Income tax in India is classified into two broad categories: (a) Taxation of agricultural income and (b) Taxation of non-agricultural income. The Constitution empowers the Parliament to levy taxes on income other than agricultural income. Thus, taxation of non- agricultural income is a Central subject while taxation of agricultural income is a State subject.

Under Article 270of the Constitution, the net proceeds of taxes on income other than corporation tax, are distributed between the Union and the States. The proceeds of income tax attributable to Union Territories and surcharge on income tax levied for Union purposes are excluded from the divisible pool. The Central Government imposes ‘duties of customs including export duties’ on a wide range of commodities. Customs revenue is not sharable with the States. In India customs revenue is mainly composed of import duties. The revenue from export duties is negligible in view of the export promotion efforts aimed at bridging the ever widening deficit in the balance of payments.

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Import duties in India are mostly ad-valorem in nature. Union excise duties are the most important source of revenue of the Centre and have increased rapidly over the years. The sharing of basic duties is permissible under Article 272 of the Constitution. Such sharing is done in accordance with law of Parliament on the recommendations of the Finance Commission. Sharing of these duties started with only three commodities on the recommendation of the First Finance Commission, but now all the basic duties are shared with the States. The Non-tax revenue receipts include revenue from currency, coinage and mint, interest receipts, dividends, profits, revenue from general services (such as police, jails, supplies and disposal, and public works), revenue from social and community services (such as education, health, housing, broadcasting and so on), and revenue from economic services (such as agriculture and allied services, industry and mines, transport and communications). Non-tax revenue is classified under three broad heads: (a) Interest receipts, (b) Dividends and profits, and (c) Other on-tax revenue.

Receipts on account of interest on loans by the Central Government represent the most important source of non-tax revenue. Revenue Expenditure: Revenue expenditure relates to the normal running of Government departments and various services, interest charges on debt incurred by the Government, and grants given to State Governments and other parties. Budget documents classify total revenue expenditure into non-plan and plan revenue expenditure. Both plan and non-plan expenditures contain development as well as non-developmental items.

Once a plan scheme is fully operative or the plan project is completed, its maintenance and operational expenses are shifted to non-plan expenditure. Therefore, non-plan expenditure keeps on increasing. The major items of non-plan revenue expenditure interest payments, defence services, and subsidies put together account 40 percent of total expenditure. Interest Payments: Interest payments constitute the single largest component of non-plan revenue expenditure.

The sharp rise in interest payments is directly linked to the increasing reliance on borrowings and rising interest rates, particularly on small savings and provident funds. The increase in domestic borrowings in the past two decades was largely because of increased budgetary deficit. The debt servicing liabilities of the Government rose sharply. The solution of problem is reduction in government borrowings is one alternative, another one is that borrowed funds must be used for productive purposes and for projects which ensure reasonable rates of return.