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title: "Vol 2 1"
book: "PG MPUB 104 (1st Sem) Financial Admn"
category: "PG MPUB"
publisher: "Ratan Prakashan Mandir Pvt. Ltd."
type: "Educational Material"
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According to Latest Syllabus
Read For Sure Success
In University Examination
RATAN
TEXT BOOK
FINANCIAL ADMINISTRATION
Vol-2
M.A.Pub.Ad. (Sem-I)
Dr. Raman Parihar
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BLOCK-III
Chapter-11
PERFORMANCE BUDGET
Structure

11.0. Introduction

11.1.    Learning Objectives

11.2.    The Concept & Prerequisites of Performance Budget
Self-Check Exercise-1

11.3.    Desirability and Scope of Performance Budgeting in India
Self-Check Exercise-2

11.4.    Summary

11.5.    Glossary

11.6.    Answers to self-check exercises

11.7.    References/Suggested Readings

11.8.    Terminal Questions

11.0. INTRODUCTION
An important characteristics of planning for economic development, as adopted by most of the under developed economics, has been the dominating role assigned to the public investments and the consequent importance accorded to the public sector. The governments of these countries have assumed not only a centralized direction of resource mobilization and their use, but also have undertaking a significant amount of entrepreneurial allocations, which have led to a logical developmental of public sector becoming a dominant factor in the process of economic development. This development has brought in its wake many important structural changes in the economic and financial administration in these countries.
These, structural changes have brought along with institutional adjustments in the organization and conduct of public sector programmes and activities. The entrepreneurial functions and activities in the public sector are mostly excluded from the conventional budgetary framework and are 'entrusted to autonomous corporation joint stock companies. In a number of instances, however, the government budget includes in addition to normal administrative programmes and activities, certain entrepreneurial activities commonly known as departmental undertakings. "The institutional separation of enterprise activities rests partly on blueprint for action while budgetary provision is mainly operational in nature. It would be, therefore, only logical
to expect that management considerations should be of eminent importance in budgeting/and that the budget' should be so devised as to high light the truly operational character, both physical and financial, of any given programme, such is however, not the experience in many developing countries. As a result the operational character of government budget and its links with planning are largely obscured.
The system of conventional budgeting, which is in vogue in the majority of the countries, conceives an emphasis on financial aspects of governmental operation. The financial accountability to the legislature is usually the overriding consideration and this permeates the entire budgetary process. Emphasis is placed mainly on the observance of appropriation limits. Moreover, the object-cum-organizational classification of expenditures in the budget does not enable identification of programmes or projects, and, furthermore, is not related to the cost of major inputs or the work performed. In other words, the system of budgeting does not provide information from departmental reports or other supplementary documents, but in many cases this information cannot be linked directly with financial, data as they appear in a budget or in the accounts because it does not constitute a basis for budget management. The absence of pertinent information of this type reduces the usefulness of this budgetary approach even for purposes of legislative review and appropriation. The sanctions resulting from this process then tend to be accorded to policy objectives that are not explicit in the budget."
The need, development, adoption and use of performance budgeting have developed, therefore essentially in the context of effective connections in this situation. The primary consideration was to highlight management aspects in the budgetary framework and in so doing to bring out the most significant economic, financial and physical aspects of 'the budgetary activity.
The concept of performance budgeting was developed in the U.S.A. and has been given its most rigorous application in that country. Although a programme based budget was in vogue, in different forms and details in metropolitan centres and a few states in the U. S.A. the concept as it is understood now got a major recognition after the first Hoover Commissions Report in 1949. The commission recognizing that the most important aspect in budgeting is the performance in respect of the work to be done or the services to be rendered and the cost involvement of such work/service, recommended that "the whole budgetary concept of the Federal Government should be refashioned by the adoption of a budget based upon functions, activities and project" and this was designated by the Commission as a "Performance Budget."
This recommendation was supplemented by the proposals put forward by A.E. Buck in the Commissioner's Task Force Report. It was stated: "A programme or performance budget should be substituted for pre-present budget, thus presenting in a document: of much briefer compass the government's expenditure requirements of the things brought. Such a budget would not detract from congressional responsibility and should be greatly improved and expedite committee consideration."
Following the Commission a recommendations, the Federal Government of the U.S.A. decided to formulate its budget on a performance basis since 1951. The
importance of the concept was further stressed in the second Hoover Commission's Report in 1955. Substantial progress has been made in the U. S.A, since then and quite recently, a few other developing countries have - either adopted this technique or are in the process of considering its introduction.
It may be added here that some distinction has been made in the past between a programme budget and a performance budget, though the Hoover Commission did not seem to view them as different concepts. "There is no practice definition for performance budgeting. It has come to mean something different in every jurisdiction which puts it into operation. In particular, there has been a tendency to make programme budget and performance budget synonymous forms, and this has contributed a good deal to the terminologi cal confusion. In an attempt to clarify what is meant here by programme and performance, definitions will precede organisational and hierarchical lines. For present purposes, programme will be defined in relation to a higher level of organization than performance. A programme embraces a number of performance units. Programme and performance may also be distinguished according to their time dimension. Budgeting programmes are inherently forward-looking a projection of the economic and social policies of a government. Performance must be based on the past on the recorded of prior accomplishment in the preparation of budget estimates, programme determination should precede and set the framework in which the measurement of performance can be undertaken."
Quite recently, a United National Manual on programme, and performance Budgeting has a useful distinction between programme budgeting and performance budgeting. "In programme budgeting the principal emphasis is on a budget classification in which functions, programmes and their sub-divisions are established for each agency, and these are related to accurate and meaningful financial data. Performance budgeting involves the development of more refined management tools, such as unit costs work measurement and performance standards. Of course, the measurement of work, both in a physical and financial sense, presumes an already formulated set of work units which can be derived only when programme and their sub-division is an all-inclusive concept embodying programme formulation as well as measurement of the performance of work in the accomplishment of programme objectives."
It may be mentioned that quite recently, a new programme budget (PlanningProgramming-Budgeting ' System) has been developed in the U. SA the purpose of which is to provide for more and better information for decision-makers at all levels of government. It seeks to focus attention on alternative means to achieve carefully defined goals, specifying the full costs and benefits of each alternative etc. Its special feature is the concept of long range planning and programming which brought into the whole process of budget making for the first time.

11.1.    LEANING OBJECTIVES
After studying this lesson, the learner will be able:

•    To understand about meaning and concept of Performance Budget.

•    To know about the prerequisites of Performance Budget in India.

•    To discuss about desirability and scope of Performance Budgeting in India.

11.2.    THE CONCEPT & PREREQUISITES OF PERFORMANCE BUDGETING
Performance budgeting, as is generally understood, is essentially a technique of presenting government operations in terms of functions, programmes, activities and projects. Through such a meaningful classification of sensations, government activities are sought to be identified in the budget in financial and physical terms so that a proper relationship between inputs and outputs could be established and performance assessed in relation to costs.
The focus in a performance budget is basically different from that in the conventional budgets. The two approaches differ in their scope and content. Firstly, under the performance budgeting emphasis is shifted from the budget as a means of accomplishment to the accomplishments themselves. It concerns itself-primarily with the objectives aimed at by the government rather than on the outlays incurred on several projects. An important aspect of the techniques of the performance budgeting is the precise detaliment of the job to be performed or services to be rendered and a realistic estimate of what that job or service will cost. Secondly, a performance budget is prepared in terms of functional categories and their sub-division into programmes, activities and projects rather than 'being prepared in terms of organisational units and the objects of expenditure. The object classification show's what the nature of governmental programmes, or accomplishments under these programmes" Thirdly, a performance budget prepared in terms of costs and results facilities management control by bringing out the programmes and accomplishments in financial and physical terms close interwoven into the comprehensive document.
The technique of performance budgeting, it may be emphasised, divides the whole gamut of governmental operation into functions, programmes, and activities/projects. A function represents a major division of the total efforts of the government such as Education, Health, Agriculture, Industry, etc. programmes are broad categories within a functions that identify the end products or accomplishments towards the fulfillment of the objectives of a function. The term project is generally used to distinguished such activities as are of a capital nature. For example, education is a function, university education a programme, training of university teacher an activity and the construction of buildings equipping the laboratories a project.
The introduction of a system of performance budgeting involves three basic steps : (a) establishment of meaningful programmes and activities for each function entrusted to an organization or an agency in order to show' precisely the work objectives of various agencies; (b) adoption of a system of accounting and financial management in accordance with the aforesaid classification, and (c) determination of suitable norms 'yardsticks, work-units of performance and unit costs, wherever possible, under each programme and activity for reporting and evaluation. Thus, a
performance budget is one which present the purposes and objectives for which funds are required, the costs of programmes proposed for achieving those obj ectives, and quantitative data,' measuring the accomplishments and work performed under each programme."
The main objects sought to be achieved by the performance budgeting are :

-    to coordinate the physical and financial aspects of every programme or activity;

-    to improve budget formulation, review decision-making at all levels of management in the government machinery;

-    to facilitate better appreciation and review by the legislature;

-    to make possible, more effective performance audit;

-    to measure progress towards long-term objectives as envisaged in a development plan; and

-    to integrate the annual budget and developments plans.
In a planned economy, where the public sector outlays constitute a major step towards accelerating the tempo of economic growth, the technique of performance budgeting has its advantages in as much as it serves to bring together the financial and physical implications of each programme, facilitating thereby better programming, decision-making, review of the progress and control for the management, and for a more precise, purposeful and intelligible presentation of government activities to the legislature and the electorate.
Phases of Performance Budgeting :
The process of performance budgeting involves four broad stages : (1) planning or establishing performance; (2) estimating of determining quantum of physical resources, like personnel materials, services, facilities, etc. In order to accomplish these objectives, and the amount of financial resources involved in that; (3) reviewing or ascertaining that the basic objective, resources requirements and resources availabilities are clear and accurate and conform to overall guides and limits; and (4) operating or accomplishing approved objectives with the appropriation voted by the legislature.
PREREQUISITES OF PERFORMANCE BUDGETING
Important pre-requisite for the introduction and operation of 'performance budgeting are that, as first step. It's desirable to emphasize the programme formulation aspect and to establish a clearly defined and meaningful pattern of organizational responsibilities in doing so the budget classification could be closely related to projects included in a development plan. The next logical step would be to bring the system of accounting and financial management in line with budget classification. "In the early stages, emphasis could be placed on planning and on providing prompt financial and related information for use in performance reporting so as to enable a comparison of actual results with original plans. As progress is made towards these, objective, the introduction of accrual accounting and the solution of
more complicated accounting problems might be considered. Accrual or cost accounting could be applied either to all types of programmes or of such operations as commercial or industrial activities. The third step consists of the introduction of a system of measuring physical progress and performance. This would depend largely on the availability of relevant statistical data. Each programme would present the own problems in terms of determining proper-units of measure and meaningful indicators of performance. Fourthly, the system of performance budgeting, because of its significant role in the management of governmental operations, demands. Specially qualified personnel for its successful operation. "The most Important consequence of performance budgeting, is that it increases' the responsibility and accountability of management. The performance budget ' enhance the role of management, but at a price-budgeting may no longer be treated as a peripheral assignment but is now at the centre of management responsibility. This should lead to an improvement in the quality and quantity of budgeting at the level of operations. "In its ultimate application, this approach involves it should budgetary operation, financial discipline, skilled and responsible manpower both for budget formulation and execution, a frequent and efficient system of recording and reporting financial and physical data, and close coordination between various governmental agencies and the central budget agency.
Firstly, it is sometimes contended that the performance budgeting involves only a quantitative and financial evolution of programmes and activities, it does not facilitate qualitative evaluation. This limitation is not, however, peculiar to this technique as no budgetary technique is capable of making qualitative evaluation which must depend on certain other appropriate devices.
Secondly, it is claimed that the usefulness of the technique is somewhat limited in the case of activities that are not subject to measurement in any precise manner, such as research,' law and order, defence etc. It is true that the technique may not be as effective as outlays on physical programmes, but even in such subjective areas, suitable norms can be developed to explain performance in a meaningful manner.
Thirdly, the success of performance budgeting depends upon well organised departments and agencies identifiable with programmes and activities. In practice, however precise categories of functions and programmes corresponding to organizational units are rather difficult to achieve. It is stage on the other hand that a synchronization of functions and programmes with organisations though desirable in the long run is neither a pre-condition to nor an essential ingredient of a performance budgeting system.
Self-Check Exercise-1
Q.1 the success of performance budgeting depends upon well organised departments and agencies identifiable with programmes and activities. True/False
Q.2 to emphasize the programme formulation aspect and to establish a clearly defined and meaningful pattern of organizational responsibilities in doing so the budget classification could be closely related to projects included in a development plan. True/False

11.3    DESIRABILITY AND SCOPE OF PERFORMANCE BUDGETING IN INDIA
The pattern of existing budgeting system in India (herewith referred to as the conventional budget) has been designed mainly to ensure legislative accountability and counting scrutiny. Its primary object is to ensure that the moneys are raised and disbursement made by the public authorities in accordance with the schemes sanctioned by the legislature. The cognitional budgets are framed by the various Ministries/ Departments with expenditures broken down into the broad objects constituting the primary units of appreciation., These, budgets are conceived largely in financial terms emphasising there by the financial aspects and not so much the physical accomplishments out of the proposed outlays. Precisely, the conventional budget is accountability-oriented and is intended, primarily, to facilitate its financial control.
Besides being the Principal instrument of providing accountability to the legislature and the means for ensuring financial correctness the budget is, in the context of State-oriented planned economic development, the chief instrument of fiscal policy, a principle device for the implementation of the projects set-out in the development Plans, a vehicle for carrying out the government s policies and decisions, a tool for better management of the governments operations, and chief sources of the data in order to facilitate the decisions of the government on fiscal and economic issues.
With the recognition that the primary object of a sound budgetary system in a planned economy must be to ensure the achievements of plan-objectives, the connotation than is understood from its conventional usage. In the context of planned economic development in which the public outlays are to play a dominant role, specific socio economic goals are derived, availability of resources is assessed, and alternative programmes are selected to attain those goals. As such, the accountability, instead confined to ensure that the moneys are spent as sanctioned and are kept within the limits laid down in the appropriations, must extend to ensure that the targeted physical results are achieved. It becomes essential, therefore, that the budget should reflect the pattern of development Plans in content and classification. The budget should reflect and reveal as to what was planned to be done in term of physical targets, the output to be aimed at or services, to be provided as envisaged in this development plan and what has actually been achieved both in financial and physical system. More specifically, by having a common classification for both the plan as well as the budget, the instrument of budget could be made; an operational document for carrying out the plan objectives.
It is in this context that an assessment has to be made about the usefulness of the present budgetary system and identify its legal accountability, but this usefulness of the system can be enhanced considerably it could be devised to give a comprehensive account of the total efforts of the government in the financial aspects the economics of its activities, the physical results that flow from them, and exact relationship between inputs and outputs'. The conventional budgetary system does not link the financial and physical aspects of programmes and activities nor does it provide
an adequate amount of information of the effectiveness of money spent on such programme and activities. It does not throw sufficient light for an overall view of the financial and physical aspects of such programmes and activities, and the accomplishments.
The question of introducing performance budgeting in the Indian context could, therefore, be viewed from two angles: (a) by pointing out the deficiencies in the conventional budgeting and considering the merits of the performance budgeting and (b) by a consideration of the various arguments against the introduction of the technique of performance budgeting; Approach (a) has briefly been conversed in the preceding paragraphs. As regards (b) various doubts and misgivings about the introduction of performance budgeting are detailed below:

1.    Quite a number of the purposes designed to be served by the technique of performance budgeting are presently being already served - by the techniques and processes of economic planning in certain ways and consequently introduction of the technique of performance budgeting would amount to duplication of effort.

2.    Sufficiently comprehensive data and information is now given in the budgetary document on both the financial and physical aspects of governmental programmes and activities, supplemented by the annual reports of the Ministries/Departments annual report on the workings of commercial and industrial undertakings of the government etc.

3.    The financial and legal accountability of the executive government to the legislature will be imparted by the introduction of performance budgeting.

4.    A bulk of the disbursements undertaken by certain Union Ministries/ Departments e.g., agriculture, education, etc., consist of grants to the states and other organizations. As such their performance may not be capable of measurement at Union level.

5.    In the present institutional structure, a performance budget can, at best, be only supplementary to the existing conventional budget and can not in any way supplemental.

6.    The utility of performances budget may be greater in the context of the relationships between the executive and the legislature as they exist in the U.S.A. in the Indian context where the initiative in budgetary decision-making vests in the executive, the legislature being mainly concerned with sanctioning the policies formulated by the executive, the system may not be capable of achieving that degree of success as may be anticipated.
The working Group examined these points and had come to the following conclusions:

1.    Commenting on the point that performance budgeting is largely a technique for planning, implementation and reporting, both in financial
and physical terms, and that this is obtaining, in some measure, in our planning process, the Working Group remarked that prima facie, the contention seems to be an over simplification both of concept of performance budgeting as also of the virtues of the planning process. The techniques of performance, budgeting is something more than a mere bridge between the financial and physical aspects of a programme, in so far as the planning process is concerned, the experience during the last decade or so has indicated the inadequacy of the link between the two. It is also observed that because of the absence of a rapport between the financial and physical aspects of a programme, budgetary' estimates were often either under pitched of over pitched with consequential impact on the allocation of resources. It has also, in turn contributed in some measure to the gap between the physical targets and financial outlays. To write programme, targets, outlays, etc., exist in the planning process, there is a lacuna in the existing system in that there is no well-organized operational framework. To the extent that such a framework would be supplied by performances budgeting it would be greatly strengthening the existing planning process.

2.    The argument is advanced that progressively increasing data and information about the various programmes and activities of the government, financial as well as physical, is now given in the 'budget and the various documents attached to it. It is correct that the Explanatory Memorandum, Notes on important Scheme furnished in the Demands for Grants, the Economic Survey the Economic Classification of the Budget, to provide the legislature and the public at large substantial amount of information. While these development have been in the right direction, it is to be recognised that unless these somewhat disjointed efforts are coordinated and brought into a well-knit, purposeful and cohesive whole at one place they are not likely to be of much help either in the formulation of programmes or in the evaluation of performance. It has thus to be seen that though there were various development welcome in themselves, yet in the absence of a comprehensive scheme for budget reform and also because they were often the result of attempts at meeting the requirements from different quarters, they tended to be diffused and were thus inadequate."

