(a) (i) Two friends, Deepak and Krish were discussing the impact of increase in GST rates on luxury items, as

Question 35 of 54

Q. (a)

(i) Two friends, Deepak and Krish were discussing the impact of increase in GST rates on luxury items, as recently undertaken by the Government. Krish was of the view that most of the luxury items (like foreign travel, imported cigarettes, etc.) should be taxed exorbitantly, while the items related to daily consumption of poor and middle class should be tax-free. Identify and explain the objective of the Government budget Krish is suggesting.

(ii) State any two examples of non-tax receipts of the Government.

(OR)

(b)

(i) "In the recent times, the Government of India has incurred a lot of expenditure on acquisition of indigenous defence items under 'Make-in-India' programme." Identify and discuss the two types of budget expenditures which may by undertaken by the Government as suggested in the above statement.

(ii) State the meaning of 'fiscal deficit' under the Government Budget.

CBSECBSE Class XII Board 2023Subjective· 6mImportance★★★★★

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Part (a)Concept understanding — Goods And Services Tax

Goods and Services Tax (GST)

Start with what you already know

Walk into any shop — a chemist, a mobile store, a restaurant — and look at your bill. At the bottom, you will see a line: GST @ 5% or GST @ 12% or GST @ 18%. That extra amount is not pocketed by the shopkeeper. It goes to the government. But why is there a separate tax called GST, and not just "sales tax" or "VAT" like before?

The answer lies in a simple problem: before GST, every state had its own tax system. A truck carrying goods from Maharashtra to Karnataka would be stopped at checkposts, pay entry tax, octroi, and state VAT — each time adding cost and delay. GST was designed to make India one unified market.

The precise meaning

Important

Goods and Services Tax (GST) is a comprehensive, multi-stage, destination-based indirect tax levied on every value addition in the supply chain — from manufacture to final consumption.

Let me unpack each part of that definition.

Comprehensive — It replaced a dozen central and state taxes (excise duty, service tax, VAT, octroi, entry tax, luxury tax, etc.) with a single tax.

Multi-stage — A product passes through several stages: raw material → manufacturer → wholesaler → retailer → consumer. GST is collected at every stage where value is added.

Destination-based — The tax revenue goes to the state where the goods are consumed, not where they are produced. If a car is made in Gujarat but sold in Bihar, Bihar gets the GST.

Value addition — This is the key idea. A manufacturer buys steel for ₹100, pays 18% GST (₹18). He uses the steel to make a machine and sells it for ₹200. He collects 18% GST (₹36) from the buyer. But he does not pay ₹36 to the government — he pays only ₹18 (₹36 minus the ₹18 he already paid on steel). This is called Input Tax Credit (ITC).

Note

Input Tax Credit is the heart of GST. It prevents "tax on tax" (cascading). Under the old system, a manufacturer paid tax on his inputs, then paid tax again on the full selling price — effectively taxing the tax. GST eliminates this.

How GST works: a simple chain

Imagine a wooden chair.

Logger sells timber to a furniture maker for ₹1,000. GST @ 18% = ₹180. Logger deposits ₹180 with the government.
Furniture maker uses the timber, adds value (labour, design), and sells the chair to a wholesaler for ₹2,000. GST on sale = ₹360. But he claims ITC of ₹180 (the tax he already paid on timber). He deposits only ₹180 (₹360 − ₹180).
Wholesaler sells to a retailer for ₹3,000. GST = ₹540. ITC = ₹360. Deposits ₹180.
Retailer sells to you, the consumer, for ₹4,000. GST = ₹720. ITC = ₹540. Deposits ₹180.

Total tax collected = ₹180 + ₹180 + ₹180 + ₹180 = ₹720 — exactly 18% of the final price ₹4,000.

Tip

Notice: the government collects the same total tax (₹720) whether it collects it in one lump from the retailer or in four small instalments from each stage. The difference is that everyone in the chain is incentivised to maintain proper invoices because they need ITC. This reduces tax evasion.

