Examkin

Question

Difficulty: MediumFiscal Policy, Union/State Budgeting, Public Finance, and Taxation Structure

Consider the following statements regarding the revenue and capital classifications in the Union Budget of India:

1. Recovery of loans advanced by the Central Government to State Governments is categorized as a Capital Receipt.
2. Dividends and profits earned by the Central Government from Public Sector Undertakings (PSUs) are categorized as Capital Receipts.
3. Interest payments on public debt incurred by the Central Government are categorized as Revenue Expenditures.

Which of the statements given above are correct?

  1. 1 and 3 onlyAnswer
  2. B
    2 only
  3. C
    1 and 2 only
  4. D
    1, 2, and 3

Answer

Statements 1 and 3 are correct.
Recovery of loans reduces government assets and is therefore a non-debt capital receipt. Interest payments are recurring operational charges that do not reduce debt principal or build assets, qualifying as revenue expenditure. Hence, the statement combination comprising '1 and 3 only' is correct.

Step-by-Step Solution

1
Analyze Statement 1: Recovery of loans.
Recovery of loans decreases total financial claims/assets of the Central Government.
Any transaction that creates a financial liability or reduces financial assets is classified as a Capital Receipt.
2
Analyze Statement 2: Dividends and profits from PSUs.
Dividends represent routine income from government investments without liquidating assets or incurring liabilities.
Income earned on government property and enterprises is classified as non-tax Revenue Receipts.
3
Analyze Statement 3: Interest payments on public debt.
Interest payments are regular operational expenses that do not reduce the principal debt liability.
Expenditures incurred for operational services and debt maintenance without asset creation belong to Revenue Expenditure.

Key Concept

Distinction between Revenue and Capital heads in Government Budgeting
Estimated Time:1m 15s
Rate this question

Topics

Fiscal Policy, Union/State Budgeting, Public Finance, and Taxation Structure