3.    The contention that under performances budgeting as emphasis 'is shifted to programmes and activities and their cost-benefit analysis, the legal and financial accountability of the executive government will be affected, appears to be based on erroneous impression. This contention may not be well- founded because for technique of performance budgeting could be formulated in  such a way that the
Ministries/Departments organisations may retain their identity and the Demands for Grants can continue to be in terms of subject of expenditure (i.e. units of appropriation) under the several programmes
and activities of the Ministries/Departments/Organisational. The legal and financial accountability of the executive management would not, therefore, be compromised, rather important aspects of accountability with result will be secured.

4.    As regards the difficulties concerned for the evaluation of the results out of loans and grants given by Union Ministries. Departments it is a matter of detail regarding the form and content of performance begetting rather than the principles underlying it.

5.    The fifth argument relates to the form in which the performance budget is to be prepared and presented. The issue involved is whether it should be a supplementary document to the conventional budget or should replace the latter. That the performance budget should be a supplementary document to the conventional budget is supported on two points (a) it may not be desirable to change an established practice; and (b) it would not be possible to prepare a performance budget within a period of three months that now terms the crucial period during which the budget is prepared and presented. It is contended, however, that 'it would not be sufficient to have the performance budget document as a supplementary one to the existing set of documents, as in that case it will not have an impact whatsoever on the existing system. For one thing the performance budget is being evolved to overcome the deficiencies in the existing budgetary process and framework and not to supplement it. The idea of a supplementary document in which a context would inevitably mean the constitution of the existing procedure, financial practices, accounting classification, etc., with their inadequacies. Instead, performance budgeting is not made an integral part of the budgetary process, but only an additional exercise, unconnected with the main process, the advantages that are expected of it would not materialize. Secondly, performance budget is not merely a matter of form; it represents a change in concept that the significant effects of the approaches to the budget and the decision-making practices. The form is only the culminating point of the various processes forwards better management and control. The form of the document has no special significance apart from the presentation effect. The performance budget as a supplementary document would be somewhat of a fifth wheel to the coach. The appropriate method in the circumstances would be to adopt, evolve and introduce performance budgeting in such a way that it would fit in without conditions and mitigate the transactional difficulties involved in the Switch over, while continuing, at the same time, to serve the purpose expected of it."
As regards the practicability of preparing a performance budget within a period of three months referred to above it is contended that "In our pl anning process, both the implementation of programmes and the evolving of new ones are a continuous process throughout the year.
Thus, in a way, budgeting would also be an all-the-year round process with the final stage of consolidation being reached in the period referred to above. Moreover, even under the present system, the administrative departments and organisations are enjoined' upon to forward their budget proposals quite early in the financial year, "'beginning with July. Information on programmes, activities, targets achievements and other work-load data will be available continuously all through the year through a performance reporting system.

6.    Coming to the executive legislature relationship, it may be pointed out the need for the performance budgeting does nothings on the character of such relationship.
Self-Check Exercise-2

Q. 1 The pattern of conventional budgeting system in India has been designed mainly to ensure legislative accountability and counting scrutiny. True/False

Q. 2 In the present institutional structure, a performance budget can, at best, be only supplementary to the existing conventional budget and can not in any way supplemental. True/False

11.4.    SUMMARY
It may be concluded that the introduction of the technique of performance budgeting is needed more than over for integrating the plan and budget-in' process, for building up an integral edifice outlays and accomplishment for each administrative agency for qualification of the results from government outlays, for enabling a more purposive audit and preliminary review and control, and thus serving as a window, so to say, to every citizen of the country on the government activities.

11.5.    GLOSSARY

•    Conventional Budgeting : it involves adding funds to the previous year's budget to expand or complete projects.

•    Performance Budgeting : it is based on the relationship between program funding levels and expected result from that programme.

11.6.    ANSWERS TO SELF-CHECK EXERCISES
Self-Check Exercise-1
Q.1 True
Q.2 True
Self-Check Exercise-2
Q.1 True
Q.2 True

11.7.    REFERENCES/SUGGESTED READINGS
Laxmikant, M. 'Public Administration 'Fifth Edition, Tata McGraw-Hill Publishing Company Limited, New Delhi, 2016.
Gupta, B.N. Indian Federal Financial and Budgeting Policy, Chaitanya Publishing House, Allahabad, 1970.
Wattal., P.L. Parliamentary Financial Control in India, Minerva Book Depot, Bombay, 1985.
Handa., K.L. Financial Administration in India, HPA New Delhi, 1988
Pyhrr., P.A. Zero-Base Budgeting, Johan Wiley and Sons, New York, 1973.
Baisys., K.N. Financial Administration in India, Himalaya Publishing House, Bombay, 1986.
Mahajan., S.K. & Mahajan., A. P. Financial Administration in India, P.H.I, New Delhi.

11.8.    TERMINAL QUESTIONS

(a)    Trace the evolution of performance Budget.

(b)    Discuss about the Desirability and Scope of performance Budgeting in India.
ZERO-BASE BUDGETING
Structure

12.0. Introduction

12.1.    Learning Objectives

12.2.    Zero-Based Budget : Meaning, Process, Definition
Self-Check Exercise-1

12.3.    The Decision Package, Ranking & Advantages of Zero Base Budget
Self-Check Exercise-2

12.4.    Summary

12.5.    Glossary

12.6.    References/Suggested Readings

12.7.    Terminal Questions

12 .0. INTRODUCTION
The budget system, it will be observed, is the means by which financial administration is expressed broadly and therefore, what has been said about the general characteristics of a good system of financial administration appeals equally to the budget system.
The budget system consequently, must provide for unity an centralization; for control at all stages of budget procedure; for simplicity; promptness and regularity; and for efficiency of functioning. The traditional budget procedure is based on incremental budgeting where most organisations start with the current Operating and expenditure levels as an established base. These traditional budgeting is a static tool, weighted down by masses of detailed numbers for every conceivable t3rpe of expenditure.
Another kind of budgeting known as zero-base budgeting (ZBB). ZBB is different from traditional budgeting method. It is a private sector system in use in Unites States private sector ZBB is sought to be applied to the public sector. Under this method the entire budget for the last year is taken as zero. It requires identification and redefining of objectives, examination of various alternative ways of achieving those objectives and then selecting the one best alternative through cost benefit analysis and cost-effectiveness analysis privatization of objectives and programmes; switching of resources from programmes with lower priority to those with higher priority; and identification and elimination of programmes which have outlived their utility.
In ZBB, a Ministry/Department or an organisation is required to justify not only the new proposals and the funds therefore but also the ongoing activities and the
funds for them. Hence, under ZBB approach, the existing programmes are not treated permanent but will be examined afresh as to their continues utility and effectiveness thereby making resources available for new programmes.
In India, the then Finance Minister, V.P. Singh told a Parliamentary Consultative Committee that the government would be introducing ZBB at first in a small way in 1986-87 and then in full in budget formulation from 1987-88. However, it is easier said than done. ZBB's applicability to the public sector is fraught with many difficulties.

12.1.    LEARNING OBJECTIVES
After studying this lesson, the learner will be able:

•     To understand about meaning and concept of "Zero Base Budgeting"

•     To analyze about advantages of Zero Base Budget.

•    To define Decision units

12.2.    ZERO-BASED BUDGET: MEANING, PROCESS, DEFINITION
Meaning
The zero-base approach required each organization to evaluate and review all programmes and activities systematically, whether current or new. It involves review of activities on the basis of output or performance as well as cost to (1) emphasize managerial decision-making, (2) number-oriented budgets, and to emphasize analysis.
ZBB has been defined as a systematic method of reviewing either all or selected number of organizational activity or the purpose of reallocating resources to improve operational effectiveness. The results of ZBB would lead to the restoration of the budget within a range of zero per cent to hundred percent or even more. There is a constant review depending upon the usefulness of a particular service, unit or function.
ZBB is an approach and not a fixed procedure to be applied uniformly to all the organisations. The process must be adapted to suit the specific needs of each organisation. It heavily depends upon a number of techniques developed in the early 1960's Peter A. Phyrr's name is closely associated with ZBB approach.
ZERO-BASED BUDGETING: PROCEDURE
Unlike the traditional budgeting method, which typically involves building on previous budgets, Zero-Based Budgeting (ZBB) requires starting from scratch, justifying every expense from the ground up. This approach involves breaking down an organization's functions and evaluating each one annually, regardless of its history or whether it is a long-standing activity or a new proposal.
In ZBB, the budget is divided into units known as decision packages, which are created by managers at various levels. These packages include an analysis of the purpose, costs, performance measures, benefits, alternative actions, and the consequences of rejecting the proposal.
The ZBB process involves four main steps:
Identification of decision units
Analysis of each decision unit through a decision package
Evaluation and ranking of decision packages by priority
Preparation of detailed operating budgets that reflect the decision packages approved for funding.
DEFINING DECISION UNITS:
The goal of ZBB is to guide management in evaluating activities and making decisions based on careful analysis. Therefore, every relevant component must be clearly defined so that it can be assessed and acted upon. In many organizations, defining decision units is straightforward, as they often align with the budget units used in traditional budgeting systems.
Decision units may be defined at the sub-programme level if there are distinct organizational units associated with each programme element. The decision packages at this level can then be grouped to assess the broader programme. Similarly, decision packages for individual programme elements can be grouped for the evaluation of the entire programme.
Self-Check Exercise-1
Q.1 ZBB attempts to focus management's attention on evaluating activities and making decision. True/False
Q.2 Incremental approach of budgeting is also known as conventional budgeting. True/False

12.3.    THE DECISION PACKAGE, RANKING & ADVANTAGES:
DECISION PACKAGE
It is the building block of zero-based concept. It is a document that identifies and describes each 'decision-unit in such a manner that the management can evaluate it and rank it against other decision units competing for funding and to decide whether to approve it or disapprove it.
The content and format of the decision package must provide management with the information it needs to evaluate each decision unit. This information may relate to:

1.    Purpose

2.     Description of actions

3.    Costs and benefits

4.    Work load and performance measures

5.    Alternative means of accomplishing objectives

6.     Various levels of efforts
The most important aspect of developing decision packages is the formulation of meaningful alternatives. The types of alternatives that should be considered in developing decision packages are alternative methods of accomplishing the objectives or performing the operation and identifying different levels of effort of performing the operation. The identification and evaluation of different levels of efforts in probably the most difficult aspect of zero base analysis, yet it is one of the key element of the process.
THE RANKING PROCESS :
This process' provides management with a technique to allocate the limited resources. It then identifies the benefits to be gained at each level of expenditure and studies the consequences of not approving additional decision packages ranked below the expenditure level.
The ranking process establishes priorities among the incremental levels of each decision unit. The ranking therefore display a marginal analysis. The key to an effective review and ranking process lies in focusing top management's attention on key policy issues and discretionary expenditures.
ADVANTAGES OF THE ZERO-BASED BUDGETING APPROACH
There are several distinct advantages to implementing an effective Zero-Based Budgeting (ZBB) approach, including the following:
Shifting the focus of the management process towards in-depth analysis and decision-making, rather than just dealing with numbers—addressing the what, why, how, and how much of each expenditure.
Merging planning, budgeting, and operational decision-making into a cohesive process.
Encouraging managers to thoroughly assess the cost-effectiveness of their operations, ensuring that both new and existing programmes are carefully examined and clearly defined, rather than being hidden within broader functions.
Providing a framework that enables a balance between long-term and shortterm needs, while also offering a tool to track costs and performance throughout the year.
Facilitating rapid adjustments to the budget or resource allocations during the year, especially in cases where revenue falls short. ZBB allows for quick, rational modifications to goals and expectations to align with what is financially feasible.
Highlighting similar functions across different departments, which allows for easier comparison and evaluation.
Promoting broader management participation and training in the processes of planning, budgeting, and decision-making.
Through ZBB, low-priority programmes can be reduced or eliminated, improving overall programme effectiveness. High-priority programmes can receive increased funding by reallocating resources within the organization. Ultimately, the goal of ZBB is to ensure that taxpayers’ money is spent wisely, with each expenditure being fully justified.
Self-Check Exercise-2
Q.1 With the help of ZBB approach low priority programmes can be eliminated or reduced. True/False
Q.2 One of the advantages of the ZBB is forcing managers to evaluate in detail the cost-effectiveness of their operations. This includes specific programmes - both new and old - all of which are clearly identified rather than functionally buried. True/False

12.4.    SUMMARY
ZBB is no miracle' in financial administration. It would be dangerous to regard ZBB as a sure remedy for financial laxity. The success of ZBB in American industry is largely due to profit motive and organisational resilience. Both of these factors do not usually operate in the governmental setting. Moreover, the bureaucratic temperament is conditioned by the growth impulse which clamours for larger budgets rather than for more challenging assignments. Also, the powerful 'impact of political pressures on financial decision-making makes the prospects of ZBB very uncertain. In fact, the very nature of government decision-making is muddling through is ill suited for ZBB.
The advocates of ZBB regard it as. a pragmatic approach which offers an extremely flexible management tool. It can lead to substantial savings.' Low priority programmes can be eliminated or reduced. Programme effectiveness can be drastically improved, although it may or may not have a budgetary impact. High impact programmes can obtain increased financial allocation by shifting resources within an agency and tax increase can be checked with all its much evaluated benefits. ZBB's application to public finance looks a doubtful starter. More conventional methods of sound budgeting should not be sacrificed for the sake of blind limitations for an ideal system.

12.5.    GLOSSARY

• Zero-Based Budgeting : a method of budgeting in which all expenses must be justified for each new period.

12.6    ANSWERS TO SELF-CHECK EXERCISES
Self-Check Exercise-1
Q.1 True
Q.2 True
Self-Check Exercise-2
Q.1 True
Q.2 True

12.7.    REFERENCES/SUGGESTED READINGS
Laxmikant, M. 'Public Administration' Fifth Edition, Tata McGraw-Hill Publishing Company Limited, New Delhi, 2016.
Gupta, B.N. Indian Federal Financial and Budgeting Policy, Chaitanya Publishing House, Allahabad, 1970.
Wattal., P.L. Parliamentary Financial Control in India, Minerva Book Depot, Bombay, 1985.
Handa., K.L. Financial Administration in India, HPA New Delhi, 1988
Pyhrr., P.A. Zero-Base Budgeting, Johan Wiley and Sons, New York, 1973.
Baisys., K.N. Financial Administration in India, Himalaya Publishing House, Bombay, 1986.
Mahajan., S.K. & Mahajan., A. P. Financial Administration in India, P.H.I, New Delhi.

12.8.    TERMINAL QUESTIONS

(a)    What do you understand by Decision units.

(b)    Discuss about from basic steps of ZBB approach.
PLANNING PROGRAMMING BUDGETING SYSTEM
Structure

13 .0. Learning Objectives


13.1.    Introduction

13.2.    Objectives, Elements/Features of PPBS
Self-Check Exercise-1

13.3.    Importance of PPBS
Self-Check Exercise-2

13.4.    Summary

13.5.    Glossary

13.6    Answers to Self-Check Exercises

13.7.    References/Suggested Readings

13.8.    Terminal Questions

11.0. INTRODUCTION
The Planning Programming Budgeting System (PPBS) is a comprehensive management approach that emphasizes using analysis for making program decisions. The goal of PPBS is to give management a more analytical foundation for making program decisions and to implement those decisions by integrating the functions of planning, programming, and budgeting. In this context, "management" refers to the overall leadership and administration of an organization. Program decision-making, which is central to management, involves determining the direction of an organization's efforts and allocating resources to achieve those objectives. This process involves defining the organization’s goals, choosing the strategies to achieve them, and implementing the selected actions.
PPBS is focused mainly on major decision-making activities, particularly those that precede operational execution. An organization can be simplified into five key phases: (1) planning, (2) programming, (3) budgeting, (4) operations, and (5) evaluation. PPBS addresses the first three of these phases, each of which plays a distinct but interconnected role in the overall functioning of the organization.

1.    Planning involves analytical activities aimed at selecting the organization’s objectives and assessing different courses of action to achieve these goals. It
essentially asks whether a specific action is the most effective way to move the organization toward its objectives compared to other alternatives.

2.    Programming translates plans into actionable schedules for the organization. It includes developing detailed resource requirements and determining the steps needed to implement the plans.

3.    Budgeting focuses on preparing and justifying the organization's annual budget. Its primary role is to ensure adequate funding to implement the program effectively.

4.    Operations refers to the actual execution of the organization’s program, with all previous phases preparing the groundwork for these activities.

5.    Evaluation assesses the success of the organization’s programs in achieving its goals. It measures the effectiveness of current operations and provides insights that can guide modifications to current programs or inform the planning of future ones.

13.1.    LEARNING OBJECTIVES
After studying this lesson, the learner will be able:

•     To know about the evolution of PPBS.

•     To know about objective and features of PPBS.

•    To Comprehend the importance of PPBS.