Why GST matters for the economy

Removed cascading — Earlier, a product bore "tax on tax". A study by the National Institute of Public Finance and Policy estimated that cascading added 25–30% to the final price of many goods. GST removed that.

Made India a common market — Before GST, a truck moving from Delhi to Chennai spent 60–70 hours at state borders in paperwork. After GST, interstate checkposts were dismantled. Logistics costs fell.

Increased tax base — Because every business wants ITC, they must file returns and show purchases from registered suppliers. This pulls informal businesses into the tax net.

Simplified compliance — Instead of filing separate returns for excise, service tax, and VAT, a business files one GST return.

The three-tier structure

GST in India is not a single rate. It has three components:

Component	Levied by	Applies to
CGST (Central GST)	Central Government	Intra-state sales
SGST (State GST)	State Government	Intra-state sales
IGST (Integrated GST)	Central Government	Inter-state sales

For a sale within the same state (say, a shop in Delhi selling to a customer in Delhi), the total GST is split equally: 9% CGST + 9% SGST = 18% total.

For a sale across states (Delhi to Mumbai), only IGST is charged (18%). The central government collects it and later transfers the state's share to Maharashtra (the destination state). …

Part (b)Concept understanding — Capital Expenditure Distinction

Capital Expenditure Distinction

Start with everyday intuition

Think of your own household. When you buy vegetables for dinner, that money is gone — you consume it. But when your family spends money to build an extra room on the house, or install solar panels, that spending creates something that will keep giving value for years. The vegetables are consumption expenditure; the room or solar panels are capital expenditure.

Now scale this up to an entire country. The government also makes two very different kinds of spending: one that is consumed within the year (like paying salaries or buying stationery), and another that creates assets that last for many years (like building a highway or a dam). That second kind is capital expenditure.

The precise meaning (NCERT definition)

In the NCERT Class 12 Macroeconomics textbook, capital expenditure is defined as the expenditure that either:

Creates physical or financial assets for the government, or
Reduces the government's liabilities.

Let me break that down.

Creates assets: When the government builds a school building, buys a new computer for a government office, or constructs a bridge — these are physical assets that will be used for years. The government also acquires financial assets, like buying shares of a public sector company.

Reduces liabilities: When the government repays a loan it had taken earlier, that reduces its debt burden. This is also counted as capital expenditure because it changes the government's net financial position.

Note

The opposite of capital expenditure is revenue expenditure — spending that does not create assets or reduce liabilities. Salaries, subsidies, interest payments, and routine maintenance are all revenue expenditure.

Why the distinction matters

This is not just an accounting technicality. The distinction tells us something crucial about the quality of government spending.

If a government spends ₹100 crore on building a new railway line, that ₹100 crore is capital expenditure. It creates an asset that will generate income and services for decades. But if the same ₹100 crore is spent on giving a subsidy that gets consumed immediately, that is revenue expenditure — it does not add to the nation's productive capacity.

Economists and policymakers watch the ratio of capital expenditure to total expenditure very closely. A higher share of capital expenditure usually means the government is investing in future growth. A higher share of revenue expenditure often means the government is just managing the present.

Important

Capital expenditure directly adds to the capital stock of the economy — the total value of physical assets like roads, factories, and power plants. This is what drives long-term economic growth.

A simple way to remember

Ask yourself: Does this spending leave behind something tangible that will last beyond this year?

Building a dam → Yes → Capital expenditure
Paying a teacher's salary → No → Revenue expenditure
Buying a new army tank → Yes → Capital expenditure
Paying interest on old loans → No → Revenue expenditure
Repaying a loan → Yes (reduces liability) → Capital expenditure

The formula connection (where it fits)

In the national income accounting framework, capital expenditure by the government is part of Gross Capital Formation (investment). The identity is:

GDP = C + I + G + (X - M)

Where:

$C$ = private consumption expenditure
$I$ = investment expenditure (includes both private and government capital expenditure)
$G$ = government final consumption expenditure (this is revenue expenditure, not capital)
$X - M$ = net exports …

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Part (a)(i): Krish is suggesting the equity/redistribution objective of the budget. Part (a)(ii): Non-tax receipts — interest receipts and PSU dividends/profits.

