTEP will be monitored by the Ministry of Finance.** Background: GST was already exempted for exports; import/customs duty for inputs required to manufacture the exported product was refunded through **MEIS by giving Duty Credit Scrips**. But certain items outside GST (**VAT on fuel, mandi tax, duty/tax on electricity**) still carried duty ⇒ now covered under RoDTEP ⇒ **exports become effectively zero-rated**.
Inverted Duty Structure — Customs Version	**Import duty on finished goods is low compared to the import duty on raw materials.** Industry wants the government to remove this anomaly. *(Distinct from the GST-side formulation in Section 1, which frames it as the tax rate on inputs exceeding the rate on output goods.)*
Deemed Exports & Deemed Export Benefit Schemes	**Deemed Export** — transactions in which the goods supplied **do not leave the country**, and payment for such supplies is received in either **₹ or forex ($ etc.)**. **Deemed Exports Benefit Schemes** aim to create a **level playing field for domestic industry vis-à-vis direct import**, by providing **duty-free inputs or exemption/refund of duty paid** on goods manufactured in India ⇒ i.e., an **instrument of import substitution**. Helps create manufacturing capability, value addition and employment. **DEB schemes availed by units of** — **Power, Petroleum refinery, Fertilizer, Nuclear power**.
Advance Authorisation (AA)	Issued to allow duty-free import of inputs which are physically incorporated in export products (including fuel, oil, catalyst used in production of the export product). Under the purview of the Directorate General of Foreign Trade (DGFT), an attached office of MoCommerce&Industry.
Generalized System of Preferences (GSP)	Originated at the **UNCTAD II Conference in New Delhi, 1968** ⇒ a **generalized, non-reciprocal, non-discriminatory system of preferences** in favour of developing countries. Under the aegis of **UNCTAD (NOT WTO)**. Certain products originating in developing countries are granted **reduced or zero tariff rates over the MFN rates**. **Currently 13 nations give GSP.** **US duty-free status for India was discontinued in 2019.**
Harmonized System (HS) Code	**HS Code is a 6-digit ID code by the World Customs Organization.** **MoCommerce&Industry allocates HS codes** — India uses an **8-digit code** (extra 2 digits for more detailed classification). A **separate HS code for Khadi** will boost Khadi exports.

26. SPECIAL TAXES, TAX-CONCEPT DEFINITIONS & TAX-LINKED INSTRUMENTS

Cue Words	Notes
Tobin Tax / Robinhood Tax	Tax on the **international flow of short-term capital** ⇒ to discourage volatile short-term capital inflows or **hot money**, which is highly speculative. **Shorter the transaction period ⇒ heavier the burden of tax.**
Pigouvian Tax	Imposed to counter the impact of negative externalities/spillovers. E.g., carbon tax.
Tax Elasticity / Buoyancy / Expenditure — Compact Definitions	**Tax Elasticity** — change in revenue to change in **tax rate**. **Tax Buoyancy** — change in revenue to change in **GDP**. **Tax Expenditure** — **opportunity cost of taxing at concessional rates**. **Laffer Curve** — Taxation vs Revenue.
Elephant Bond	**25-year sovereign bond** ⇒ to bring back **black money stashed outside India**. A person gets **immunity from prosecution** if they invest **40% of their undisclosed money** in this bond and **pay 15% tax**. Money will be used **exclusively to fund the Infrastructure sector**. Recommended by the **Surjit Bhalla Committee on Trade and Policy**.
Tax Collected at Source (TCS) under LRS	**TCS applies for**: remittance **> ₹7 lakh in a financial year**; **sale of an overseas tour package** through a tour operator.
Tax Treatment of Gold Instruments	**Gold ETF** — exempted from **Securities Transaction Tax, Wealth Tax, VAT, Sales Tax**. **Sovereign Gold Bonds** — **interest is taxable**, but **not deducted at source**.
CSR Spending — Tax Status	Under the **Companies Act, 2013**, for **both private & public companies** with **net worth > ₹500 crore**, or **annual turnover > ₹1,000 crore**, or **net profit > ₹5 crore** ⇒ must spend **2% of average net profits of the last 3 years** on CSR. **CSR spending is NOT tax exempted** (with some exceptions like **PM-NRF**). **NOT covered under CSR**: activities outside India; projects benefiting only employees; contributions to a political party; one-off events like marathons, awards, charitable contributions. **Injeti Srinivas Committee on CSR** — submitted to **MoCorporateAffairs**.