13.2.    OBJECTIVES, ELEMENTS/FEATURES OF PPBS
A key goal of the Planning Programming Budgeting System (PPBS) is to integrate the functions of planning, programming, and budgeting. In PPBS, planning—carried out through analysis and research—becomes an essential part of the program development process. The research conducted during the planning phase helps identify the most appropriate actions to guide the organization’s overall program. Additionally, the annual budget is directly linked to the approved program and financial plan of the organization. While planning, programming, and budgeting each serve distinct roles, they are structured as sequential phases of a unified process aimed at steering the organization toward its goals.
PPBS seeks to minimize the independence of planning, programming, and budgeting, ensuring that the procedures and workflows under this system establish clear connections between these core functions. Emphasis is placed on research to aid in selecting the most effective courses of action for the organization. The planning phase lays the foundation for the development of the program, which in turn informs the budget preparation. Therefore, the creation of the program directly stems from the planning outcomes, and the budget is developed based on that program, ensuring that all activities are interconnected and aligned.
ELEMENTS/FEATURES OF PPBS
Defining PPBS is challenging, as there is no universal agreement on its precise meaning. This difficulty arises because PPBS encompasses several distinct features, each emphasized to varying degrees depending on the specific context in which it is applied. The Planning Programming Budgeting System is fundamentally made up of five key components:

1.    A structured program framework,

2.    A formalized program document with future projections,

3.    A decision-making process,

4.    The application of analysis for informed decision-making, and

5.    An information system tailored to support PPBS needs.
Disagreements about the definition of PPBS often occur when too much focus is placed on one element while neglecting others. However, all five components—the program structure, the program document, the decision-making process, the analytical approach, and the supporting information system—are essential to the system's success. The most effective PPBS incorporates all of these elements because they are interconnected and work together to enhance overall system effectiveness. For instance, the program structure is linked to the decision-making process, and issues for analysis are framed within the program’s classification. Additionally, analysis is integrated into the decision-making procedures, and the information system underpins all other components.
Although these elements are interrelated, it is still possible for an organization to implement individual aspects of PPBS. For example, the use of analysis in decisionmaking can be valuable on its own, even without the other components. Similarly, creating a program with clear goals and actions over a long-term period can be beneficial. However, the full potential of PPBS is only realized when all elements are combined.
SELF-CHECK EXERCISE-1
Q.1 A major objective of the PPBS is to unify the planning, programming and budgeting functions. True/False
Q.2 Programming is the process of turning plans into a detailed action plan for the organization. It involves identifying the resources required and outlining the steps necessary to carry out the plans. True/False

13.3.    IMPORTANCE OF PPBS
A program structure refers to a classification of possible actions an organization can take to achieve its goals. This structure is designed to support decision-making and the allocation of available resources within the organization. The program data, including benefits and resource allocations, should be presented within the organization’s multi-year program and financial plan according to this structure. The structure also provides a framework for creating program memoranda, which are used to justify proposed programs. These documents will be further elaborated upon below.
The program structure offers a perspective on the organization’s activities that aligns with the needs of program analysis and decision-making. A key aspect of the program structure is its alignment of major agency objectives with the corresponding actions selected to reach those objectives. This feature prompts fundamental management questions about what the agency aims to achieve and what steps are being taken to meet these goals. By structuring programs around objectives, the agency ensures that its goals remain central to program analysis and decision-making.
SELF CHECK EXERCISE-2
Q.1 Budgeting involves the process of preparing and justifying the annual financial plan for the organization. The primary purpose of budgeting is to ensure that adequate funds are available to implement the program. True/False

13.3.    SUMMARY
For the purposes of PPBS, organizational goals or objectives must be defined clearly enough to ensure they can be directly aligned with the actions that contribute to their accomplishment. The structure ensures that there are clear connections between goals and the methods used to achieve them. Therefore, the definitions of goals should be specific enough to allow for the consideration of alternative actions. These goals should provide precise direction to evaluate different courses of action.
At the top level of the program structure are the major organizational goals. These are referred to as Major Programs and represent the highest tier of the program classification. Depending on the specific adaptation of PPBS, this level may be referred to using different terms, such as program categories, program packages, or program accounts, all signifying the higher level within the classification.

13.5.    GLOSSARY


11.7.1.    Planning Programming Budgeting System : It is to set certain major objectives to define programmes essential to these goals, to identify resources to the specific types of objectives and to systematically analyze the alternative available.
13.6.    ANSWERS TO SELF-CHECK EXERCISES
Self-Check Exercise-1
Q.1 True
Q.2 True
Self-Check Exercise-2
Q.1 True

13.7.    REFERENCES/SUGGESTED READINGSS
Laxmikant, M. 'Public Administration' Fifth Edition, Tata McGraw-Hill Publishing Company Limited, New Delhi, 2016.
Gupta, B.N. Indian Federal Financial and Budgeting Policy, Chaitanya Publishing House, Allahabad, 1970.
Wattal., P.L. Parliamentary Financial Control in India, Minerva Book Depot, Bombay, 1985.
Handa., K.L. Financial Administration in India, HPA New Delhi, 1988
Pyhrr., P.A. Zero-Base Budgeting, Johan Wiley and Sons, New York, 1973.
Baisys., K.N. Financial Administration in India, Himalaya Publishing House, Bombay, 1986.
Mahajan., S.K. & Mahajan., A. P. Financial Administration in India, P.H.I, New Delhi.

13.8.    TERMINAL QUESTIONS

(a)    Give reasons about the importance of PPBS?

(b)    The PPBS is Concerned Primarily with major decision-making process. Elaborate.
SUNSET BUDGETING
Structure

14 .0. Introduction


14.1.    Leaning Objectives

14.2.    Termination Innovation & Voting-Assumption in Sunset Legislation
Self-Check Exercise-1

14.3.    Relationship between Sunset Review and Politics, features & need
Self Check Exercise-2

14.4.    Summary

14.5.    Glossary

14.6.    Answers to self check exercises

14.7.    References/Suggested Readings

14.8.    Terminal Questions

14.0 Introduction: Sunset budget is structured to 'self-destruct' within a given pre-set duration to make expenditure is stopped by an already fixed date. The fundamental difference between with and without a sunset clause is the default rule of termination. Legislation without defaults to legislation that effectuates in perpetuity, while legislation with a sunset budgeting legislation that effectuates until termination. Obviously, these are defaults and can be with further legislative action by extending sunset legislation or repealing permant.
SUNSET LEGISLATION AND THE FEDERAL GOVERNMENT USA
Even though many efforts were made for budgetary reform, federal budgeting incremental process in which the most important factor in deciding an agency's budget amount of the previous year's budget. Legislators look only at additions or increments new budget is formulated and last year's programmes continue to receive funding with no review.
The Sunset Act was introduced, as mentioned earlier while tracing its origin and by Senator Edmund Muskie m 1976, designed to eliminate incremental budgeting. Act carried with it the assumption that every federal program will automatically unless there is a vote to continue it. Instrumentalism would be replaced with a procurement evaluation of each federal programme before continued funding could' be approved promise of budgetary reform. Sunset Legislation was never approved by the Congress
felt that the work involved in viewing all federal- programs would create '.tremendous would be conducted by congressional oversight committees that are biased in favour of the continued funding of the only programmes with low funding and weak constituencies nomination and if these agencies were meant to be terminated to' set legislation.
Sunset Legislation never was adopted by the federal government in the USA, dewed sunset as one of the most significant.

14.1.    LEARNING OBJECTIVES
After studying this lesson, the learner will be able:

•    To understand Sunset Budgeting

•      To trace the termination and innovation is Sunset Legislative

•     To Comprehend the relationship between Sunset Review and Policies

•    To discuss about the features of Sunset Budgeting.

14.2.    TERMINATION, INNOVATION & VOTING-ASSUMPTION IN SUNSET LEGISLATION
Defined as an idea, perceived as new, by an individual. It is adopting it, no matter how old the idea may be or how opted it. In this respect, Sunset Legislation is an innovate ratification, no matter how many states have previously adore vanes is the adoption proneness of an entity that has the simply means that the idea may have been tied earlier but if it concept of innovation.
TERMINATION AND OF SUNSET
Act assumes that every federal program will terminate unit Instrumentalism would be replaced with a performance before consumed funding would be approved. Under the would be reviewed once every eight years. Implicit in Sunset termination.
Its promise of budgetary reform, Sunset Legislation was it was felt that reviewing all federal programs would creating administrators and might lead only to a wrong evaluation to meet was viewed as one of the most significant movements of the.
RELATIONSHIP BETWEEN SUNSET REVIEW AND POLICIES
Parliament's capacity for adopting innovative policies depends on outdated policies, the most innovative States should be. States that adopt Sunset legislation and are reviewing and programs must have a new policy or program that mil replies relationship between sunset review and policy innovation can be three hypotheses;
States that adopt sunset are more, innovative than States that his state's most innovative in adopting sunset, with lower add innovative in adopting other policies.
Unanending sunset after initial adopting Mark Ross Daniels, the first hypothesis is true to quite an extent. Research and statistical analysis, he concluded that there is
a statistically significant between general policy innovativeness and adoption of Sunset Legislation on two innovation indices. This falls short of demonstrating a causal relationship between to the adopt a Legislative termination mechanism and the tendency to embrace new pickly. The results show that only sunset adopting States have a greater tendency policy innovativeness than non-adopting states. While this can be seen as a connection termination and innovation, it can also be seen as further evidence that a State's imitativeness reveals a willingness to adopt all new policies, including the policy review.
In this sense, sunset adoption may not be so much an enactment of termination loping of yet another new policy or a new innovation.
SECOND HYPOTHESIS
The second hypothesis results report that there is a statistically significant relationship general policy innovativeness and the speed of Sunset Legislation adoption. However, the relationship is inverse States that quickly adopt other innovation, the octant to adopt sunset. States that are _ usually slow in adopting other innovation, they are most innovative when it comes to adopting Sunset Legislation. The speed of ensured by a State's adoption and the order of adopting being the same. States slow in adopting other policies were among the early adopters of sunset. There terous studies and researches on this issue.
THIRD HYPOTHESIS
Trading the third hypothesis, data analysis reveals no relationship between general activeness and repeal/suspension or retention of Sunset. Although, it has been Legislatures have a tendency to repeal or suspend Sunset review, there is no evaluate states are generally less innovative than states that retain Sunset.
Self-Check Exercise-1
Q.1 Sunset budget is structured to 'self-destruct' within a given pre-set duration to make expenditure is stopped by an already fixed date. True/False
Q.2 Senator Edmund Muskie in 1976, designed Sunset budgeting to eliminate incremental budgeting. True/False

14.3.    NEED AND FEATURES FOR SUNSET CLAUSE
It termination rules in a wide range of Legislation, for example, a patent exploit reward an innovator or a protective tariff expiring to force an industry to compete.
Intrinsic Necessity: Intrinsic necessity means that sunset clauses may be brings into force when a parliamentary objective is time bound. If Legislatures law must end so that a pre-decided identified aim is accomplished, they law with default termination. In the US, the reward theory, supported, by 'the, Constitution, states that it is the job of an intellectual property to reward people are active in innovating otherwise there would be no incentive to do so.
Information Rationale : The informational rational explains how are used between government and private actors to produce information transaction costs. If
the law is about to be terminated, the legal environment change too by updating the law. In such a situation, the Legislature will avoid the transaction costs of repealing or amending the law.
Political Requirement : Sunset clauses are ' used between lawmakers as a bargaining since sunset clauses affect a law, the sunset can favour one politician more than other.
Taucrtic Uses : Sunsets may be brought in to reinforce the time limits. Firstly, it an interim law giving the Legislature more time to create a permanent law. An law is a stop-gap, an incomplete solution. So, sunsets may be used to permit Legislature more time to create a permanent law. The British Labour M.P., Nick ford said that the Bill could have an interim characteristic tackling the current problems but not the far-reaching problems.
Legitimacy Legislation : Sunsets may be introduced as a Stop-Gap Legislation, sometimes termed as emergency legislation. A law maybe created by the Legislature a gap which it understands to be an emergency gap. It often attributes a sunset law as it wishes to come back to the issue. This happens in the situation where concerned issue needs to be examined extensively before the Legislature passes.
Temporary Social Problem Responses: The United Kingdom's Better Regulation Force suggests utilizing a sunset clause to initiate controlled steps taking into the market conditions or authorizing an economic regulation which can be estimated once the markets develop.' Here, a policy decision in this situation portrays final decision that the law will need elimination, not modification. Sometimes, even though the Legislature feels some uncertainty, the Legislators presume that situation improve with such surety that the law will become absolute, for example, in 1933, Agricultural Adjustment Act was made to stabilize falling prices by, in the interim, thereby reducing agricultural production in Franklin D. Roosevelt's New Deal.
FEATURES OF SUNSET BUDGETING
Featuring has the following features:
Termination : The notion behind the theory of sunset provides for programs and agencies to terminate automatically agreeing to a predetermined timetable unless clearly renewed by law. Sunset provisions generally comprise of two components:

12.8.1.    An action-forcing system, with the eventual risk of elimination, and

12.8.2.    A structure or a design for the systematic review and assessment of past outcomes.11
Emphasis on Goals : Sunset budgeting techniques will allow you to take a look at operating budget, not in comparison with what your totals were last year, but with what your goals are. Ultimately, that kind of budgeting approach is necessary, because, when all is said and done, there are only two kinds of money-new money old money. New money is what you get from romance who has never given any.
Self-Check Exercise-2
Q.1 Sunset budgeting techniques will allow you to take a look at operating budget, not in comparison with what your totals were last year, but with what your goals are. True/False
Q.2 Intrinsic necessity means that sunset clauses may be brings into force when a parliamentary objective is time bound. True/False

14.4.    SUMMARY
Sunset legislation is a formal policy process designed to phase out outdated, redundant, or unnecessary programs. According to K.H. Handa, it represents the idea of self-terminating government programs by setting expiration dates for their statutory authority. This is accomplished by including time limits within legislative acts, ensuring that programs automatically end on a specified date unless they are actively renewed by the legislature following a comprehensive review.

14.5.    GLOSSARY

•    Sunset Legislation : It is a formal process of policy review for eliminating the undesired, outdated, redundant, and irrelevant programmes.

•    Sunset Budget : Designed to self destruct within a prescribed time period to ensure the cessation of spend in by a determined date.

14.6    ANSWERS TO SELF-CHECK EXERCISES
Self-Check Exercise-1Q.1 True
Q.2 True
Self-Check Exercise-2Q.1 True
Q.2 True

14.7.    REFERENCES/SUGGESTED READINGSS

•    Laxmikant, M. 'Public Administration' Fifth Edition, Tata McGraw-Hill Publishing Company Limited, New Delhi, 2016.

•    Gupta, B.N. Indian Federal Financial and Budgeting Policy, Chaitanya Publishing House, Allahabad, 1970.

•    Wattal., P.L. Parliamentary Financial Control in India, Minerva Book Depot, Bombay, 1985.

•    Handa., K.L. Financial Administration in India, HPA New Delhi, 1988

•    Pyhrr., P.A. Zero-Base Budgeting, Johan Wiley and Sons, New York, 1973.

•    Baisys., K.N. Financial Administration in India, Himalaya Publishing House, Bombay, 1986.

•    Mahajan., S.K. & Mahajan., A. P. Financial Administration in India, P.H.I, New Delhi.

14.8.    TERMINAL QUESTIONS

(a)    Critically analyse advantages and disadvantages of sunset budgeting.

(b)    Why we do have need for sunset clause?
BLOCK-III
Unit-15
TAX ADMINISTRATION IN INDIA
Structure

15 .0 Introduction


15.1    Learning Objectives

15.2    Tax Revenue — Concepts and Classification, Direct Taxes, Indirect Taxes before 2017
Self-Check Exercise-1

15.3    Non-tax Revenue
Self-Check Exercise-2

15.4    Summary

15.5    Glossary

15.6    Answers to Self-Check Exercises

15.7    References/Suggested Readings

15.8    Terminal Questions

15.0 INTRODUCTION
The mobilization of resources is essential for the planned economic development of an economy, serving as a key driver of growth. Resource mobilization goes beyond just taxation, encompassing income from public services, enterprises, and utilities. For a development plan to succeed, it must prioritize generating sufficient surpluses from the government's current revenues, departmental units, and public enterprises. As the economy grows and incomes rise, it should be able to generate additional resources through public borrowings and small savings. In some cases, deficit financing may also be used to accommodate the increasing demand for money, driven by rising incomes and the growing monetization of the economy. However, care must be taken to ensure that such financing does not lead to inflation. Additionally, external financial assistance may be required if domestic resources are insufficient to support development programs.
This unit primarily focuses on two key revenue sources—tax and non-tax revenues— for resource mobilization. We will explore the components of both and provide examples, such as the provisions related to resource mobilization in the 1991-92 Budget.

15.1    LEARNING OBJECTIVES
By the end of this unit, you should be able to:

•    Define the concepts and categories of tax revenue

•    Explain the various components of non-tax revenue

15.2    TAX REVENUE — CONCEPTS AND CLASSIFICATION

•    Government income can be defined in two primary ways: broadly or narrowly. In the broadest sense, public receipts encompass all forms of income or revenue that the government receives, including borrowings and asset sales. However, when referring to government revenue in the narrower sense, it specifically refers to the money that the government earns from taxes and other regular sources that contribute to its budget.

•    The most significant source of government revenue is taxes, which are compulsory payments imposed by public authorities. These are usually levied on individuals, businesses, or goods. A tax is not meant to penalize a person for wrongdoing (as penalties do), but rather to generate revenue for the government. Penalties, on the other hand, are imposed as punishment for breaking the law, with the goal of deterring undesirable behavior. Taxes, however, are imposed to fund government services and infrastructure without necessarily linking the amount collected to the specific services provided to the taxpayer.

•    The main categories of taxes are direct taxes and indirect taxes:

•    Direct Taxes

•    Direct taxes are those where the tax burden falls directly on the person or entity being taxed, and the liability cannot be transferred or shifted to another. These taxes are based on an individual’s or corporation’s ability to pay, as they are directly assessed based on income or wealth.

•    Examples of Direct Taxes:

•    Income Tax:

•    Income tax is a tax imposed on an individual’s or entity’s income after deductions and exemptions. In India, the first Income Tax Act was introduced in 1886, and several amendments have been made since, with the most recent comprehensive changes made under the Income Tax Act of 1961. Income tax covers all types of earnings, including salaries, profits from business, capital gains, and benefits like perquisites. However, agricultural income is exempt from income tax.

•    The tax rates are subject to change each year during the Union Budget, with income slabs for individuals and tax rates being adjusted accordingly. Some income sources are also fully exempt from tax, such as certain contributions to provident funds, gratuities, and scholarships.

•    Corporation Tax:

•    Corporation tax is levied on the income of companies, based on the profits they generate. Companies are required to pay this tax on their earnings, while the shareholders receive dividends after tax deductions. The government periodically adjusts the tax rate for corporations. For example, in the 1991-92 Budget, the rate for widely held domestic companies was reduced from 50% to 40%. Additional deductions were also introduced for companies setting up new industries.