Part (b)(i): The two expenditures are capital expenditure (defence assets) and revenue expenditure (maintenance/salaries). Part (b)(ii): Fiscal deficit = total expenditure − total receipts excluding borrowings.

Part (a)

(i) Krish wants luxury items (foreign travel, imported cigarettes — consumed mainly by the rich) taxed heavily, while daily-consumption items of the poor and middle class are tax-free. This is the equity (redistribution of income) objective of the government budget: using a progressive tax structure so that those with greater ability to pay bear a larger burden, thereby reducing inequalities of income and wealth.

(ii) Non-tax receipts are government revenue receipts that do not arise from taxes. Two examples:

Interest receipts — interest earned on loans given by the government to state governments, UTs and public sector undertakings.
Dividends and profits — income the government earns as an owner of public sector enterprises. …

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 42 on this concept.

CBSE 2026Set MARCH1 markMCQ
$Q. Which of the following is an example for 'Paper tax'?$
(a) a) Income tax
(b) b) Excise tax
(c) c) Customs duty
(d) d) Wealth tax
›Reveal solutionSolution

A paper tax raises almost no revenue in practice; the classic example is (d) Wealth tax.

In Indian public finance, some direct taxes were imposed more for equity and appearance than for revenue. Because they collected very little and were difficult to administer, they were nicknamed 'paper taxes'. Wealth tax is the standard textbook example of such a tax.

…

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CBSE 2026Set ANNUAL1 markMCQ
$Q. In which of the following years the Goods and Services taxes are implemented in India?$
(a) In 2006
(b) In 2016
(c) In 2017
(d) In 2020
›Reveal solutionSolution

GST was implemented in India in 2017 — option (c).

The Goods and Services Tax (GST) — a single, comprehensive, destination-based indirect tax that replaced many central and state indirect taxes — came into force in India on 1 July 2017, real …

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CBSE 2026Set ANNUAL1 mark
$Q. Which type of tax is income tax, Direct or Indirect?$
›Reveal solutionSolution

Income Tax is a Direct Tax, since its burden cannot be shifted onto someone else.

The key distinction between Direct and Indirect taxes is whether the tax's burden can be SHIFTED from the person who legally pays it to someone else. Income Tax is levied on an individual's (or entity's) income, and the person who earns that income is both the one legally liable to pay the tax AND the one who ultimately bears its burden (reduced take-home income) — there is no mechanism by which this burden can be passed on to another party. This makes Income Tax a Direct Tax, …

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CBSE 2025Set 58/5/11 markMCQ
$Q. Read the following statements carefully : Statement 1 : Foreign aids are the capital receipts for the government. Statement 2 : Disinvestments may lead to a decrease in the assets of the government. In the light of the given statements, choose the correct option from the following : (A) Statement 1 is true and Statement 2 is false. (B) Statement 1 is false and Statement 2 is true. (C) Both Statements 1 and 2 are true. (D) Both Statements 1 and 2 are false.$
›Reveal solutionSolution

Statement 1 is false and Statement 2 is true. Foreign aid (grants) neither creates a liability nor reduces an asset, so it is a revenue receipt, not a capital receipt; disinvestment does reduce the government's assets. The correct option is (B).

Understanding Government Receipts and Assets

Government receipts are classified as either revenue receipts or capital receipts. The dividing test is simple: a capital receipt either creates a liability (e.g., borrowing, which must be repaid) or reduces an asset (e.g., disinvestment, recovery of loans). A revenue receipt does neither — it is a regular inflow such as taxes, fees, dividends, or grants received.

Statement 1: "Foreign aids are the capital receipts for the government."

Foreign aid usually takes the form of grants or assistance from foreign governments and international institutions. A grant does not have to be repaid, so it creates no liability, and it does not reduce any government asset. On both tests it fails to qualify as a capital receipt — it is a revenue receipt. Only foreign loans, which must be repaid and therefore create a liability, are capital receipts. Because the statement calls "foreign aids" capital receipts, it is false.