27. FISCAL FEDERALISM — SCHEME FINANCING & MUNICIPAL BORROWING

Cue Words	Notes
Centrally Sponsored Schemes (CSS)	**Financed by Centre and States in a fixed ratio** (50:50, 70:30, 75:25, 90:10). **Implementation by states.** **Formulated on subjects of the State List.** **Shivraj Singh Chauhan Panel recommendations ⇒ 28 umbrella CSS schemes** now. **Core of the Core Schemes (6)** — for social protection and social inclusion: **National Social Assistance Programme** (Dept of Rural Dev), **MGNREGA** (Dept of Rural Dev), **Umbrella Scheme for Development of SC** (Dept of Social Justice & Empowerment), **Umbrella Programme for Development of ST** (MoTribal Affairs), **Umbrella Programme for Minorities**, **Umbrella Programme for Development of Other Vulnerable Groups**. **Core Schemes (20)** — for the National Development Agenda where Centre and States work together in the spirit of "Team India". **Optional Schemes (2)** — states free to choose whether to implement; **funds allocated as a lump sum** (e.g., **SP Mukherjee Rurban Mission**).
Central Sector Schemes	**Financed by the Centre completely**; **implementation by the Centre**; **based on subjects of the Union List**. Some programmes directly implemented by the central ministry in states and UTs. **Examples** — BharatNet, Namami Gange, LPG connection to poor, Crop Insurance scheme, Metro projects.
Municipal Bonds	**Marketable debt instruments issued by ULBs** ⇒ to on-lend towards project implementation by the ULB. **Regulated by SEBI.** **Bangalore Municipal Corporation ⇒ 1st ULB to issue, in 1997.**

28. TAX & FISCAL REFORM COMMITTEES — QUICK MAPPING

Cue Words

Notes

Committee → Mandate

**Raja Chelliah Committee** — For **Tax Reforms**. **Kelkar Committee** — For **Tax Structure Reforms**. **Parthasarathi Shome** — For the **Tax Administration Reform Commission (TARC)**. **N.K. Singh Committee** — To review the **Fiscal Responsibility and Budget Management Act**. **Rakesh Mohan Committee** — **Small Savings**. **Rattan P. Watal Committee** — To boost the **digital payment system** in India. **Surjit Bhalla Committee** — On **Trade and Policy** (recommended the Elephant Bond).

📰 16th Finance Commission Submits Report 2025

Cue Words	Notes
XVIFC Report Submission	On **17 November 2025**, the **Sixteenth Finance Commission (XVIFC)**, chaired by **Dr. Arvind Panagariya**, submitted its report to **President Droupadi Murmu**, and subsequently to the **PM and Union Finance Minister**. The report covers the **award period 1 April 2026 to 31 March 2031** (5 years). **Other Members**: Annie George Mathew, Dr. Manoj Panda, T. Rabi Sankar, Dr. Soumyakanti Ghosh (**Secretary: Ritvik Pandey**). Constituted under **Article 280(1)** of the Constitution.
XVIFC Mandate (Terms of Reference)	Recommendations on **distribution of net tax proceeds** between Union and States. **Allocation among States** of their respective shares. **Grants-in-aid** to States. **Review of Disaster Management financing arrangements**.
Report Structure	Report has **2 volumes**: **Volume I** (recommendations) and **Volume II** (annexures). Will become **public once tabled in Parliament**, under **Article 281**.