•    Capital Gains Tax:

•    This tax applies to the profits made from selling capital assets such as land, property, or shares, when the selling price exceeds the original purchase price. Capital gains tax varies depending on the type of asset and the length of time it was held. However, certain items like consumables and raw materials are exempt from capital gains tax.

•    Wealth Tax:

•    Wealth tax is levied on the net wealth of individuals, Hindu Undivided Families (HUF), and closely held companies. Agricultural land is excluded from the calculation of wealth tax. The tax is assessed based on the value of assets such as properties, investments, and savings. The wealth tax threshold and rates have changed over time, with exemptions and deductions applied to the total wealth of individuals.

•    Estate Duty:

•    Estate duty is a tax that was imposed on the total value of a deceased person’s estate, including their properties, cash, and assets. In 1985, estate duty was abolished for agricultural land. The Estate Duty (Amendment) Act of 1984 and 1985 removed the tax on most property transfers, except for those occurring before certain dates.

•    Gift Tax:

•    The gift tax is levied on the value of gifts given by individuals, Hindu Undivided Families (HUFs), and corporations. If the value of gifts exceeds a specific amount (such as Rs. 20,000), the giver must pay the tax. However, certain gifts, like those given to charitable institutions or a spouse, are exempt from this tax.

•    Indirect Taxes

•    Indirect taxes are those that are imposed on one person but can be shifted to others. This typically happens in the form of taxes on goods or services where the buyer pays the tax, but the seller is responsible for remitting it to the government. Examples include sales tax, excise duties, and Value Added Tax (VAT) .

•    While direct taxes primarily focus on the income or wealth of individuals and corporations, indirect taxes are often associated with consumption and the movement of goods.

•    Revenue Sharing with States

•    Although taxes like income tax and wealth tax are collected by the central government, a portion of the tax revenue is shared with state governments based on established provisions in the Constitution. This sharing of tax revenue
ensures that states have the necessary resources to carry out their responsibilities, such as public services, infrastructure development, and welfare programs.

•    The direct tax revenue of state governments typically includes the state’s share of income tax (a portion of the total income tax collected), estate duty, and land revenue, among others. States also levy their own taxes, such as property tax and sales tax, to fund their operations.
Self-Check Exercise-1
Q.1 What is distinction between taxes and penalities?
Q.2 What is Gift Tax?

15.3    Indirect Taxes (Before 2017)
After covering the various types of direct taxes, which serve as a key source of revenue for the Central Government, we now turn our attention to indirect taxes. The Indian tax system places significant emphasis on indirect taxes, which contribute approximately 83% of the total revenue.
Indirect taxes encompass a wide range of taxes, including sales tax, excise duties, entertainment tax, and customs duties, among others. A major reason for the growing contribution of indirect taxes is that, given the increasing financial needs of the government, it is often simpler and quicker to adjust and implement indirect taxes compared to direct taxes.
Customs Duty
Customs duties are taxes imposed on goods crossing the border, either entering (import duties) or leaving (export duties) a customs area. Import duties apply to goods entering the country, while export duties are levied on goods being exported.
There are three broad categories of customs duties — import duties, export duties, and cesses on exports.

(i)    Import Duties: These duties are determined based on the rates specified in Schedules I and II of the Indian Tariff Act of 1934. The Act outlines various import duties on different commodities, with luxury goods often carrying higher duties to deter their import, while essential goods face lower rates.
In 1990-91, the estimated customs revenue was Rs. 20,800 crore, and Rs. 26,410 crore in 1991-92, with some revisions based on changes under the Finance Act of 1990. The revised estimate for 1990-91 was slightly lower, reflecting decreased revenue from specific imports, like electrical machinery and motor vehicles, although this was offset by higher import duties on petroleum products and machine tools.

(ii)    Export Duties: Initially, export duties were primarily introduced to generate revenue. After World War II, their role expanded to include regulating domestic prices and shielding domestic markets from global inflation.
Historically, export duties formed a substantial share of indirect taxes, especially when India enjoyed a near-monopoly in certain commodities. However, as competition increased, these duties were progressively reduced and, by the end of the Third Plan, many were abolished. By 1966, export duties were reinstated on several products due to changing market dynamics. Over time, these duties have become less significant in the tax structure, particularly as excise duties gained prominence.
The revised estimate for export duty collections in 1990-91 was Rs. 1 crore, significantly lower than the original estimate of Rs. 6.15 crore, with a further reduction in the 1991-92 budget estimate.
Union Excise Duties
Excise duties are levies imposed on goods manufactured within the country. In India, excise duties are under the jurisdiction of the Union Government, except for items like alcoholic beverages and narcotics, which are taxed by the state governments.
Excise duties can be specific (charged per unit of the product) or ad valorem (calculated as a percentage of the product’s monetary value).
The Central Excises and Salt Act of 1944 governs most excise duties, and various commodities are grouped into 139 budget heads for taxation. However, several commodities are exempt from these duties.
In the fiscal year 1990-91, excise duty receipts were estimated at Rs. 24,500 crore, slightly below the original estimate due to reduced revenue from sectors such as petroleum and iron and steel.
Other Taxes and Duties
In addition to the major taxes outlined above, there are various smaller taxes such as foreign travel tax, inland air travel tax, foreign exchange conservation tax, and water cess, among others. These are grouped under a broader category of ‘other taxes’.

(i)    Foreign Exchange Conservation Tax: This tax is levied on individuals who draw foreign exchange for travel purposes abroad. The rate is set at 15% of the equivalent rupee value of the foreign exchange granted. Certain travel categories, including medical treatment and pilgrimages, are exempt from this tax.

(ii)    Foreign Travel Tax: Introduced in 1971 and amended in 1989, this tax applies to passengers traveling abroad, with a fee of Rs. 300 for international journeys and Rs. 150 for travel to neighboring countries. A small percentage of the tax collection is paid to the carrier as a handling fee.

(iii)    Inland Air Travel Tax: This tax, introduced in 1989, was initially levied at 10% of the basic air fare, but now it is imposed on the full fare amount.

(iv)    Water Cess: Under the Water Cess Act of 1977, industries and local authorities are taxed for their use of water. The proceeds from this tax are deposited in the Consolidated Fund of India and then distributed to state water pollution control boards.
Indirect taxes also contribute to the revenue of state governments, which include their share of union excise duties, state excise duties, general sales tax, motor vehicles tax, entertainment tax, and other taxes.
NON-TAX REVENUE
Non-tax revenue for the Union Government comprises various sources, including administrative receipts and the net contribution from public sector undertakings, such as Railways, Posts and Telegraphs, and others. It also includes revenues from forests, irrigation, and electricity, among others.
Administrative Receipts include loans advanced by the Centre to states. As per the Ninth Finance Commission's recommendations, state plan loans were consolidated with an interest rate of 9%. The interest from these loans was estimated at Rs. 5,576.53 crore in 1990-91 and projected to rise to Rs. 6,789.5 crore in 1991-92. Interest on loans to Union Territories, such as the Union Territory of Pondicherry, was estimated at Rs. 16 crore in 1990-91, with a slight increase in 1991-92.
Interest Receipts from loans provided to public sector enterprises and other statutory bodies are also a part of non-tax revenue. These contributions come from a variety of sources, including port trusts, cooperatives, and other commercial undertakings.
India’s participation in the Special Drawing Rights (SDRs) system of the IMF also generates revenue, with a net cumulative allocation of SDR 327 million in 1990-91.
State governments, similar to the Union Government, also generate non-tax revenue through administrative receipts, contributions from public sector undertakings, and other grants.
Self-Check Exercise-2
Q.1 What are custom duties?
Q.2 What is estate duty?

15.4.    SUMMARY
As mentioned earlier, direct taxes serve as a significant source of revenue for the Central Government. While some of these taxes are collected by the Union
Government, the proceeds are often shared between the Union and the states. The specific distribution arrangements will be discussed in Section 13.4 of this unit. For state governments, direct tax revenues typically include their share of income tax, estate duty, land revenue, urban property tax, and other related taxes.

15.5.    GLOSSARY

•    Customs Duties: These taxes are levied on goods that either enter (import duties) or leave (export duties) a customs zone.

•    Gift Tax: This is a tax charged on gifts made by individuals, Hindu Undivided Families, and corporations, based on the value of the taxable gifts they provide during the year.

1 5.6 ANSWERS TO SELF-CHECK EXERCISES
Self-Check Exercise-1
Q.1 The key difference between taxes and penalties lies in their purpose. Taxes are primarily levied by public authorities to generate revenue, whereas penalties are intended to discourage certain behaviors or actions.
Q.2 The Gift Tax was introduced in India in 1958. It is levied on the value of gifts made by individuals, Hindu Undivided Families, and corporations during the year.
Self-Check Exercise-2
Q.1 These taxes are applied to goods that either enter (import duties) or leave (export duties) a customs zone.
Q.2 The Estate Duty was introduced in India in 1953. It was charged on the entire estate of a deceased person, covering all property that passed or was considered to pass upon their death.

15.7.    REFERENCES/SUGGESTED READINGSS

•    Bhatia, H.L. , 1992. Public Finance (Revised Edition), Vikas Publishing House : New Delhi.

•    Bishnoi Usha, 1980. Union Taxes in India, Chugh Publications : Allahabad.

•    Chelliah Raja I. 1969. Fiscal Policy in Under-Developed Cduntries with special reference to India, George Allen and Unwim Ltd : London.

•    Jain, Inu, 1988. Resource Mobilization and Fiscal Polic y in India, Deep and Deep Publications : New Delhi.

•    Jha, S.M. , 1990. Taxation and the Indian Economy, Deep and Deep Publications : New Delhi.

•    Lall, G.S. , 1969. Financial Administratio n in India, H.P.J. Kapoor : Delhi.

•    IGNOU New Delhi, egyankosh

15.8.    TERMINAL QUESTIONS

(a)    Critically analyse Indirect Taxes before 2017.

(b)    What are the non tax sources of revenue?
CHAPTER-16TAX ADMINISTRATION : PART II
Structure

16.0 Introduction

16.1    Learning Objectives

16.2    Sharing of Receipts with States & Resource Mobilisation over the Years
Self-Check Exercise-1

16.3    Indirect Taxes after 2017: GST
Self-Check Exercise-2

16.4    Summary

16.5    Glossary

16.6    Answers to Self-Check Exercises

16.7    References/Suggested Readings

16.8    Terminal Questions

16.0 INTRODUCTION
The Goods and Services Tax (GST) is considered one of the most significant tax reforms since India's independence. It represents a transformative indirect tax change aimed at establishing a unified national market by eliminating barriers to interstate trade. GST has incorporated various indirect taxes that were previously imposed by both central and state governments.
Originally introduced in France in 1954, GST has now been implemented by around 160 countries worldwide over the course of 62 years. While many countries use a single GST model, Canada and Brazil have adopted a dual GST system. India, too, has chosen a dual GST structure, with the tax being levied simultaneously by both the central and state governments.

16.1    OBJECTIVES
After studying this unit, you should be able to:

•    explain how revenue is shared with states; and

•    outline the evolution of tax administration over time to understand the concept of GST.

16.2    SHARING OF RECEIPTS WITH STATES
The Indian Constitution adopts a quasi-federal structure, with a three-tier system of government: the central government, state governments, and local governments. Since local authorities fall under the jurisdiction of state governments, they are not granted independent taxation rights. To minimize conflicts between the central and state governments regarding tax matters, the Constitution includes specific provisions.

1.    Taxes are divided so that no single tax can be levied by both the central and state governments. For instance, customs duties and corporate taxes are under the central government, contributing significantly to its tax revenue (approximately 50%). States are empowered to levy taxes like sales tax, land revenue, state excise duties, and entertainment tax to fund their activities.

2.    Certain taxes are imposed by the central government, but the revenue is shared between the central and state governments. These include union excise duties and income taxes, excluding agricultural income. The Finance Commission determines the basis for dividing these revenues.

3.    Some taxes are solely levied by the central government, but the proceeds are distributed to states. These include estate duties on non-agricultural property, railway freight duties, and terminal taxes on goods and passengers. Additionally, stamp duties (outside the Union list) and excise duties on items like drugs and cosmetics are collected by the state, even though they fall under central jurisdiction.
The need for decentralization is essential for fostering local initiative, enhancing decision-making speed, and increasing administrative efficiency. This decentralization approach allows for tailored solutions to diverse regional needs and ensures resource mobilization in line with a national vision. This framework is in harmony with the federal nature of India’s Constitution.
According to 1991-92 budget, current situation of sharing of receipts with states
is as
Table 3
| Budget 1990-91 |  | Revised 1990-91 | Budget 1991-92 |
|---|---|---|---|
| Total Tax Revenue | 59,778.57 | 58,916.01 | 66,217.73 |
| Less states share: |  |  |  |
| Taxes on income | 4,064.31 | 4,120.48 | 4,467.91 |
| Union Excise Duties | 10,361.44 | 10,414.00 | 11,175.47 |
| Total States Share | 14,425.75 | 14,534.91 | 15,643.38 |
| Less : Transfer of Union territory taxes and duties to local bodies | 58.83 | 63.25 | 79.43 |
| Centre's Net Tax Revenue | 45,293.99 | 44,317.85 | 50,494.92 |


Source : Budget 1991-92

Tax Revenue

There is often tension between the financial transfers made according to the Finance Commission’s recommendations and those made by the Planning Commission. To resolve this issue, the Finance Commission should be established as a permanent statutory body, with its role and functions expanded through constitutional amendments.
Revenue transfers from the Centre to the states should align with economic considerations, administrative efficiency, and practicality, ensuring that a national minimum standard of living is met. An effective approach to achieving this is to redistribute resources from wealthier to poorer states. In this process, factors such as population, climate, rainfall, and the state of economic development should be considered.
The central government should refrain from offering direct loans to states. Instead, state governments should be encouraged to raise funds by borrowing directly from the public, to the extent possible.
A notable issue in recent times concerning the Centre-State financial relationship is the use of unauthorized overdrafts by states from the Reserve Bank of India. This is often driven by temporary cash flow issues and long-term imbalances between state responsibilities and available resources. Additionally, the repayment of past loans,
along with interest, has placed a significant strain on state budgets. Many projects that states have funded through borrowing from the Centre have not generated the expected returns, making it necessary to address inefficiencies in public sector initiatives. Some non-plan loans have become burdensome debts that need to be reconsidered.
A thorough review and adjustment of Centre-State financial relations is necessary. States must learn to operate within their financial limits while maximizing their resource utilization.
RESOURCE MOBILISATION OVER THE YEARS
India has made significant progress in tax collection over the years. When the planning process began in 1950-51, the ratio of Tax-Net to National Product (NNP) was just 6.4%. Since then, it has steadily increased and currently stands at around 25%. This achievement is particularly impressive for a developing nation like India, which began with a low per capita income and has grown at a modest rate (approximately 1% annually in NNP per capita). By international standards, India’s success in generating tax revenue is commendable. Most of India’s major taxes, except for personal income tax and land revenue, have shown growth rates greater than unity. In recent years, the buoyancy of excise duties and sales tax has reached 1.51% and 1.41%, respectively, leading to a more efficient mobilization of resources through taxation. There remains potential to raise additional tax revenue, particularly if agricultural incomes, currently outside the tax net, are taxed.
In addition to tax revenues, resource mobilization involves generating non-tax revenues, reducing current government expenditures, and increasing surpluses from public sector enterprises.
In the 1990-91 budget, additional measures were anticipated to generate Rs. 1,790 crore, of which Rs. 550 crore would come from direct taxes and Rs. 1,240 crore from indirect taxes. The states' share of the additional resource mobilization, after accounting for the Rs. 170 crore loss due to income tax concessions, was estimated at Rs. 3 crore.
The Railway Budget for 1990-91 proposed hikes in goods traffic rates, passenger fares, and parcel rates, with an expected additional revenue of Rs. 892 crore.
Increases in postal and telecommunications tariffs were expected to add Rs. 645 crore. Combined, these revisions were projected to generate an additional Rs. 3,327 crore in revenue.
Central government public enterprises saw a substantial increase in net profits, rising from Rs. 2,994 crore in 1985-89 to Rs. 3,782 crore in 1989-90. The rate of return, measured by net profits to capital employed, increased to 4.5% in 1989-90, the highest in the decade. However, the majority of these profits, Rs. 2,900 crore, came
from the petroleum sector, while the non-petroleum sector contributed only Rs. 882 crore. Despite this improvement from the previous year’s profit of Rs. 430 crore, the return on capital in non-petroleum enterprises was a mere 1.3% in 1989-90. This highlights a significant opportunity for improving financial performance in nonpetroleum sectors. In the first half of 1990-91, Central Government public enterprises made a net profit of Rs. 481 crore, compared to Rs. 1,103 crore in the same period of the previous year.
The Seventh Plan aimed to generate Rs. 23,013 crore in internal resources and Rs. 11,490 crore through additional resource mobilization at 1984-85 prices to finance plan expenditures. In reality, public enterprises generated gross internal resources of Rs. 37,715 crore at current market prices, with approximately 32% of central public enterprise investments funded by net internal resources during the Seventh Plan period.
While the outlook for resource mobilization is challenging, it is not insurmountable. The resource imbalances accumulated over time cannot be fixed quickly. In the current context, soft options have limited or no impact on addressing macroeconomic imbalances. Measures introduced in 1990-91, aimed at improving revenue collection and reducing public expenditure, have had modest effects, as evidenced by the revised budget deficit being significantly higher than initially estimated. To address this, the government must take decisive actions, such as strictly controlling expenditure, particularly non-plan and revenue expenditures, rationalizing subsidies to better target the poor, and improving revenue collection. Ongoing efforts could lay the foundation for a more sustainable resource mobilization framework in the coming years.
Self-Check Exercise-1
Q.1 Apart from tax revenue other important aspects of resource mobilisation are generation of non-tax revenues, restricting of current government expenditure and raising of surpluses of public sector enterprises. True/False
Q.2 The devolution of revenues from centre to states should be in conformity with economy, administrative convenience and efficiency. True/False

