Finance Bill or Finance Act

The Finance Bill and the Finance Act are critical legislative instruments in the fiscal governance of India. They are integral to the country’s budgetary process, facilitating the implementation of the government’s taxation policies and financial proposals. While the Finance Bill represents a legislative proposal, the Finance Act embodies the final, enacted law following parliamentary approval. Together, they serve as the principal mechanism through which the Union Government gives legal effect to revenue measures announced in the annual budget.

Constitutional Framework and Legal Basis

The Finance Bill and Finance Act derive their authority from the Constitution of India, particularly from Article 110, Article 117, and Article 265. Article 110 defines a Money Bill, which includes any Bill dealing with the imposition, abolition, remission, alteration, or regulation of any tax. The Finance Bill falls within this category, as it contains provisions related to taxation and government revenue.
According to Article 265, “No tax shall be levied or collected except by authority of law.” Thus, the Finance Bill provides this legal authority once enacted. The Finance Act, which results from the passage of the Finance Bill, validates the government’s power to levy taxes for the financial year.
The process is deeply linked to the Union Budget (as per Article 112), which outlines the government’s estimates of revenue and expenditure for the upcoming financial year.

Finance Bill: Nature and Characteristics

The Finance Bill is introduced annually in the Lok Sabha immediately after the presentation of the Union Budget by the Finance Minister. It serves as a legislative vehicle for implementing the tax proposals outlined in the budget speech and accompanying documents.
Key features of the Finance Bill include:

• It is a Money Bill as defined under Article 110 of the Constitution.
• It includes provisions for imposing new taxes, modifying existing tax rates, and abolishing certain levies.
• It covers matters related to direct taxes (such as income tax and corporate tax) and indirect taxes (such as customs duties, excise duties, and GST-related amendments).
• It may also include amendments to various tax laws like the Income-tax Act, 1961, Customs Act, 1962, and other fiscal statutes.
• It has to be introduced only in the Lok Sabha, not in the Rajya Sabha.

There are generally two types of Finance Bills in the Indian context:

1. Finance Bill (I) – The main Finance Bill accompanying the annual budget, containing the government’s taxation proposals for the upcoming financial year.
2. Finance Bill (II) – Introduced occasionally to give effect to supplementary financial proposals during the year, often arising from mid-year policy changes or extraordinary fiscal needs.

Passage of the Finance Bill

The legislative journey of the Finance Bill follows a constitutionally defined process:

1. Introduction in the Lok Sabha: The Finance Minister introduces the Bill immediately after presenting the Union Budget, outlining its objectives and key fiscal measures.
2. Consideration and Discussion: Members of Parliament debate the Bill alongside the Demands for Grants and Appropriation Bill. The Finance Bill is examined clause by clause.
3. Amendments and Approval: The Lok Sabha may accept, reject, or amend specific provisions. However, since it is a Money Bill, the Rajya Sabha can only make recommendations, which the Lok Sabha may choose to accept or ignore.
4. Presidential Assent: Once the Lok Sabha passes the Bill and the Rajya Sabha returns it (with or without recommendations) within 14 days, it is sent to the President for assent.
5. Enactment as Finance Act: Upon receiving presidential assent, the Bill becomes the Finance Act, thereby acquiring legal force.

Finance Act: Implementation and Scope

Once enacted, the Finance Act is the law that gives legal effect to the taxation changes proposed in the Finance Bill. It lays down specific amendments to various tax legislations, rates, and procedural norms. The Finance Act also prescribes the effective dates for the implementation of new taxes or rate revisions.
For instance, the Finance Act, 2025, would define the income tax rates applicable for the assessment year 2026–27, revise customs duties, or introduce new cesses or surcharges.
Key functions of the Finance Act include:

• Providing statutory backing for tax proposals announced in the budget.
• Amending or repealing provisions in existing fiscal laws.
• Defining fiscal limits for expenditure and revenue measures.
• Implementing changes in duties, levies, and tax procedures.

Importance in Fiscal Management

The Finance Bill and Finance Act are central to India’s fiscal policy and public finance management, performing several essential roles:

• Revenue Generation: They authorise the collection of taxes that finance government expenditure on infrastructure, defence, welfare, and development.
• Policy Implementation: They operationalise budgetary announcements, turning policy goals into actionable fiscal measures.
• Legal Sanction: They ensure that all taxation measures comply with constitutional requirements.
• Economic Regulation: Through adjustments in tax rates, exemptions, and incentives, they influence consumption, savings, and investment behaviour in the economy.
• Transparency and Accountability: Their annual passage through Parliament subjects government fiscal measures to public scrutiny.

Relationship with Other Budgetary Instruments

The Finance Bill forms part of a trio of legislative instruments that together constitute the Union Budget’s legislative framework:

1. Finance Bill – Deals with taxation and revenue proposals.
2. Appropriation Bill – Seeks Parliament’s approval for government expenditure.
3. Demand for Grants – Specifies departmental spending allocations.

Only after the passage of these three components can the government lawfully raise and spend funds for the new financial year.

Historical and Contemporary Developments

Over time, Finance Acts have introduced landmark reforms in India’s fiscal structure. Examples include:

• Finance Act, 1991: Introduced major liberalisation measures and tax reforms under the economic reforms programme.
• Finance Act, 1994: Introduced the Service Tax, marking the beginning of indirect tax expansion.
• Finance Act, 2017: Enabled the merger of multiple tribunals and incorporated enabling provisions for the Goods and Services Tax (GST) rollout.
• Finance Act, 2020: Rationalised tax slabs and introduced the Vivad se Vishwas scheme to settle tax disputes.

In recent years, Finance Acts have also incorporated digital compliance initiatives, tax transparency measures, and rationalisation of exemptions to improve the efficiency of India’s tax system.

Criticism and Debates

While the Finance Bill and Act are necessary for fiscal governance, they have been subject to criticism and debate:

• Inclusion of Non-Tax Provisions: Critics argue that successive Finance Bills have included clauses unrelated to taxation, bypassing scrutiny in the Rajya Sabha by using the Money Bill route.
• Limited Parliamentary Debate: Given the constitutional urgency of passing the Bill before the new fiscal year begins, detailed scrutiny is often curtailed.
• Complexity of Tax Provisions: Frequent amendments through Finance Acts have made tax laws voluminous and difficult for taxpayers to interpret.
• Centralisation of Power: The concentration of fiscal decision-making in the executive branch reduces legislative oversight.

The Supreme Court of India has, in several judgments, emphasised the need for the Finance Bill to strictly adhere to the constitutional definition of a Money Bill to maintain the balance of legislative powers between the two Houses of Parliament.

Contemporary Relevance

In the modern fiscal environment, the Finance Bill and Finance Act continue to shape the economic trajectory of the nation. They reflect government priorities in taxation, growth, investment, and welfare spending. The increasing use of digital systems in tax collection, the simplification of compliance procedures, and the integration of technology-driven transparency measures underscore the evolving character of India’s fiscal legislation.