Note

Watch the distinction: foreign grants/aid → revenue receipt; foreign loans/borrowings → capital receipt (they create a liability). The word "aid" points to grants, which are revenue receipts.

Statement 2: "Disinvestments may lead to a decrease in the assets of the government." …
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CBSE 2025Set ANNUAL1 markMCQ
$Q. Financial year in India is (A) April 1 to March 31 (B) January 1 to December 31 (C) October 30 to September 1 (D) None of these$
›Reveal solutionSolution

India's financial year is 1 April to 31 March, so the answer is (A).

The government budget is an annual statement of estimated receipts and expenditure for a financial year. In India this financial (fiscal) year runs from 1 April of one calendar year to 31 March of the next. The calendar year 1 January to 31 December (B) is not India's fiscal year, and (C) is not a valid perio …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. Which of the following is a component of Budget? (A) Budget Receipts (B) Budget Expenditure (C) Both (A) and (B) (D) None of these$
›Reveal solutionSolution

The budget has both receipts and expenditure, so the answer is (C) Both (A) and (B).

The government budget is an annual financial statement with two main components: (A) budget receipts — the money the government expects to receive (revenue receipts and capital receipts), and (B) budget expenditure — the money it plans to spend (revenue expenditure and capital expenditure). Both sides together constitute the budget, s …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. Which of the following is a component of Budget Receipts? (A) Revenue Receipts (B) Capital Receipts (C) Both (A) and (B) (D) None of these$
›Reveal solutionSolution

Budget receipts include both revenue and capital receipts, so the answer is (C).

Budget (government) receipts are divided into two categories: (A) revenue receipts — those that neither create a liability nor reduce an asset (e.g. taxes, fees, interest), and (B) capital receipts — those that either create a liability (borrowing) or reduce an asset (disinvestment, recovery of loans). Together they form total budget receip …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. Which of the following is direct tax? (A) Wealth tax (B) Excise tax (C) Custom duty (D) Service tax$
›Reveal solutionSolution
A direct tax's burden stays on the person taxed; wealth tax fits this, while the other three are indirect, so (A) is correct.

In the RBSE/CBSE Class-12 government-budget chapter, taxes are classified as:

Direct tax — levied on and paid by the same person; the burden (incidence) cannot be shifted. Examples: income tax, corporate tax, wealth tax.

Indirect tax — levied on goods and services; the seller passes the burden on to the buyer. Examples: excise duty, customs duty, service tax (now largely subsumed under GST). …
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CBSE 2025Set ANNUAL1 mark
$Q. Clarify the meaning of annual financial document.$
›Reveal solutionSolution

The annual financial document is the Government Budget — the statement of estimated receipts and expenditure for the year.

In the RBSE/CBSE Class-12 government-budget chapter, the Government Budget is defined as the annual financial statement showing the government's estimated receipts (revenue and capital receipts) and expenditure (revenue and capital expenditure) for a financial year (1 April to 31 March). In India it is presented to Parliament under Article 112 of the Constitution.

…

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CBSE 2025Set ANNUAL1 mark
$Q. Write the answer in one sentence: What type of expenditure is defence expenditure?$
›Reveal solutionSolution
Routine defence spending is revenue expenditure; buying defence assets is capital expenditure.

Defence expenditure has two parts:

Revenue expenditure – salaries and allowances of defence personnel, maintenance, fuel and day-to-day operational costs; these neither create an asset nor reduce a liability, so they are revenue expenditure (the bulk of defence spending).