16.3    Indirect Taxes (After 2017): Introduction and Overview of GST
GENESIS OF GST IN INDIA
2004: The concept of GST was introduced in India following the recommendations made by the Kelkar Task Force.
2007: During the presentation of the Union Budget (2007-08), Finance Minister Shri P. Chidambaram announced that GST would be implemented in India.
2014: The NDA government introduced the Constitution (122nd Amendment) Bill, which was a step toward the implementation of GST.
2016: The President of India granted assent to the Constitution (101st Amendment) Act on 8th September, 2016, formally clearing the path for the implementation of GST in the country.
2017 (March): The Central Goods and Services Tax Bill, 2017, the Integrated Goods and Services Tax Bill, 2017, the Union Territory Goods and Services Tax Bill, 2017, and the Goods and Services Tax (Compensation to States) Bill, 2017 were introduced and passed in the Lok Sabha. These bills received the President's assent on 12th April, 2017. Following this, individual states enacted their own respective GST laws.
2017 (July): GST was officially rolled out across India, effective from 1st July 2017.
CONSTITUTIONAL AMENDMENT FOR GST
The Constitution (101st Amendment) Act, 2016, was enacted on 8th September 2016, bringing about several important changes:
Both Parliament and state legislatures now have concurrent powers to create laws regarding the taxation of goods and services.
GST will be applicable on all goods and services, with the exception of alcoholic liquor for human consumption.
Parliament has the exclusive authority to legislate on the goods and services tax concerning inter-state supply (i.e., movement of goods or services between states).
The Parliament is responsible for determining the principles regarding the place of supply and the occurrence of supply during inter-State trade and commerce.
As per the explanation to Article 269A of the Constitution, the import of goods and services will be regarded as a supply under inter-State trade and commerce.
For certain items, Central Excise duty will apply to their production, while respective states will impose sales tax on their sale. These items include:
Petroleum crude
High-speed diesel
Motor spirit (commonly known as petrol)
Natural gas
Aviation turbine fuel
Tobacco and tobacco products
Article 279A of the Constitution empowers the President of India to form the Goods and Services Tax (GST) Council, chaired by the Union Finance Minister. This council is responsible for advising on various aspects of GST, including:
The GST rate
Valuation and fundamental rules
Exemptions
Future modifications
Returns and registration\
LEGISLATIVE FRAMEWORK
India has a total of 35 GST-related Acts, which include:
The Central Goods and Services Tax (CGST) Act, 2017: This Act imposes CGST on the intra-State supply of goods and services.
31 State Goods and Services Tax (SGST) Acts, 2017: These Acts enable each state to impose SGST on the intra-State supply of goods and services.
The Union Territory Goods and Services Tax (UTGST) Act, 2017: This Act applies to five Union Territories without their own legislative assemblies (Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli, Daman and Diu, and Chandigarh), allowing for the levying of UTGST on goods and services supplied within these territories.
The Integrated Goods and Services Tax (IGST) Act, 2017: This Act governs the levy of IGST on inter-State transactions involving the supply of goods and services.
The Goods and Services Tax (Compensation to States) Act, 2017: This Act was introduced to levy GST Compensation Cess for compensating states for any revenue loss they incur due to the implementation of GST.
STRUCTURE OF GST
GST is applied on the supply of goods and services throughout India, including Jammu and Kashmir. It is a unified tax that covers all stages of the supply chain, from the manufacturer to the consumer. Under GST, taxpayers can offset taxes paid at earlier stages against the output tax.
GST is a destination-based consumption tax, meaning that the tax revenue (whether CGST, SGST, or UTGST) will go to the state where the goods or services are consumed.
Both the Centre and the States will impose taxes on goods and services at the same time. The Centre can now tax goods sales within a state, while states are authorized to tax services.

(1)    Intra-State Supply of Goods and Services:
CGST: Payable to the Central Government.
SGST/UTGST: Payable to the respective State Government/Union Territory.

(2)    Inter-State Supply of Goods and Services:
IGST: Payable to the Central Government.
The Centre will be responsible for administering CGST and IGST, while individual states and Union Territories will manage SGST and UTGST.
Imports will be treated as inter-state transactions, and IGST will be charged along with basic customs duties.
Exports are treated as zero-rated supplies under GST, meaning no IGST is charged.
GST is applied at the following rates: 0.5%, 3%, 5%, 12%, 18%, and 28%. Additionally, a compensation cess is levied on certain goods such as pan masala, coal, aerated drinks, and motor cars. There are no Education cess, Swachh Bharat cess, or Krishi Kalyan cess under GST.
GST is calculated based on the transaction value of goods or services supplied, with certain exceptions.
Suppliers making taxable supplies are required to register under the GST law.
Registered entities are entitled to claim credits for input tax paid, which can be offset against the output tax, subject to specific rules:
IGST: First used to pay IGST; any remaining balance can be applied to CGST or SGST/UTGST.
CGST: First used for CGST, with any balance applied to IGST.
SGST/UTGST: First used for SGST/UTGST, with any balance applied to IGST.
The GST system facilitates seamless credit flow for inter-state supplies, a feature not available in the pre-GST era. Under the new system:
The supplier in the exporting state can use credits of IGST, CGST, and SGST/UTGST to pay the IGST on inter-state supplies.
The buyer in the importing state can claim credits for the IGST paid on purchases against their output tax.
The exporting state transfers the SGST/UTGST credit used for paying IGST to the Centre.
The Centre transfers the IGST credit used for SGST/UTGST payment to the importing state.
A common platform has been established to verify claims and transfer funds between the Central and State Governments. The GST Electronic Portal (www.gst.gov.in) managed by the Goods and Services Network (GSTN) offers several services for taxpayers, including:
Registration facilitation.
Return forwarding to the relevant authorities.
IGST computation and settlement.
Matching tax payment details with the banking network.
Analysis of taxpayer profiles.
BENEFITS OF GST
GST offers multiple advantages for all involved parties, including businesses, government, and consumers. It is expected to lower the cost of goods and services, enhancing their competitiveness on a global scale. The key benefits of GST are outlined below:

•    Creation of a Unified National Market: GST aims to transform India into a unified market with standardized tax rates and processes, removing economic barriers and creating a more integrated national economy.

•    Reduction of Cascading Effects: By consolidating most of the central and state indirect taxes into a single tax system, GST eliminates the "tax on tax" effect. This allows businesses to claim tax credits for taxes paid on earlier stages of the production process, benefiting the industry by reducing costs.

•    Support for the 'Make in India' Initiative: GST provides a significant boost to the government's 'Make in India' program, making domestically produced goods and services more competitive in both local and global markets.

•    Increase in Government Revenue: By expanding the tax base and encouraging better compliance, GST is expected to enhance government revenue over time.
SELF-CHECK EXERCISE-2
Q.1 Centre and states will impose tax on goods and services simultaneously. Centre now can impose tax on sale of goods within State and States can impose tax on services. True/False
Q.2 The idea of GST was emerged in India from the recommendation of Kelkar Task Force. True/False

16.4.    SUMMARY
The direct taxes mentioned earlier serve as a primary source of revenue for the Central Government. While the Union Government collects certain taxes, a portion of the revenue from these taxes is shared with the states. On the other hand, the direct tax revenues for State governments include their share of income tax, estate duty, land revenue, urban property taxes, and others.

16.5.    GLOSSARY
Custom duties: These are taxes applied to goods that either enter (import duties) or leave (export duties) a customs territory.
Gift Tax: This tax is levied on gifts given by individuals, Hindu Undivided Families, or Corporations, based on the value of taxable gifts provided during the year.

16.6 ANSWERS TO SELF-CHECK EXERCISES
Self-Check Exercise-1
Q.1 True
Q.2 True
Self-Check Exercise-2
Q.1 True
Q.2 True

16.7.    REFERENCES/SUGGESTED READINGS

•    Bhatia, H.L. , 1992. Public Finance (Revised Edition), Vikas Publishing House : New Delhi.

•    Bishnoi Usha, 1980. Union Taxes in India, Chugh Publications : Allahabad.

•    Chelliah Raja I. 1969. Fiscal Policy in Under-Developed Cduntries with special reference to India, George Allen and Unwim Ltd : London.

•    Jain, Inu, 1988. Resource Mobilization and Fiscal Polic y in India, Deep and Deep Publications : New Delhi.

•    Jha, S.M. , 1990. Taxation and the Indian Economy, Deep and Deep Publications : New Delhi.

•    Lall, G.S. , 1969. Financial Administratio n in India, H.P.J. Kapoor : Delhi.

•    IGNOU New Delhi, egyankosh

15.8.    TERMINAL QUESTIONS

(a)    Critically analyse Indirect Taxes after 2017.

(b)    Discuss the GST in detail.
PRINCIPLES OF TAXATION
Structure

17.0 Introduction

17.1    Learning Objectives

17.2    Role Of fiscal system In Economic Development
Self-Check Exercise-1

17.3    Main Aspects of India’s Tax Structure
Self-Check Exercise-2

17.4    Summary

17.5    Glossary

17.6    Answers to Self-Check Exercises

17.7    References/Suggested Readings

17.8    Terminal Questions

17 .0. INTRODUCTION
In India's federal financial structure, there are three levels of government, each with distinct areas of responsibility and revenue sources. These levels include:
The Central (Union) Government
The State Government
The Local Government

17.1    LEARNING OBJECTIVES
After going through this lesson, the students will be able to

-    Know he role of fiscal system in economic development

-    Know the main aspects of tax structure of India

17.2    ROLE OF FISCAL SYSTEM IN ECONOMIC DEVELOPMENT
The core of a fiscal system lies in managing the financial affairs of the government. This involves: (i) assessing the financial needs of the State, (ii) determining how to generate revenue, and (iii) overseeing the allocation and effective use of funds to meet the State's goals. The fiscal system primarily focuses on: (a) generating revenue, and (b) government spending. These aspects are consolidated in a document known as the budget. Whether at the union, state, or local level, the budget reflects the
projected financial receipts (as well as the actual receipts from the previous year) and their distribution (along with the actual expenditure from the prior year). It breaks down the relationship by various departments, programs, and initiatives. As such, the budget plays a crucial role in economic planning and policy formulation.
OBJECTIVES OF BUDGETARY POLICY
In a developing economy, fiscal policy, or budgetary policy, plays a crucial role in shaping economic progress. Its primary objectives include: (i) fostering economic growth by encouraging productive investments in both public and private sectors; (ii) generating optimal resources for investment while considering the returns on those investments, with the aim of increasing both marginal and average savings rates within the economy; (iii) ensuring a level of economic stability necessary to achieve sustainable growth; and (iv) redistributing the national output to promote balanced development across regions.
LIMITATIONS OF BUDGETARY POLICY
Several factors can hinder the successful implementation of budgetary policy objectives in a developing economy. Key challenges include: (a) the inflexibility and limited scope of the tax structure, which makes it difficult to create a cohesive and integrated tax policy; (b) the absence of accurate and reliable data on income, spending, savings, investment, and employment, complicating the task for public authorities in formulating an effective budgetary strategy; and (c) insufficient administrative infrastructure to properly collect revenues and ensure their efficient allocation and use.
UNION FINANCES
The annual budgets serve as the foundation for analyzing government finances. In this section, we will briefly discuss: (i) the key components of the budget, (ii) the different types of deficits in budgeting, and (iii) the trends observed in India's Union Budgets.
COMPONENTS OF UNION BUDGET
The Union Government's budget is categorized into two sections: (i) the revenue budget and (ii) the capital budget. The revenue budget includes recurring items, while the capital budget focuses on the acquisition and disposal of capital assets. Each budget has two main components: receipts and expenditures.
Receipts in the revenue budget include items that do not require repayment, such as tax revenue and surpluses. On the other hand, receipts in the capital budget mainly
comprise internal and external borrowings, net of repayments, as well as loan recoveries and proceeds from asset sales.
Expenditure in the revenue budget is classified into development and nondevelopment categories. Development expenditure involves spending on social and community services (like education and healthcare) and economic services (such as agriculture, industry, and infrastructure). Non-development expenditure covers administrative costs, defense, and interest payments on public debt.
In general, revenue expenditure is focused on maintaining existing services, while capital expenditure is aimed at acquiring assets or expanding services. Ideally, a revenue surplus should be generated to fund capital expenditures.
CONCEPT OF DEFICIT
In a budget, there are three types of deficits: (i) revenue deficit, (ii) budgetary deficit, and (iii) fiscal deficit.
A revenue deficit occurs when there is a shortfall between the revenue receipts and the revenue expenditure. The budgetary deficit is calculated as the difference between the total of revenue receipts and capital receipts, and the sum of non-plan and plan expenditures.
A fiscal deficit is defined as the difference between the total expenditure (which includes both plan and non-plan expenditures) and the combined value of revenue receipts plus non-debt capital receipts. This indicates the total borrowing required by the government to meet its overall expenditure needs.
The fiscal deficit can be further divided into two components: primary deficit and interest payments. The primary deficit reflects the difference between the fiscal deficit and the government's interest payments. Additionally, the primary deficit can be broken down into revenue deficit and capital deficit. The primary deficit related to revenue would be equal to the revenue deficit minus interest payments, while the primary deficit related to capital would be calculated as capital expenditure minus loan repayments.
STATE FINANCES
State finances, like Union budgets, have also witnessed a growing trend in revenue deficits. In response to this, both the Union and State governments have devised a strategy to address the fiscal challenges faced by the states. This approach involves a combination of financial assistance provided by the central government and a structured time-bound plan for implementing medium-term fiscal reforms by each state.
These programs include several key measures aimed at improving fiscal health, such as:

•    Reducing non-plan revenue expenditure by downsizing government staff wherever feasible.

•    Implementing pricing and subsidy reforms to ease the fiscal burden on the state while enhancing allocative efficiency.

•    Introducing institutional reforms to improve the effectiveness of public service delivery.

•    Minimizing the government's involvement in non-essential areas through decentralization, disinvestment, and privatization.

•    Establishing an Incentive Fund to encourage the states to adopt fiscal reforms.

•    Creating a model fiscal responsibility framework for states, which most states have since adopted, providing flexibility to tailor specific details.

•    Introducing a debt swap program to help states retire high-cost debt by utilizing small savings and market loan initiatives.
Self-Check Exercise-1
Q.1 A debt swap initiative was introduced to allow states to pay off expensive debt by using small savings and market loan options. True/False
Q.2 A revenue deficit refers to the gap between the revenue receipts and revenue expenditure. True/False

17.3 . MAIN ASPECTS OF INDIA'S TAX STRUCTURE
The key features of India’s tax system can be summarized as follows:

•    Rising Significance of Tax Revenue: Tax revenue from both the Central and State Governments has grown substantially, from Rs. 460 crore in 1951-52 to Rs. 10,17,107 crore in 2008-09, with an average annual growth rate of 13.9%. However, the proportion of total revenue from taxes has decreased from 88.6% in 1951-52 to 84.1% in 2008-09. This suggests either a reduced reliance on tax revenue or a faster rise in non-tax revenue sources. Given the overall growth in tax collection, the latter inference seems more probable. Additionally, the percentage of national income derived from tax revenue has consistently risen.

•    Tax Revenue as a Share of GDP: The tax-to-GDP ratio increased from 6.7% in 1950-51 to 19.2% in 2008-09. While this is a notable increase, it remains lower than the 25-45% range observed in developed nations. However, considering India's status as a low-income country, a tax-to-GDP ratio of around 20% can place a significant burden on its population. This makes understanding the structure of the tax system crucial.

•    Tax Structure: Taxes are broadly categorized into direct taxes, such as income, corporate, and wealth taxes, and indirect taxes, such as VAT, service tax, excise duties, and import duties. Over time, the Indian tax system relied more on indirect taxes, as they allowed for broader collection. However, recent reforms aimed at simplifying the tax structure have led to a reduction in the share of indirect taxes, with a focus on improving tax administration and compliance.

•    Shift in the Importance of Taxes: Over the years, there has been a shift in the relative importance of different taxes. In the 1950s, corporate and income taxes were major sources of revenue for the Union government, but excise and customs duties gradually gained prominence. Similarly, at the State level, sales tax replaced land revenue as the primary source. This shift reflected changes in the economy due to industrialization and export growth. Following economic reforms in the 1990s, personal income and corporate taxes have regained importance, while customs and excise duties have declined.

•    Progressive Tax System: India’s tax structure has been designed to be progressive, ensuring that those with higher income or wealth contribute more. The direct tax system has evolved to account for factors such as a service-driven economy, the rise of small businesses, industrialization, and a growing taxpayer base. In indirect taxes, consumption of luxury goods is taxed more heavily, targeting wealthier individuals. Taxation, therefore, serves not only as a revenue source but also as a tool for achieving socio-economic objectives.
EVALUATION OF THE TAX SYSTEM
The evaluation of India's tax system can be approached through four essential criteria, which are crucial for achieving the goals of planned economic development:

1.    Adequacy and Productivity: In contrast to earlier periods, India’s tax system has shown notable growth in recent years, with tax revenue steadily increasing alongside national income. However, despite this positive trend, the increase in tax revenue has not been sufficient to meet the growing needs of the developing economy.

2.    Efficiency: The Indian tax system does not fully meet the efficiency standard. The complexity of laws and frequent changes to their provisions have led to a loss of simplicity and predictability in the tax structure. This has contributed to widespread tax evasion and avoidance, generating significant black money and causing distortions in both the economy and the sociopolitical landscape. Furthermore, taxpayers face high costs in compliance.

3.    Equity: The tax system also falls short in terms of equity. While direct taxes are relatively progressive, the heavy reliance on indirect taxes undermines this progressivity. The exemption of agricultural income from taxation has further compounded inequities. Additionally, the unorganized sector, which has
expanded over time, remains largely outside the tax net, contributing to further imbalance.

4.    Certainty: The Indian tax system has been subject to frequent changes, leading to instability. Constant revisions in tax exemptions, incentives, and concessions have resulted in uncertainty for both taxpayers and the government. Additionally, the goals of taxation have evolved over time. Initially, the focus was on broadening the tax base by increasing the number of taxes, but more recently, the focus has shifted towards reducing tax multiplicity and eliminating overlapping laws. Similarly, indirect taxes on commodity inputs were previously higher and more widely applied.

