Union Finance Minister of India Nirmala Sitharaman is set to present the Union Budget 2025, marking the second full budget of Prime Minister Narendra Modi’s term and her eighth budget.

As February 1 draws near, it’s crucial to understand key budgetary terms. Here’s a guide to the essential concepts ahead of the budget unveiling.

What is the difference between Direct and Indirect Taxes?

Direct taxes are imposed on individuals and corporations, who pay them directly to the government. Examples include income tax, corporate tax, and capital gains tax. These taxes are usually progressive and cannot be transferred.  

Indirect taxes, such as GST, excise duty, and VAT, are levied on goods and services. Businesses collect them from consumers and remit them to the government. Unlike direct taxes, they are generally regressive and can be shifted from businesses to consumers.

New Tax Regime

The New Tax Regime in India, introduced in the 2020 budget, offers lower tax rates on income without allowing exemptions and deductions (like those for investments and house rent). Taxpayers can choose between this simpler, lower-tax option or the old regime with higher tax rates but more deductions. It aims to simplify tax filing and provide relief through lower tax rates.

Corporate tax

This is the tax paid by corporations or firms on the incomes they earn.

Customs duties

These are levies charged when goods are imported into, or exported from, the country, and they are paid by the importer or exporter. Usually, these are also passed on to the consumer.

Fiscal deficit

When the government’s non-borrowed receipts fall short of its entire expenditure, it has to borrow money from the public to meet the shortfall. The excess of total expenditure over total non-borrowed receipts is called the fiscal deficit.

It is often bridged by borrowing from institutions like the Reserve Bank of India (RBI), and it is calculated as a percentage of the Gross Domestic Product (GDP).

Revenue deficit

Revenue deficit is the difference between revenue expenditure and revenue receipts. It indicates the shortfall of the government’s current receipts in covering its current expenditure.

Primary deficit

The primary deficit is calculated as the fiscal deficit minus interest payments. It indicates the portion of government borrowings used to cover expenses other than interest payments.

Fiscal policy

Fiscal policy refers to government actions on revenue collection (taxation) and public spending to influence economic activity. It is implemented through the budget and aims to achieve economic stability, growth, and inflation control.

Monetary policy

Monetary policy involves actions by the central bank (RBI) to manage the money supply and liquidity in the economy, often by adjusting interest rates, to control inflation and stabilise economic growth.

Capital budget

The Capital Budget consists of capital receipts and payments. It includes investments in shares, loans and advances granted by the Central Government to State Governments, Government companies, corporations and other parties.

Revenue budget

The revenue budget consists of revenue receipts of the government and its expenditure.

Revenue receipts are divided into tax and non-tax revenue. Tax revenues constitute taxes like income tax, corporate tax, excise, customs, service and other duties that the Government levies. The non-tax revenue sources include interest on loans, dividend on investments.

Finance bill

The bill produced immediately after the presentation of the Union Budget detailing the imposition, abolition, alteration or regulation of taxes proposed in the Budget.

Capital expenditure (Capex)

Capital expenditure (capex) refers to the funds allocated by the government to invest in long-term assets like infrastructure, buildings, and equipment, which are essential for driving economic growth and development.

Capital receipts

Capital receipts are the funds the government receives from borrowing, selling assets, or investing in equities.

Cess

A cess is an additional tax levied on income tax to finance specific purposes like education and healthcare. It applies to the total tax liability, including any surcharge.

Plan expenditure

Money given from the government’s account for the central plan is called plan expenditure. This is developmental in nature and is spent on schemes detailed in the Plan.

Non-plan expenditure

Non-plan expenditure covers all expenditure of the government not included in the plan. It includes both development and non-development expenditure.

Excess grants

If the total expenditure under a grant exceeds the provision allowed through its original grant and supplementary grant, then, the excess requires regularization by obtaining the excess grant from the Parliament under Article 115 of the Constitution of India. It will have to go through the whole process as in the case of the annual budget, i.e. through presentation of demands for grants and passing of appropriation bills.

For example, suppose the government gets a budget (grant) to spend on a project, like building roads. If they end up spending more money than originally planned, even after adding extra funds (supplementary grant), they need special approval for the extra spending.  

To make this legal, they must ask Parliament for permission through something called an ‘excess grant’.

Budget estimates

Amount of money allocated in the Budget to any ministry or scheme for the coming financial year.

Revised estimates

Revised estimates are mid-year review of possible expenditure, taking into account the trend of expenditure, new services and new instruments of services etc.

Revised estimates are not voted by the Parliament, and hence by itself do not provide any authority for expenditure. Any additional projections made in the revised estimates need to be authorised for expenditure through the Parliament’s approval or by re-appropriation order.

Outcome budget

Since the fiscal year 2006-07, each ministry submits an outcome budget to the ministry of finance, which compiles them. This budget tracks the progress of government programs, assessing how effectively funds from th e previous budget were used and whether they achieved their intended outcomes.

Demands for Grants 

Document that the government presents to Parliament to request approval for spending money on various ministries and departments. They are part of the annual financial statement and are presented to the Lok Sabha. 

Guillotine

The ‘Guillotine’ process in the Indian Parliament refers to the practice of putting all the outstanding demands for grants to a vote after the allotted discussion time has ended.

Despite some demands being discussed, others may not have been, but once the prescribed period is over, the Speaker of the Lok Sabha ensures that all the demands are voted on, effectively limiting further scrutiny. This is done due to time constraints in reviewing the budgetary requirements of all Ministries.

Cut motions

Motions for reduction to various Demands for Grants are made in the form of Cut Motions seeking to reduce the sums sought by Government on grounds of economy or difference of opinion on matters of policy or just in order to voice a grievance.

Consolidated Fund of India

The Consolidated Fund of India is the primary account where all government revenues, loans, and borrowings are deposited. It is used for most government expenditures, except for certain exceptional items funded from the Contingency Fund and Public Account. Money can only be withdrawn from this fund in accordance with the law.

Contingency Fund of India

The Contingency Fund of India is a reserve fund managed by the President, allowing for quick advances to the government to cover urgent and unforeseen expenditures.

Public account

The Public Account of India, as per Article 266(1) of the Constitution, handles funds where the government acts as a banker, such as Provident Funds and Small Savings. The money in this account belongs to the depositors and must be returned to them. Expenditures from this fund do not require parliamentary approval.

Minimum Alternative Tax (MAT)

The Minimum Alternative Tax is a minimum tax that a company must pay, even if it is under zero tax limits.

Disinvestment

Disinvestment refers to the sale of government-owned shares in public sector undertakings. By selling these shares, the government converts earning assets into cash.

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