Hoping to bring more transparency in its allocations in the Union Budget subsequent to the scrapping of Plan and non-Plan expenditure, the Finance Ministry has defined capital and revenue spendings.
The capital expenditure would include any significant spending on constructing a permanent physical asset or enhancing the utility of an existing asset. The cost of any subsequent maintenance and repair work would be classified as revenue expenditure.
The definition, which is proposed in the draft general financial rules, comes after the government’s decision to remove the artificial distinction of Plan and Non-Plan spending from 2017-18 and replace it with revenue and capital expenditure.
“The draft rules are likely to be cleared soon and will be followed by all government agencies,” said an official.
“All expenditure on the working and upkeep of the project and also on renewals and replacements and additions, improvements or extensions,” would be revenue expenditure, said the draft rules.
In case of works of renewal and replacement, revenue expenditure would pay for replacement of all wastage or depreciation of property originally provided out of capital grants.
The draft rules also propose that in case of natural calamities or disaster, the expenditure on rehabilitation would also depend on the nature of construction.
“Expenditure on a temporary asset cannot ordinarily be considered as a capital expenditure, except in cases specifically authorised by the President of India,” said the rules.
It further said that grants-in-aids by the Centre to States or government entities would also be considered as capital expenditure.
The general financial rules (GFR) lay down the accounting principles that are followed in the Union Budget and by government Ministries and agencies such as the Controller General of Accounts.
Economists say that the proposed definitions, if finalised, would help clear the air on what exactly constitutes the government’s revenue and capital spending.
“It is not clear on how the allocation to a scheme or programme is divided into revenue and capital spending. With the change in the Budget, this clarity is required from 2017-18 to get a better understanding of government finances,” said NR Bhanumurthy, Professor at National Institute of Public Finance and Policy, adding this was the reason why the government coined the term of “effective revenue deficit”.
Economists pointed out accounting difficulties such as instances when the Centre transfers funds to States as revenue expenditure, but it is then classified as capital expenditure by States in their accounting.
“Due to the challenges of classification, the estimates by the CGA also often become murky,” said the official.
User chargesNoting that user charges are an important source of non-tax revenue, the draft GFR have proposed that each Ministry and department must identify and assess the quantum of such fees collected by them.
“The rates of user charges should also be linked with appropriate price indices and periodically reviewed,” it said.
To protect government revenue, it has also suggested that payment of dividends by public sector units as well as transfer of surplus by the Reserve Bank of India to the Centre must be done in a timely manner.