17.4    Summary: Currently, the focus of indirect taxes has shifted towards minimizing the cascading effects of taxation. A significant change in the tax approach in recent years is the shift in priorities from the primary goal of "avoiding concentration of income and wealth" to an emphasis on promoting thrift, productivity, and wealth accumulation. This marks a departure from the earlier approach. In the area of corporate taxation, there is also a tendency towards ad-hoc decisions. While the motives behind these changes are often positive, the frequent and sudden adjustments to tax policies should be replaced with a more stable and predictable system to ensure long-term consistency in tax administration.
Self-Check Exercise-2
Q.1 The aim of indirect taxes is to prevent the cascading impact of taxes. True/False
Q.2 The Indian tax system does not meet the efficiency standard due to its complex laws and frequent changes, which have undermined simplicity and certainty. True/False

17.5 . GLOSSARY

•    Audit : Examination of accounts with a view to determining their correctness.

•    Auditor : Officer who are responsible for Audit.

•    Extravagance : Over Expenditure

17.6    ANSWERS TO SELF-CHECK EXERCISES
Self-Check Exercise-1
Q.1 True
Q.2 True
Self-Check Exercise-2
Q.1 True
Q.2 True

17.7 . REFERENCES/SUGGESTED READINGS

•    Laxmikant, M. 'Public Administration 'Fifth Edition, Tata McGraw-Hill Publishing Company Limited, New Delhi, 2016.

•    Gupta, B.N. Indian Federal Financial and Budgeting Policy, Chaitanya Publishing House, Allahabad,1970.

•    Wattal., P.L. Parliamentary Financial Control in India, Minerva Book Depot, Bombay, 1985.

•    Handa., K.L. Financial Administration in India, HPA New Delhi, 1988

•    Pyhrr., P.A. Zero-Base Budgeting, Johan Wiley and Sons, New York, 1973.

•    Baisys., K.N. Financial Administration in India, Himalaya Publishing House, Bombay, 1986.

•    Mahajan., S.K. & Mahajan., A. P. Financial Administration in India, P.H.I, New Delhi.

17.8 . TERMINAL QUESTIONS

(a) Discuss the various priniciples of tax administration in India.
PARLIAMENTARY CONTROL OVER FINANCE
Structure

18 .0. Introduction


18.1.    Learning Objectives

18.2.    Legislative Control & Financial Control
Self-Check Exercise-1

18.3.    Committees to Ensure Parliamentary Control Self-Check Exercise-2

18.4.    Summary

18.5.    Glossary

18.6.    Answers to Self-Check Exercises

18.7.    References/Suggested Readings

18.8.    Terminal Questions
18.0. INTRODUCTION
Parliament is called upon to vote large sums of tax payer's money from time to time. It authorises the Government through the Appropriation Act to draw money from the Consolidated Fund and spend them as per the budgetary allocations. In the interest of taxpayers, it is expected that Parliament should satisfy itself that the moneys so voted are directed for the purposes intended and are spent prudently and economically.
It may be noted that the efforts of the administration itself can ensure efficiency and economy. But under the present set up of administration as it is here is a necessity to have some agency of the House itself to, assure it that its wishes are carried out, that Government is conducted honestly and faithfully, and that where business is not transacted efficiently, there is a fair chance that notice will be taken off. It is neither necessary nor practicable to defect every inefficient or unwise action, even if it was possible to say accurately on every occasion what is inefficient or unwise. But the House, through its own agency, as J. S. Mill long ago contended, is expected "to watch and control the Government to throw the light of publicity on its acts, to compel a full exposition and justification of all of them which any one considers questionable, to censure them if found condemnable."
Effective financial control involves scrutiny of the details of estimates and accounts. The Houses of Parliament, constituted as they are, though anxious to exercise rigid and reasonable control, are not suitable organs for going into such
minute details. Neither House has the time or facilities for detailed examination of such complex and technical documents. Accordingly it has been felt necessary to delegate these duties, subject to their final control, to committees, estimated with the task of examining whether or how a process is being performed, and "by their conduct of this task they serve to provide the means of some sort of control over the carrying out of the process.
Dr. Subhash C. Kashyap has pointed out that it is the duty of Parliament to review and approve the government's proposals for taxation and expenditure estimates. Despite the fact that nearly two months of the Budget Session are dedicated to this task, the discussions often lack depth and thoroughness. In an effort to address all matters, the debates often become general, repetitive, and formal. With limited time, discussions on several Ministries or Departments may not even take place, and the "guillotine" procedure is sometimes applied. This is where the Finance Committees of Parliament step in, undertaking a more detailed examination of government spending and performance to ensure accountability in financial matters.
The execution of a policy is more critical than its mere formulation. Without proper implementation, a policy may fail to achieve its intended objectives due to inefficiency or poor organizational structure. Therefore, it is essential to have bodies in place that scrutinize the practical application of policies, assessing the performance of government organizations in terms of both efficiency and economy. Administrative systems are not immune to issues like misuse of power, negligence, delays, indifference, and nepotism. It is difficult to assess these problems without comprehensive research and methodical inquiry into the practices of the concerned officials and ministries.
The Financial Committees play a crucial role as the overseers of Parliament. What sets them apart is their direct interaction with civil servants, which makes their control over the administration more continuous and thorough. These committees utilize a variety of tools, such as issuing questionnaires, obtaining memoranda from representative non-governmental organizations and experts, conducting on-site studies, and holding informal discussions, to scrutinize government actions.
The three primary Financial Committees of Parliament—(1) The Estimate Committee, (2) The Public Accounts Committee, and (3) The Committee on Public Undertakings— are instrumental in uncovering inefficiencies and waste in the implementation of policies and programs. Their recommendations are designed to improve administration, ensuring policies and programs are executed economically, efficiently, and quickly. Through their constant vigilance, these committees keep the administration in check and drive improvements in the execution of public initiatives.
Some of the fundamental features of parliamentary 'government are: (a) representative democracy on the basis of a broad base franchise, (b) parliament as the focus of power in the political system, (c) collective responsibility of the executive
to the legislature, (d) pivotal role of the opposition in the scheme of government, and (e) political mentality of the head of state and that of civil service. The most significant characteristic of parliamentary government is the collective and the continuous responsibility of the cabinet to the directly elected those of the Parliament, and its continuation in office as long as it commands the support of the majority, in that House.
Article 75(3) of the constitution of India contains the following provision regarding the responsibility of the council of Ministers to Parliament. "The council of Minister shall be collectively responsible to the House of people." Despite this brief provision, it is clear that Indian legislative and executive apparatus is based on the parliamentary system of government and the parliamentary form of executive has been adopted in India it follows that a thorough grasp of the concept of parliamentary control over the executive and the nature, sphere and method of exercising such control is essential in understanding and the proper functioning of parliamentary government in India.
Modern governments are characterized by a phenomenal proliferation of states activities. The assumption by the state of welfare functions have resulted in an enormous increase in range and scope of governmental functions and responsibilities. The result of this growth in state activities has been a corresponding expansion inadministrative machinery and emergence of new political and administrative institutions. The spread of the modem welfare state and its activities are so vast and complex that the executive has also come to exercise far reaching functions of a quasi-judicial and legislative character. These developments have tended to upset the traditional balance between parliament and the executive and thrown into bold relief special problems in the process of parliamentary over executives.
The experience has shown that the working a parliamentary and welfare governmental has led parliamentary to conflict itself to the broad framework of policy. In the sprawling area of administration, parliamentary control has taken the form of export fact to supervision and control. The control of Parliament over the executive can be divided into the following categories:

a)     Legislative Control;

b)     Financial Control

c)    General control over the policies and actions of the executive; and

d)    Control over cabinet and administration.
In this lesson, we will be first concentrating on one aspect of control of Parliament over the executive, i.e. financial control.

18.1.    LEARNING OBJECTIVES
After studying this lesson, the learner will be able:

•    To understand about Parliamentary Control over Finance.

•    To comprehend about evolution, composition, functions and procedure of Public Account Committee.

•    To discuss about composition, function and methods of working of Estimate Committee.

•    To describe composition, function and utility of the committee on Public Understating.

18.2    FINANCIAL CONTROL
One of the important ways in which Parliament "controls the executive is through its control on the exchequer. Parliamentary powers and procedures in this respect are defined by the constitution itself. Article 113(2) states that all the estimates other than these related to the expenditure, charged on the Consolidated Fund of India "shall be submitted in the form of demands for grants to the House of People and the House of People shall have power to assent, or to refuse to assent, to any demand subject to a reduction, of the amount specified therein." Parliament has the power both to grant supplies and control taxation and appropriations and to be assured that the appropriations are spent by the executive for purposes for which they are granted.
The Public Accounts Committee, the Estimate Committee and Committee on Public Undertakings make a detailed examination of the accounts and estimates of the ministers of Government of India and of the Public Undertakings and submit their reports to Parliament.
SELF CHECK EXERCISE-1
Q.1 The Public Accounts Committee (PAG) is the oldest financial Committee. As early as 1923, a PAC was set up by the Central Legislative Assembly. True/False
Q.2 The PAC is now constituted by members drawn from both houses of Parliament, it consists of 30 members (15 from Lok Sabha arid 15 from Rajya Sabha). True/False

18.3 . VARIOUS COMMITTEES TO ENSURE PARLIAMENTARY CONTROL
The Public Accounts Committee (PAG) is the oldest financial Committee. As early as 1923, a PAC was set up by the Central Legislative Assembly. Consequently, the committee set of well established traditions.
Evolution
The PAC was set up under the Montage Chelmsford Reforms, 1919 in the year 1923. It functioned for three decades before it become a full-fledged Parliamentary Committee to be served by the Secretariat of Parliament. The Committee was to consist of elected members only from the year, consisted of elected members only from the year 1950. Till then it was a product of rules by the Governor-General-in-Council-with the sanction of Secretary of Slate. The Act of 1935 made a specific
provision that the Accounts and Audit Report there on should be placed before the legislature. The Rules of Procedure then provided for the appointment of a PAC, to examine the Accounts and Audit Reports. The- constitution of India provides that the reports of the Comptroller and Auditor General (CAG) of India relating to the accounts of the Union shall be submitted to the President, who shall cause them to be laid before each House of Parliament and the Parliament has continued to constitute a PAC to scrutinize these reports.
Composition
The Public Accounts Committee (PAC) is currently composed of members from both houses of Parliament, with a total of 22 members (15 from Lok Sabha and 7 from Rajya Sabha). Before 1954, the committee had only 15 members, all of whom were elected from Lok Sabha. The PAC operates under the oversight of the Speaker of Lok Sabha. Members are selected through a proportional representation system, using a single transferable vote. Ministers are excluded from eligibility, and the term of each member lasts for one year. Since 1967, it has been a common practice to appoint a member from the opposition as the committee's Chairman.
Functions:
The primary responsibility of the PAC is to review the accounts of the government across all its financial transactions. Specifically, the committee scrutinizes the appropriation accounts and the reports of the Comptroller and Auditor General (CAG). It must ensure that:

•    The funds disbursed are legally available and applied to the intended service or purpose.

•    The expenditures comply with the governing authority.

•    Any re-appropriations have been made in accordance with the relevant rules set by the competent authority.
The PAC is also tasked with reviewing:

a)    The financial statements of state corporations, trading, and manufacturing entities, including their balance sheets and profit-and-loss accounts, as required by the President or under statutory regulations. The committee also looks at the CAG's report related to these entities.

b)    The financial statements of autonomous and semi-autonomous bodies audited by the CAG under the President's directions or relevant legislation passed by Parliament.

c)    Reports from the CAG in cases where the President directs the audit of specific receipts or the examination of accounts for stores and stocks.
If the government has spent more than the allocated amount for a specific service during a financial year, the PAC examines the circumstances that led to the excess expenditure. Based on the findings, it makes appropriate recommendations.
Procedure
The Committee works methodically. The Committee usually conducts its examination by putting questions to the witnesses. They cross examine the witness with full knowledge that they are extracting information from the official experts. The Chairman takes the major part in the conduct of committee's deliberations. The committee also appoints subcommittees to make any specific study of any problem.
On the basis of facts before it the committee formulates its findings and makes its recommendations and present them to the Houses of Parliament in the form of a report. A convention has been developed that the most of the recommendations are accepted by the Government and implemented.
Even through the Committee conducts a post mortem examination of the accounts after having been audited by CAG and the Auditor-General yet it has been serving a useful purpose by detecting cases of misappropriation and suggesting economics.
THE ESTIMATES COMMITTEE
The Estimates Committee came into being in 1950. Its predecessor was the Standing Finance Committee which was constituted in 1921. This committee depended on the will of the executive. It has no statutory status its functions were not clearly defined and its deliberations were not satisfying to the selected representations of the Legislative Assembly.
Composition
The Estimates Committee consists of not more than 30 members who are elected by Lok Sabha every year from the amongst its members according to the principle of proportional representation by means of the single transferable vote. The rules prohibits ministers from being members of the Committee. Another important feature of the Estimates Committee is that unlike the PAC. the members of Rajya Sabha are not associated on the ground that as the speaker explained. "Under: the Constitution the Rajya Sabha has no right to interfere with or cut down any item of budget.
Rule 258 provides that the chairman of a committee shall be appointed by Speaker amongst the member of the committee, if the Deputy Speaker is a member of committee, he shall be appointed automatically Chairman of the committee. It may be noted that while the chairman is nominated as in other committees, the members of the committee are elected by the House.
Functions
The functions of the Committee have been laid 'down in the rules of procedure and directions by the speaker issued from time to time. The rules here provide that the Committee shall examine in general, such of the estimates as may seem to be fit or as are specifically referred to it by the House or the speaker. In general the functions of the Committee are :
to report v/hat economics, improvements in organisation, efficiency or administrative reform, consistent with the policy underlying the estimates may affect;
to suggest alternative policies in order to bring about efficiency- and economy in administration, to examine whether the money is well laid out within the limits of the policy implied in the estimates; and
to suggest the form in which the estimates shall be presented to Parliament.
Method of Working
Once a decision is taken as to the estimates to be examined, the committee collects and collates material required for an adequate examination of the expenditure. It interviews officials, issue questionnaires to the concerned Ministries/Departments call witness, calls for papers, records and files, and so on. If the disclosure of any document is not in public interest, the matter is referred to the speaker for his guidance. The committee submits its reports to the house. The draft report is shown to the speaker before finalization.
The recommendations of the Estimate Committee relates to:
improving the organisation and working of the department;
effecting economy; and
general espects.
Based on the analysis made by the committee or the Study Group, a draft 'Action Taken Report' is prepared which consists of the following chapters :

1.    The Repot.

2.    Recommendations and suggestions, etc, agreed to by the executive government and implemented:

3.    Recommendations where it has not been, possible, for the Ministry/Department to implement; for reasons; stated by them and which the Committee on reconsideration think should not be pressed.

4.    Recommendations which the executive government is unable to accept for reasons given by them but which the committee feels should be implemented.

5.    Recommendations on which final replies of the executive government have not been received.
The report after finalization is presented to the House and it is left to the House to r take any further actions may be thought necessary.
COMMITTEE ON PUBLIC UNDERTAKINGS
The Industrial Policy Resolution of 1955 gave a new orientation and meaning to the role of the state in Indians economic and industrial development. As a consequence of this resolution and the ideals of a welfare state embodied in the Directive Principles of State Policy, the Government has undertaken to speed up industrialization by developing and operating industrial enterprises.
The industrial development of the country is a talk to be implemented by executive, but Parliament exercise control on the operation and' progress of the public industrial enterprises through its power to sanction grants as well as through its Committee on Public Undertakings.
The Committee on Public Undertakings was established on May, 1964 and is the third financial committee of the Parliament.
Composition
The Committee consists of ten members from the Lok Sabha and five members from the Rajya 3abha elected by the respective Houses according to the principle of proportional representation by means of the single transferable vote; The chairman of the Committee is appointed by the Speaker. The term of office of the member is one year.
Functions
The functions of the Committee on Public Undertakings are :
to examine the reports and accounts of such public undertakings as have been specifically allotted to the committee for this purpose;
to examine the reports, if any, of the CAG on public undertakings;
to examine, in the context, of the autonomy and efficiency of public undertakings, whether the affairs of public undertakings are being managed in, accordance with sound business principles and prudent commercial practices, and
to exercise such other functions vested in PAC and the Estimates Committee in relation to the public undertakings specified' for the Committee as are not covered by clauses (a), (b) and (c) above and as may be allotted to the Committee by the speaker from' time to time.
Provided that the Committee shall not examine and investigate following matters :

(i)    matters of major government policy as distinct from business or commercial functions of the public undertakings;

(ii)    matters of day to day administration; and

(iii)    matters for the consideration of which machinery is established by a special statute under which a particular undertaking is established.
The examination of the public undertakings by the Committee on Public Undertakings is, therefore, in the nature of evaluation of the performance of undertakings which covers all aspects," viz. implementation of policies, programmes, management, financial performance, etc.
Working of the Committee
At the beginning of the year, the committee decides upon the subjects or the undertakings proposed to be examined during the year. The examination by the Committee may be comprehensive or limited to the working of an undertaking which is considered to be topical interest. The chairman of the committee is authorised to ascertain full details of required information from the undertaking concerned without prior reference to the Committee.
The sources of information utilized by the Committee may be as follows:

1)    preliminary and detailed information submitted by the Ministry/
Department or Undertaking concerned with the subject to be examined;

2)    memoranda on the subjects under study submitted by non-official

organizations such as chambers of, commerce, trade organizations, professional consultants, trade unions, etc;

3)    evidence given by officers of the undertaking. Ministry/Department; and

4)    audit reports (commercial) and the 'Memorandum of important Points submitted by the CAG.
The draft of the committee is sent to the undertakings, Ministry/Department, Ministry of finance and the CAG for factual verification. The report is finalized after the factual verification. The final report is submitted to the Parliament.
Utility
The Committee has rendered valuable service and secured effective accountability of the public undertakings to Parliament. The Government and the Public Undertakings have accepted a majority of its recommendations. The management has: acknowledged that the guidance given by the Committee through its recommendations has been helpful.
SELF CHECK EXERCISE-2

Q.1 A key responsibility of the Committee on Public Undertakings is to review the reports and financial records of public undertakings assigned to the committee for examination. True/False

Q.2 The Estimates Committee is made up of a maximum of 30 members, who are selected annually by the Lok Sabha from among its members using the system of proportional representation with a single transferable vote. True/False

18.4.    SUMMARY
It can be observed that formal excellence of financial machinery is a prerequisite for smooth and harmonious operation of financial administration, the growth of the democracy and the consequent changes in the role of the government in the sphere of economic and social development which has resulted in an enormous growth in public expenditure. Financial control of Parliament over executive is one such tool with the help of which control over public expenditure can be exercised.