Capital expenditure – the purchase of defence equipment, weapons, aircraft and construction of assets, which create assets. …
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CBSE 2025Set ANNUAL1 mark
Q.Carefully read the data of revenue receipts, taken from the budget summary of Government of India, and answer the questions given below. Revenue Receipts (In ₹ crore) Category | 2022-2023 Actuals | 2023-2024 Budget Estimates | 2023-2024 Provisional Actuals | 2024-2025 Budget Estimates
1. Tax Revenue — Gross Tax Revenue | 3054192 | 3360858 | 3464792 | 3840170
(a) Corporation Tax | 825834 | 922675 | 911055 | 1020000
(b) Taxes on Income | 833260 | 900575 | 1044726 | 1187000
(c) Wealth Tax | -9 | ... | ... | ...
(d) Customs | 213372 | 233100 | 233067 | 237745
(e) Union Excise Duties | 319000 | 339000 | 305330 | 319000
(f) Service Tax | 431 | 500 | 424 | 100
(g) GST | 849133 | 956600 | 957032 | 1061899 CGST | 718523 | 811600 | 820622 | 910890 IGST | 4748 | ... | -5026 | ... GST Compensation Cess | 125862 | 145000 | 141436 | 151009
(h) Taxes of Union Territories | 8711 | 8408 | ... | 9426
(i) Other Taxes | 4460 | ... | 13158 | 5000 How much increase is estimated in Union Excise Duties, in the budget estimates of year 2024-25, as compared to actual receipts of year 2022-23?
›Reveal solutionSolution

2024-25 BE Union Excise Duties (₹3,19,000 cr) equals 2022-23 Actuals (₹3,19,000 cr) — increase = ₹0.

From the given data table, Union Excise Duties figures are:

2022-23 Actuals: ₹3,19,000 crore

2023-24 Budget Estimates: ₹3,39,000 crore

2023-24 Provisional Actuals: ₹3,05,330 crore

2024-25 Budget Estimates: ₹3,19,000 crore

Comparing the two figures asked for: 2024-25 Budget Estimates (₹3,19,000 crore) minus 2022-23 Actuals (₹3,19,000 crore) = ₹0 crore. So, despite the figure rising to ₹3,39,000 crore in the 2023-24 Budget Estimate and then coming in lower at ₹3,05,330 crore in the 2023-24 Provisional Actuals, the 2024-25 Budget Estimate for Union Excise Duties has been set at e …

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CBSE 2025Set ANNUAL1 mark
Q.Carefully read the data of revenue receipts, taken from the budget summary of Government of India, and answer the questions given below. Revenue Receipts (In ₹ crore) Category | 2022-2023 Actuals | 2023-2024 Budget Estimates | 2023-2024 Provisional Actuals | 2024-2025 Budget Estimates
1. Tax Revenue — Gross Tax Revenue | 3054192 | 3360858 | 3464792 | 3840170
(a) Corporation Tax | 825834 | 922675 | 911055 | 1020000
(b) Taxes on Income | 833260 | 900575 | 1044726 | 1187000
(c) Wealth Tax | -9 | ... | ... | ...
(d) Customs | 213372 | 233100 | 233067 | 237745
(e) Union Excise Duties | 319000 | 339000 | 305330 | 319000
(f) Service Tax | 431 | 500 | 424 | 100
(g) GST | 849133 | 956600 | 957032 | 1061899 CGST | 718523 | 811600 | 820622 | 910890 IGST | 4748 | ... | -5026 | ... GST Compensation Cess | 125862 | 145000 | 141436 | 151009
(h) Taxes of Union Territories | 8711 | 8408 | ... | 9426
(i) Other Taxes | 4460 | ... | 13158 | 5000 According to given data, what is the highest tax receipt in gross tax revenue of the budget estimates of the year 2024-25?
›Reveal solutionSolution
Among all 2024-25 BE tax heads, Taxes on Income (₹11,87,000 crore) is the single highest.

From the given 2024-25 Budget Estimates column:

Corporation Tax: ₹10,20,000 crore

Taxes on Income: ₹11,87,000 crore

(d) Customs: ₹2,37,745 crore

(e) Union Excise Duties: ₹3,19,000 crore

(f) Service Tax: ₹100 crore

(g) GST (total): ₹10,61,899 crore

(h) Taxes of Union Territories: ₹9,426 crore

(i) Other Taxes: ₹5,000 crore

…
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