18.5.    GLOSSARY

•    Apparatus : The set of tools, instruments or equipments used for doing a job or as activity.

•    Fundamental : Basic and important, from which everything else develops.

•    Proliferation : The fact of something increasing a lot and suddenly in numbers or accounts.

18.6    ANSWERS TO SELF-CHECK EXERCISESSELF CHECK EXERCISE-1
Q.1 True
Q.2 False
SELF CHECK EXERCISE-2
Q.1 True
Q.2 True

18.7.    REFERENCES/SUGGESTED READINGS
Laxmikant, M. 'Public Administration' Fifth Edition, Tata McGraw-Hill Publishing Company Limited, New Delhi, 2016.

•    Gupta, B.N. Indian Federal Financial and Budgeting Policy, Chaitanya Publishing House, Allahabad, 1970.

•    Wattal., P.L. Parliamentary Financial Control in India, Minerva Book Depot, Bombay, 1985.

•    Handa., K.L. Financial Administration in India, HPA New Delhi, 1988

•    Pyhrr., P.A. Zero-Base Budgeting, Johan Wiley and Sons, New York, 1973.

•    Baisys., K.N. Financial Administration in India, Himalaya Publishing House, Bombay, 1986.

•    Mahajan., S.K. & Mahajan., A. P. Financial Administration in India, P.H.I, New Delhi.

•    IGNOU New Delhi, egyankosh

18.8.    TERMINAL QUESTIONS

(a)    What are the functions of the estimate committee?

(b)    Describe about working of the committee on Public Undertaking.
AUDIT AND CAG: PART I
Structure

19.0. Introduction

19.1.    Learning Objectives

19.2.    Audit in India, Functions of an Auditor
Self-Check Exercise-1

19.3.    The Comptroller and Auditor General of India & Independence of the CAG
Self-Check Exercise-2

19.4.    Summary

19.5.    Glossary

19.6.    Answers to Self Check Exercises

19.7.    Terminal Questions

19.8.    References/Suggested Readings

19 .0. INTRODUCTION
Audit plays a crucial role in ensuring effective financial management, particularly in allowing Parliament to maintain control over finances. It is employed worldwide to optimize the use of financial resources, with its scope and function varying across different nations. A robust audit system serves as a key safeguard, protecting against the misuse of public funds. There is no doubt that audit is an essential component of a modern democratic government, such as India's.
Audit means the examination of accounts with a view to determining their correctness and of the transactions they undertake to quickly know everything and understand the profit and; loss. According to James C. Charlesworth, Audit means the process of ascertaining whether the administration has spend or is spending its funds in accordance with the terms of the legislative instrument which appropriated the money' it is a systematic examination of the books and records of a business or other organisation in order to ascertain or verify and to report upon the facts regarding its financial operation and the results thereof.

19.1.    LEARNING OBJECTIVES
After studying this lesson, this learner will be able:

•    To understand about the Audit system and their obj ectives in Indi a.

•     To understand the genesis of the office of CAG.

•     To know about terms, conditions, power and functions of CAG.

•    To analyze the relations of CAG and Public Accounts Committee.

19.2.    AUDIT IN INDIAOBJECTS OF AUDIT
The main objects of Government Audit are to ensure :

a)    That there is provisions of funds for the expenditure duly authorized by competent authority;

b)    That the expenditure is in accordance with the sanction properly accorded and it incurred by an officer competent to incur it;

c)    That payment has, as a fact been made and has been made to proper person, and that it has been so acknowledged and recorded that a second claim against Government on the same account is impossible that the charge is correctly classified and that it a charge is debatable to the personal account' of a contractor, employee or other individual, or is recoverable from him under any rule of order, it is recorded as such in a prescribed account.

d)    That in case of audit of receipts, (i) sums due are regularly recorded and checked against demand and (ii)-sums reviewed are duly brought to credit in accounts;

e)    That in the case of audit of stores and stock, where priced with reasonable accuracy, and that the rates initially fixed are reviewed from time to time, correlated with market rates and revised when necessary;

f)    That the' articles are counted periodically and otherwise examined for verification of the accuracy of quantity balances in the books and the total of the valued account taken with the outstanding amount in general accounts and that the numerical balance of stock materials is reasonable with the total of value to the various classes of stores; and

g)    That expenditure conforms to the general principles which has been recognized as standards of financial property.
Audit in India
In India, the authority for auditing is derived from Articles 148 to 151 of the Constitution of India, as well as the Parliament Act of 1971 (Duties, Powers, and Conditions of Service Act) and its amendments in 1976. The main features of India's audit system are as follows:

1.    Integrated Audit
The Comptroller and Auditor General (CAG) of India oversees the audit of accounts not only for the Union Government but also for the States.

2.    Quasi-Independent Audit
Audit is not placed under any ministry at the Union or State level. The audit reports are submitted to Parliament and State legislatures through the President or Governor, respectively. While in the UK, the CAG's reports go directly to the House, the Indian system is not fully independent, but is considered quasi-independent.

3.    Unified Functions
Though the CAG is expected to carry out both audit functions, in practice, the role primarily focuses on auditing expenditures. Some departments are authorized to draw funds through cheques without CAG’s approval, unlike the UK where the CAG oversees both receipts and expenditures, and no funds can be withdrawn from the Exchequer without his consent.

4.    Limited to Legal Compliance
India’s audit system mainly ensures adherence to established rules and regulations, seldom expanding to assess propriety or performance. In contrast, countries like Sweden conduct comprehensive audits, evaluating government performance to inform the public and measure the nation's financial health.

5.    Field Offices Across the Country
The audit organization in India is not centralized at the headquarters but has field offices across the nation.

6.    Separation of Audit and Accounts
Since 1976, audit functions have been separated from accounts at the Union level. The state governments have followed suit, ensuring complete separation of audit and accounts. Under this system, ministries have assumed responsibility for payment functions, which are managed by their own Pay and Accounts Officers.
FUNCTIONS OF AN AUDITOR
An annual audit should be done by one who is independent of executive control, and the agency performing the work of conducting independent audit should be responsible to the legislature.
Generally, the duties of the auditor are mainly

a)    They should examine past transactions. The accounts and reports of all personal or agents having the receipt, custody or disbursement of public money should be examined to ensure proper accountability of fidelity.

b)    The transactions of public funds that have been expended have been received, or that should have been received, should be examined with respect to the question of legality.

c)    The auditor should report the result of such examinations to the legislature which is the branch of the government acting as a check upon the executive and administrative levels. The function of the comptroller on the other hand are the settlement of claims, either of or against the state, and in this connection the keeping of the central accounts of the state and the prescribing of the subsidiary accounting system in field offices and institutions.
These involve purely administrative duties. The CAG will make an administrative pre-examination of all claims for the purpose of determining their expediency, propriety.
Self-Check Exercise-1
Q.1 Accounts have been separated from audit at the union level in 1976. True/False

Q. 2 Audit reports are submitted to the parliament and the state legislatures through the President or Governor respectively. True/False

19.3.    THE COMPTROLLER AND AUDITOR GENERAL OR INDIA
Financial control is a cornerstone of parliamentary democracy, and an independent audit agency plays a vital role in ensuring that control. The Comptroller and Auditor General (C&AG) of India is established under the Constitution of India as a constitutional mechanism designed to maintain parliamentary accountability, federal oversight, and expert administrative management over government spending. The C&AG is appointed by the President of India to perform these critical functions.
The foundation of the parliamentary system lies in the executive’s responsibility to the legislature for its actions. For the legislature to effectively enforce this responsibility, it must be capable of scrutinizing the executive’s activities and assessing their validity. Some executive actions can be easily evaluated, while others, such as examining financial transactions, require technical expertise. Parliament, primarily composed of laypersons, is not equipped to thoroughly assess financial dealings. However, it is Parliament's responsibility to ensure that public funds are used appropriately. This is where the C&AG’s expertise is indispensable, providing the necessary assistance to Parliament in making informed financial judgments. The C&AG, therefore, plays a crucial role in maintaining the smooth functioning of parliamentary government, making the office an essential component of India's democratic framework. The C&AG is regarded as one of the four fundamental pillars of the Constitution, alongside the Legislature, Executive, and Judiciary.
The C&AG operates as an independent constitutional authority, separate from Parliament. The office was created not only for auditing government transactions but also for overseeing public expenditure. This dual role is why the position is considered so significant. Dr. B.R. Ambedkar, in discussing the C&AG’s importance, emphasized its independence and crucial function, asserting that the office should be even more
autonomous than the judiciary to carry out its duties effectively. The C&AG’s work is vital to ensuring transparency and accountability in financial matters, and interference from discontented legislators could undermine its efficient operation.
As noted by Asoka Chanda, the re-designation of the Auditor General to Comptroller and Auditor General in 1950 signified a shift toward greater control over government spending, an area that had previously lacked oversight. The change was a significant step in establishing the C&AG as a key institution in ensuring financial accountability in India.
In the Constituent Assembly, when K.T. Shah suggested that the C&AG should be a certified accountant, T.T. Krishnamachari opposed the idea. He argued that the role required more than accounting knowledge; it required a broad understanding of administration and governance, which could not be reduced to mere technical skills. This position was accepted, reinforcing the idea that the C&AG’s responsibilities go far beyond simple financial calculations.
GENESIS OF THE OFFICE OF C&AG
The history of the Indian Audit Department is linked with the formation of three Presidencies of Bengal, Madras and Bombay. Each of these Presidencies had its independent accounting office and the accounts prepared by them were consolidated in the accounting office of the East India Company in London. These independent organisations were amalgamated in 1857 by, Lord Canning to form one imperial establishment under the control of an Accountant General to the Government of India. The purpose of this consolidation was to secure co-ordination and uniformity in the compilation and presentation of accounts.
In 1858, when the East India Company's administration was taken over by the Crown, the complimentary post of Accountant General at the India office was created to prepare the accounts of expenditure incurred in England. Simultaneously, an independent auditor was appointed by the Crown for the audit of these accounts. This pattern of separated accounts and audit offices was reproduced in the administrative structure of the reconstituted Government of India also. But this arrangement was short-lived and both auditing and accounting functions were amalgamated in 1860 and placed in charge of the Accountant General to the Government of India, who was now designated Auditor General.
The statutory' recognition of the Auditor General came, however, only in 1919, with the introduction of constitutional reforms. He was made independent of the Government of India, and was appointed by the Secretary of State and. held office as the administrative head of the Indian Audit Department during His Majesty's pleasure.
The Secretary of State for India-in-Council was the font of authority for all executive power, and the Administration in India merely exercised delegated authority derhed through statutory rules and executive orders. It was necessary, therefore, to
have an agency in India independent of the executive and responsible to the Secretary of State, so as to ensure that the administration in India was exercising financial authority within the delegations made. This duty was discharged by the Auditor General who was required to submit of the Secretary of State reports dealing with the total expenditure in India in each year, through the Governor General-inCouncil, with such comments of a general feature as he thought appropriate to make.
The Government of India Act, 1935, gave further recognition to the importance and status of this office. Thereafter his appointment was made by His Britannia Maj esty, and the conditions of his service were also determined by His Majesty in council. His duties and powers were prescribed by rules made under the order of His Majesty in council, with the provision that his authority could be subsequently varied or extended, by the Federal Legislature. His salary, allowances and pension were made chargeable on the revenues of the Federation. He could be removed from office only in the same manner and on the same grounds as a judge of the Federal Court. To make him completely independent of the executive in the exercise of his function, he was made ineligible to hold further office Under the Crown in India after he had demitted office.
The Comptroller and Auditor General of India : Appointment and Term of Office
The provisions regarding the appointment and conditions of service of the C&AG are laid down in Article 148 of the Constitution. The C&AG is appointed by the President by warrant under his hand and seal for a period of six years or upto the age of 55 years, whichever is earlier. Before he enters upon his office, every person so appointed as the C&AG takes an oath before the President or any other person appointed in that behalf by him, according to the form set out for this purpose in the Third-Schedule. He can be removed from office in like manner and on like grounds as in the case of a judge of the Supreme Court. The salary and other conditions of service of the Comptroller and Auditor General are prescribed, by Parliament by law, viz., the Comptroller and Auditor General (Conditions of Service) Act, 1953, as amended in 1971. Being equated with a judge of the Supreme Court, the C & AG draws the equivalent salary of Rs. 30,000 per month. He is entitled to receive pension after his retirement. In other matters, his service conditions are equivalent to those of a Secretary to the Government of India.
Professor M. V. Pylee observes, "The framers of the Constitution, realizing the importance of an independent agency for audit under parliamentary democracy, made the Comptroller and Auditor General fully independent so that he could discharge his functions efficiently and fearlessly."
INDEPENDENCE OF THE C&AG
The Constitution of India ensures the independence of the Comptroller and Auditor General (C&AG) through several key provisions:

1.    The President of India appoints the C&AG through a warrant under his hand and seal, similar to how a Supreme Court judge is appointed.

2.    To safeguard the independence of the office from the executive, the C&AG cannot be removed except for proven misconduct or incapacity. This requires an address from both Houses of Parliament, passed by a two-thirds majority of those present and voting, and a majority of the total membership of each House. The process mirrors that of removing Supreme Court judges as outlined in Article 124(4).

3.    While Parliament determines the C&AG's salary and service conditions, once appointed, these terms cannot be altered to his disadvantage, including changes to salary, leave, pension, or retirement age.

4.    The office's administrative expenses, including salaries and other costs, are charged to the Consolidated Fund of India, ensuring the office’s financial autonomy.

5.    After retiring or resigning, the C&AG is ineligible for any government office or profit, either with the central government or any state government.
Self-Check Exercise-2
Q.1 The office's administrative costs, including staff salaries, are paid from the Consolidated Fund of India. True/False
Q.2 Once the Comptroller and Auditor General retires or resigns, they are not eligible for any governmental office or financial benefits from the Government of India or any State Government. True/False

19.4.    SUMMARY
The sum and substance of all those provisions is that the CAG is an officer of Parliament and is supposed to work for it without fear to favour and for this reason has been placed beyond the pale of any executive influence.
Asoka Chanda observes, "To protect his independence and to place him beyond a the pale of the influence and interference of the executive government, both the ban on his employment after retirement as well as his removal by a special parliamentary process, have been retained and elaborated in the Constitution."

19.5.    GLOSSARY

•    Apparatus : The set of tools, instruments or equipments used for doing a job or as activity.
Fundamental : Basic and important, from which everything else develops.

•    Proliferation : The fact of something increasing a lot and suddenly in numbers or accounts.

19.6    ANSWERS TO SELF-CHECK EXERCISESSELF CHECK EXERCISE-1
Q.1 True
Q.2 True
SELF CHECK EXERCISE-2
Q.1 True
Q.2 True

19.7.    REFERENCES/SUGGESTED READINGS

•    Laxmikant, M. 'Public Administration' Fifth Edition, Tata McGraw-Hill Publishing Company Limited, New Delhi, 2016.

•    Gupta, B.N. Indian Federal Financial and Budgeting Policy, Chaitanya Publishing House, Allahabad, 1970.

•    Wattal., P.L. Parliamentary Financial Control in India, Minerva Book Depot, Bombay, 1985.

•    Handa., K.L. Financial Administration in India, HPA New Delhi, 1988

•    Pyhrr., P.A. Zero-Base Budgeting, Johan Wiley and Sons, New York, 1973.

•    Baisys., K.N. Financial Administration in India, Himalaya Publishing House, Bombay, 1986.

•    Mahajan., S.K. & Mahajan., A. P. Financial Administration in India, P.H.I, New Delhi.

•    IGNOU New Delhi, egyankosh

19.8.    TERMINAL QUESTIONS

(a)    What are the functions functions of CAG?

(b)    How independence of CAG is ensured?.
CHAPTER-20AUDIT AND CAG: PART II
Structure

20 .0. Introduction


20.1.    Learning Objectives

20.2.    Duties and Powers of the CAG
Self-Check Exercise-1

20.3.    Organization of Structure, The CAG and PAC, Role of CAG : Critical Review Self-Check Exercise-2

20.4.    Summary

20.5.    Glossary

20.6.    Answers to Self Check Exercises

20.7.    References/Suggested Readings

20.8.    Terminal Questions

20.0. INTRODUCTION
The Comptroller and Auditor General of India (CAG) leads the Indian Audit and Accounts Department (IA&AD) and holds his constitutional role as the auditor for both the Union and State Governments, as outlined in Articles 149 to 151 of the Constitution. The responsibilities, authority, and terms of service of the CAG are defined under the CAG's (Duties, Powers, and Conditions of Service) Act of 1971.

20.1.    LEARNING OBJECTIVES
After studying this lesson, this learner will be able:

•    To understand the genesis of the office of CAG.

•    To know about terms, conditions, power and functions of CAG.

•    To analyze the relations of CAG and Public Accounts Committee.

20.2.    DUTIES AND POWERS OF THE COMPTROLLER AND AUDITOR GENERAL
Audit Responsibilities
The CAG's statutory responsibilities include auditing:

•    The receipts and expenditures of both Union and State Governments, as reflected in their respective Consolidated Funds.

•    Transactions related to the Contingency Funds (established for emergencies) and the Public Accounts (primarily for loans, deposits, and remittances).

•    The trading, manufacturing, profit and loss accounts, balance sheets, and subsidiary accounts maintained by any Government Department.

•    The accounts of stores and stocks managed by Government organizations, companies, and corporations that require audits by the CAG as per their statutes.

•    Authorities and organizations that receive substantial funding from the Union or State Consolidated Funds.

•    Any body or authority, even if not significantly funded by the Consolidated Fund, at the request of the President or Governor.

•    Accounts of entities receiving government loans or grants for specific purposes.
A distinct process is in place for auditing Government companies, where the Union Government holds a 51% or higher equity stake. The primary auditors for these companies are Chartered Accountants appointed by the Union Government upon the CAG's advice. The CAG directs the Chartered Accountants on how the audit should be carried out and retains the authority to comment on or augment their reports. Furthermore, the CAG has the right to audit these companies' accounts and submit audit findings to Parliament and State Legislatures.
A key aspect of auditing Government companies and Public Sector Undertakings (PSUs) is the periodic, in-depth evaluation of their performance by Audit Boards formed by the CAG. These boards include experts in relevant fields for specific PSU operations and conduct thorough reviews of a selection of undertakings each year, with the results featured in the CAG's Commercial Audit Reports. Additionally, similar Audit Boards have been established in some States for auditing State Government PSUs.
Accounts Duties
The Constitution stipulates that the President, based on the advice of the Comptroller and Auditor General (CAG), determines the structure for the accounts of both the Union and State Governments. The CAG’s (Duties, Powers and Conditions) Act of 1971 grants the CAG the authority to establish guidelines for Government departments regarding general accounting practices and the broad principles applicable to the audit of receipts and expenditures. Additionally, the CAG plays a key role in overseeing federal financial relations. According to Article 279 of the Constitution, the CAG is responsible for determining and certifying the net proceeds from taxes levied and collected by the Union but either assigned to the States or shared between the Union and the States.
Beyond his auditing functions, the CAG also compiles the financial accounts for most State Governments, except for Goa. The Department is also responsible for compiling the accounts of Union Territories, including Chandigarh and Dadra & Nagar Haveli.
Furthermore, the CAG has the authority to approve the salaries and allowances for officers in certain State Governments. Additionally, the CAG authorizes the payment of pensions and retirement benefits to employees across many State Governments and Union Territories and manages their Provident Fund Accounts.
AUDIT REPORTS
In addition to certifying the Appropriation Accounts and Finance Accounts for both Union and State Governments and submitting separate audit reports for Statutory Corporations and other Autonomous Bodies where the CAG is the sole auditor, the CAG publishes several audit reports concerning both the Union and State Governments. The key categories of these reports include:
For State Government:

•    Civil

•    Autonomous Bodies

•    Scientific Departments

•    Post & Telecommunications

•    Defence

•    Railways
For Union Government:

•    Civil

•    Receipts

•    Commercial

•    Indirect Taxes

•    Direct Taxes
Each year, the CAG communicates the significant findings and observations through these reports. These reports, along with the certified Finance and Appropriation Accounts, are forwarded to the President or Governors to be presented before Parliament or State Legislatures. Reports concerning Public Sector Undertakings and Autonomous Bodies are sent to the respective Ministries or Departments for presentation to the relevant legislative bodies.
As noted by Asoka Chanda, "The audit by the C&AG is not limited by any constraints. He can bring any executive action’s impropriety to Parliament’s attention, even if its legality is not questioned. Additionally, his tenure does not depend on the administration’s will. The constitutional provisions not only emphasize his role as a servant of the people but also grant him the necessary authority to assess the country’s overall financial management."
Some view the Comptroller and Auditor General (CAG) as the Parliament’s agent, stressing his central role in a parliamentary democracy. His responsibilities go beyond ensuring that parliamentary appropriations are not exceeded without supplementary votes or that expenditure aligns with established rules. The CAG also ensures, on Parliament's behalf, that financial decisions are wise, faithful, and economical.
One of the CAG’s crucial duties is to protect the Constitution and laws in financial matters, particularly by preventing any expenditure he believes violates the Constitution or breaches legal standards. An even more significant role is evaluating whether the sanctions granted by competent authorities align with their intended purposes. The CAG is empowered to challenge improper discretion and comment on the appropriateness of sanctions and expenditures. His function is to uphold the necessary independence, objectivity, and fearlessness to assess the executive’s actions impartially. As Ambedkar rightly pointed out, "The functions and authority of the Comptroller and Auditor General as an auditor are broader and more extensive than those of professional auditors."
Self-Check Exercise-1
Q.1 The C&AG is not a mere civil servant. He is also not a servant of Parliament. True/False
Q.2 One of the important duty of CAG is to audit the receipts and expenditure of the Union and the State Governments accounted for in the respective Consolidated Funds. True/False

20.3.    ORGANIZATIONAL STRUCTURE & THE C&AG AND THE PUBLIC ACCOUNTS COMMITTEE
The CAG discharges his duties and functions through the Indian Audit & Accounts Department. The office of the CAG directs, monitors and controls the activities of various offices of the Department and is responsible for development of organisational objectives and policies, auditing standards and system laying down policies for management of man-power and material resources of the Department and final processing and approval of the Audit Reports to be laid before the Parliament and the State Legislatures.
The Public Accounts Committee of our Parliament plays a very important role as the watch dog of Parliament. However, the basic material from which the Committee draws its subjects for examination are the audit reports of the Comptroller and Auditor General of India relating to the accounts of the Union which are laid before each House of Parliament. The C&AG's report is usually prepared after giving each ministry an opportunity to offer explanations or comments on the relevant portions of the draft audit report. After the report is submitted to the House and com mitted to the Public Accounts Committee, the programme of action of the Committee is drawn up in consultation with the Auditor General. He is in a way, the eye, the ear and
the tongue of the Committee. He guides the Public Accounts Committee in its labours, detects the points of questions, presents them with such information as he has obtained and leaves the Committee to pursue them further, to consider them and report on them. He is the ' acting hand' of the Committee and its guide, philosopher and friend.
REPORT OF THE COMPTROLLER AND AUDITOR GENERAL
The C&AG every year brings out a series of reports on the audit conducted by its staff on the accounts of ministries, departments and organisations of the Central Government. Accountant-Generals bring out their own respective reports. Reports of the C&AG are laid before Parliament. Likewise reports emanating from AccountantGenerals are laid before the respective State Legislatures! These are referred to the Public Accounts Committee, respectively, of Parliament and the State Legislatures. Public Accounts Committees are supposed to examine the deficiencies and irregularities pointed out in these-reports. Observations and directions of the Public Accounts Committees are passed on to the concerned departments and ministries for appropriate action.
Reports of the C&AG are quite bulky documents, containing findings defaults, omissions and commissions running into hundreds of paragraphs each of the reports. In these the audit parties of C&AG tiring out special instances of misuse and wastage of public funds. They cover a very wide rang dealing with operations of all departments, organisations and public sector enterprises of respective ministries. Normally considering the status according to C8sAG in the Constitution, and taking into account the nature of tax performed by this august organisation, one would expect that the findings and observations contained in the reports would receive urgent attention of the concerned officials and department; in practice, the fact is that when the respective paragraphs of C&AG's observations and finding reach the concerned departments, after they have been commented upon by the Public .Accounts Committee, they often get buried in files and remain on the shelves. They hardly even cause the stir that they are expected to create.
However, C&AG's reports serve a public purpose. A 1962 C&AG report indicted the then Defence Minister V. K. Krishna Menon for contractual lapse in the purchase of army jeeps. Even Rajiv Gandhi himself used the critical reports by the C&AG and the PAC to ask his Railway Minister, Ghani Khan Choudhury to resign. The C&AG report on the Befors issue was highly critical of the way in which the gun deal was made. Basically, three criticisms were leveled. First, the evaluation of competing guns was flawed in that no General Staff Evaluation Requirement (GSER) was prepared. Second, the Defence Research and Development Office (DRDO) itself felt that test firing of the guns was inadequate and the evaluation limited. And, third, between 1982-85, the Army Headquarters preferred a French gun, but for reasons not too clear initially, it reversed itself and instead recommended the Swedish Bofors guns in 1986.
In December 1996, the C85AG has censured the Himachal Pradesh Government for violation of various articles of the Constitution, while borrowing funds, on which even the State Legislature failed to, set limits. In one of its report, which was
placed in the State Assembly, the C&AG has pointed out that the internal debt of the State Government has gone up by a whopping 327 percent. It was Rs. 104.50 crore in 1990 and soared to Rs. 446.41 crore by 1995 end. The report has pointed out that the Constitution prohibits raising of loans by the State Government if there was any outstanding loan which had been made to the State Government by the Government of India or in respect of which a guarantee had been given by the Government of India except with the consent of the Government of India itself. In the Himachal case, it has been pointed out that heavy loans were arranged through the Himachal Pradesh State Electricity Board (HPSEB) though not for any purpose related to the HPSEB operations. It has also been summarily pointed out that concurrence of the GOI was not obtained in the matter. Very recently the C&AG has established Bihar Chief Minister's direct involvement in the fodder scam by personally pursuing the' appointment and seeking service extension for three key officials of the scam.
The C&AG in its latest special audit report has concluded that irregularities have been committed by the Power Grid Corporation of India in the import of the controversial Emergency Restoration System (ERS) equipment. While the union power ministry' continued to drag its fact in ordering a full-fledged investigation into the ERS equipment import, the C&AG's report of January 14, 1997 says that the Power Grid Management has incurred an avoidable extra expenditure of Rs. 23.81 crores in the deal with US based Lindsey Manufacturing Co. Ltd." The Ministry of Petroleum 65 Natural Gas has been flayed by the C&AG in its report on the participation of private parties with Oil 85 Natural Gas Corporation (ONGC) in production of crude oil and natural gas in its Report No. 5 (Commercial) of 1996. The report pointed out that production sharing contracts did not provide for the past cost reimbursement of Rs. 676.52 crores to ONGC in respect of Panna-Mukta and Mid and south Tapti fields. The C&AG report on audit for Bihar has shown non-reconciliation of Rs. 1,659.17 crores during the year 1995-96. Of special significance is irregular mid fraudulent withdrawal under the head 20137'Council of Ministers' Test checks of 12 departments under this head has pointed out to excess drawl of Rs. 6.24 crores from Patna Secretariat Treasury between 92-96. Audit of the central and centrally sponsored schemes for SC/ST groups revealed misuse of Rs. 282.85 crores.
The CAG has censured the Railways for delay in completion of ongoing projects leading to whopping coast overruns, injurious expenditure on various heads and loss of revenue due to incorrect levy of freight charges.
THE COMPTROLLER & AUDITOR GENERAL OF INDIA : POSITION
This is an office about which Dr. Ambedkar said in the Constituent Assembly that it is "probably the most important office in the Constitution of India". About the duties of this office, Dr. Ambedkar said they are "far more important than the duties even of the judiciary" of its status he said it was deserving of "far greater independence than the judiciary itself."
Importance of the office of C85AG arises from the fact that he exercises supervision over the accounts of all expenditure incurred by the ministries, departments and organisations of the Centre which, in the aggregate, are of the order
of Rs. 1,70,000 crore, equivalent approximately to the entire budget expenditure, besides exercising supervision over Accountant Generals of States who are responsible for accounts of all State Governments and Union Territories involving aggregate expenditure of the order of Rs. 2,00,000 crore. total staff of C&AG and Accountant Generals is about 30,000 officials, spread all over the country.
Thus C& AG of India is undoubtedly entrusted with unique responsibilities. He is responsible for ensuring and overseeing 'every year the audit relating to aggregate expenditure of nearly Rs. 4,00,000 crore, of the Central Government and the State Governments. He is also responsible for audit of provident fund accounts of millions of government employees. He is expected to personally approve about 150 bulky reports every year, each consisting of hundreds of audit paragraphs and all this task has to be performed within a period of not more than about four months every year.
The C&AG is not a mere civil servant. He is also not a servant of Parliament. It is a unique constitutional post, carrying unique powers and responsibilities. This was explicitly recognised by the Supreme Court in the Accountant General's Case (1981) which recognised the C&AG's "special position under the Constitution a high ranking authority who can be expected to act according to the needs of the service ... (as) the constitutional head of the most important department of state.
A distinguished Auditor General, Mr. A. K. Roy, opined in 1964 that the C&AG was free "to determine the extent and scope of audit in various kinds of transactions. His audit transcends the mere formal or legal aspects of audit and includes what may be called efficiency and propriety audit." Without such an audit, the Public Accounts Committee-by far the most important committee of Parliament would be powerless. This is recognised by several Public Accounts Committee reports, both in England and in India. The English formula for describing the range and scope of the Comptroller's powers are 'economy, efficiency and effectiveness'. Indian understandings of this role are no less wide ranging Consider the ascription of responsibility given by the Public Accounts Committee of the Third Lok Sabha in 1962 to the Comptroller and Auditor General: "When a particular course of administrative action has resulted in waste, extravagant or improper expenditure, it is certainly the duty of the audit to call specific attention to matters of that kind and to bring facts to the notice of Parliament."
This, then, is the Comptroller and Auditor General's job. It is variously described as 'efficiency-cum-propriety' audit; or, 'economy, efficiency effectiveness'; or a check on "waste, extravagance and improper expenditure'.
It is for all these reasons that the office of the CAG is of crucial importance and why its independence is so jealously guarded. The C&AG is totally forbidden to hold any office of profit after he has finished his appointment. There was an enormous row-and rightly so when Mr. Asoka Chanda, the former C&AG-in 1960 was appointed the Chairman of the Finance Commission. The Minister's reply that the post was not an office of profit was rightly denigrated in Parliament as being too 'casual' for as a Congress M. P. (Mr. Khadilkar) rightly stressed the Comptroller and Auditor General was one a of 'the pillars of the Constitution' and he "did not know what would happen to us if the pillars are corroded and the House topples on our head."
ROLE OF THE C&AG : A CRITICAL VIEW
The role and functions of the C&AG have recently sparked debate on two primary issues:
The first issue pertains to whether the C&AG, in performing his audit duties, has the authority to comment on issues of extravagance and recommend measures for economy, beyond merely assessing the legal authority behind specific expenditures. Traditionally, the view is that when a statute grants an authority the power to approve expenditure, the audit process should include evaluating not only the legality of that expenditure but also its propriety, particularly from an economic standpoint. However, government departments object, arguing that such oversight interferes with their responsibility for administering funds. This perspective is supported by scholars like Appleby, who contend that economic considerations are inherently tied to administrative efficiency, and since the C&AG lacks direct responsibility for administration, he is not qualified to make judgments on economic matters. Appleby asserts, “Auditors may not be well-versed in good administration practices. Their expertise lies in auditing, not in managing administration. Their influence is greatest among those with little understanding of administration. Auditing is crucial, but it is a function with a limited scope and relatively narrow application.”
Another issue is whether the audit of the C&AG should be extended in industrial and commercial undertakings carried on by the government through private limited companies, who are governed by the articles of their association or to statutory public corporations or undertakings which are governed by statute. It was rightly contended by former Comptroller and Auditor General that in as much as money is issued out of the Consolidated Fund of India to invest in these companies and corporations on' behalf of the Government, the audit of such companies must necessarily be right and responsibility of the C85AG, while, at present, the C8gAG can have no such power unless the articles of association of such companies or the governing statutes provide for audit by the Comptroller and Auditor General. The result is that the report of the C&AG does not include the results of the scrutiny of the accounts of these corporations and the Public Accounts Committee or Parliament has little material for controlling these important bodies, spending public money. This defect has been partially remedied by the Act of 1971 which enjoins the CAG to audit and report on the receipts and expenditure of 'Government Companies' and other bodies which are 'substantially financed' from the Union or State revenues, irrespective of any specific legislation in this behalf.
However, critics are of the view that the CAG's audit of public undertakings is an effective instrument of parliamentary control, but the form, content and the approach of this audit have affected the efficiency and profitability of the public undertaking in India."
Self-Check Exercise-2
Q.1 One of the key duties of the Comptroller and Auditor General is to ensure compliance with the Constitution and legal frameworks in financial matters, and to prevent any expenditure that he believes contravenes constitutional provisions or legal regulations. True/False
Q.2 Reports emanating from Accountant-Generals are laid before the respective State Legislatures. True/False

20.4.    SUMMARY
The services provided by the Comptroller and Auditor General (C&AG) are invaluable in protecting taxpayer interests. As the chief overseer of government financial operations, the C&AG acts on behalf of Parliament. Unlike the Finance Ministry, the C&AG does not have control over public spending. Instead, it offers an impartial framework that facilitates public oversight of government expenses. The C&AG's report on the Bofors case caused significant controversy, with the government criticizing both the report and the office itself. For example, N.K.P. Salve, Deputy Leader of the Lok Sabha, argued against the report and personally criticized C&AG T.N. Chaturvedi in Parliament.
It is fitting to recall Jawaharlal Nehru's statement from November 19, 1952: "Criticizing the Comptroller and Auditor General on the floor of the House would undermine his special position under the Constitution and make it difficult for him to perform his duties impartially."
As public spending in India continues to rise each year, there is room to expand and intensify the C&AG’s role to further support the democratic principles in the Constitution. However, the C&AG's role should remain as a watchdog, not an overzealous investigator.

20.5.    GLOSSARY

•    Apparatus : The set of tools, instruments or equipments used for doing a job or as activity.

•    Fundamental : Basic and important, from which everything else develops.

•    Proliferation : The fact of something increasing a lot and suddenly in numbers or accounts.

20.6    ANSWERS TO SELF-CHECK EXERCISESSELF CHECK EXERCISE-1
Q.1 True
Q.2 True
SELF CHECK EXERCISE-2
Q.1 True
Q.2 True

20.7.    REFERENCES/SUGGESTED READINGSS

•    Laxmikant, M. 'Public Administration' Fifth Edition, Tata McGraw-Hill Publishing Company Limited, New Delhi, 2016.

•    Gupta, B.N. Indian Federal Financial and Budgeting Policy, Chaitanya Publishing House, Allahabad, 1970.

•    Wattal., P.L. Parliamentary Financial Control in India, Minerva Book Depot, Bombay, 1985.

•    Handa., K.L. Financial Administration in India, HPA New Delhi, 1988

•    Pyhrr., P.A. Zero-Base Budgeting, Johan Wiley and Sons, New York, 1973.

•    Baisys., K.N. Financial Administration in India, Himalaya Publishing House, Bombay, 1986.

•    Mahajan., S.K. & Mahajan., A. P. Financial Administration in India, P.H.I, New Delhi.

•    IGNOU New Delhi, egyankosh

20.8.    TERMINAL QUESTIONS

(a)    How CAG is related to Public Accounts Committe of the parliament?

(b)    What are the powers and functions of CAG?