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«Government of India Ministry of Finance Department of Expenditure General Financial Rules, 2005* (* Amendments issued upto March 2010 have been added as ...»

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(c) In the case of works of renewal and replacement, which partake expenditure both of a capital and revenue nature, the allocation of expenditure shall be regulated by the broad principle that Revenue should pay or provide a fund for the adequate re- placement of all wastage or depreciation of property originally provided out of capital grants. Only the cost of genuine improvements, which enhance the useful life of the asset whether determined by prescribed rules or formulae, or under special orders of Government, may be debited to Capital. Where under special orders of Government, a Depreciation or Renewals Reserve Fund is established for renewing assets of any commercial department or undertaking, the distribution of expenditure on renewals and replacements between Capital and the Fund shall be so regulated as to guard against overcapitalisation on the one hand and excessive withdrawals from the Fund on the other.

(d) Expenditure on account of reparation of damage caused by extraordinary calamities such as flood, fire, earthquake, enemy action, etc., shall be charged to Capital, or to Revenue, or divided between them, depending upon whether such expenditure results in creation/acquisition of new assets or whether it is only for restoring the condition of the existing assets, as may be determined by Government according to the circumstance of each case.

Rule 92. Allocation between capital and revenue expenditure : The allocation between capital and revenue expenditure on a Capital Scheme for which separate Capital and Revenue Accounts are to be kept, shall be determined in accordance with such general or special orders as may be prescribed by the Government after consultation with the Comptroller and Auditor-General Rule 93.

Capital receipts during construction mainly to be utilised in reduction of capital expenditure : Capital receipts in so far they relate to expenditure previously debited to Capital accruing during the process of construction of a project, shall be utilised in reduction of capital expenditure. Thereafter their treatment in the accounts will depend on circumstances, but except under special rule or order of Government, they shall not be credited to the revenue account of the department or undertaking.

Rule 94. Receipts and recoveries representing recoveries of expenditure previously debited to Capital Major Head : Receipts and recoveries on Capital Account in so far as they represent recoveries of expenditure previously debited to a Capital Major Head shall be taken in reduction of expenditure under the Major Head concerned except where, under the rules of allocation applicable to a particular department, such receipts have to be taken to Revenue.

Rule 95. Capital cost of non-productive work to be met from ordinary revenues : As a general rule, capital cost of works which are non productive in nature is met from ordinary revenues.

Borrowed moneys and other resources outside the Revenue Account shall not ordinarily be spent for non productive purposes unless the following conditions are fulfilled:a) The objects for which the money is wanted are so urgent and vital that the expenditure can neither be avoided, postponed or distributed over a series of years; and (b) The amount is too large to be met from current revenues.

Rule 96. Conversion of outstanding loans into equity investments or grants-in-aid : Government takes from time to time, suitable measures to strengthen/restructure the Capital base of public sector enterprises so that these enterprises can improve their performance and productivity.

As a part of the package scheme, financial relief in the form of conversion of outstanding loans into equity investments or grants-in-aid are also agreed to.

Where loans outstanding against Public Sector Undertakings are proposed to be converted into equity investments in or as grants-in-aid to the Public Sector Undertakings, the approval of the Parliament to such proposals, shall be obtained by including a token provision in the relevant Demands for Grants or Supplementary Demands for Grants as may be found expedient. The details of such conversion of loans may be explained in the relevant Budget/Supplementary Demand documents. After obtaining the approval of the Parliament, the balances under loans and the progressive expenditure of the Capital Heads of Accounts shall be corrected pro forma through “Prior Period Adjustment Account” in the relevant Finance Accounts of the Union Government without affecting the current transactions of the year, under the Loan/Capital Major Heads concerned.


Rule 97. Interest rate : Except in special cases regulated by special orders of Government, interest at such rates as may be specified from time to time shall be charged in the accounts of all Commercial departments or units for which separate capital and revenue accounts are maintained within the Government accounts.

Rule 98. Charging of interest on capital outlay met out of specific loans raised by Government :

(1) For capital outlay met out of specific loans raised by Government, the interest shall be charged at such rate as may be prescribed by Government, having regard to the rate of interest actually paid on such loans and the incidental charges incurred in raising and managing them.

By specific loans are meant loans that are raised in the open market for one specific purpose which is clearly specified in the prospectus and in regard to which definite information is given at the time of raising of the loans.

(2) For capital outlay provided otherwise, interest shall be charged at the average rate of interest to be determined each year by the Department of Economic Affairs, Ministry of Finance.

(3) In the case of Capital Outlay of the Railways, dividend is payable to the general revenues on the capital-atcharge at the rate prescribed in the Railway Convention Resolution from time to time.

Rule 99. Method of calculation of interest : The interest shall be calculated on the direct capital outlay at the end of the previous year plus half the outlay of the year itself, irrespective of whether such outlay has been met from current revenues or from other sources.

Rule 100. How interest charged to capital is to be written back : When under any special orders of Government, charges for interest during the process of construction of a project are temporarily met from capital, the writing back of capitalised interest shall form the first charge on any capital receipts or surplus revenue derived from the project when opened for working.


Rule 101. Adjustments with State Governments : Subject to the relevant provision of the Constitution or of law made by Parliament or any orders issued thereunder, adjustments in respect of financial transactions with State Governments shall, unless otherwise provided for, be made in such manner, and to such extent as may be mutually agreed upon between the Central Government and the State Government concerned.

However, adjustments with State Government in respect of the matters mentioned below shall be regulated by the rules contained in Appendixto the Government Accounting Rules, 1990. The rules are based on reciprocal arrangements made with the State Governments and are, therefore, binding on all of them:i) Pay and Allowances, other than Leave Salaries.

(ii) Leave Salaries.

(iii) Pensions.

(iv) Expenditure involved in Audit and Keeping Accounts.

(v) Cost of Police functions on Railways including the cost of protecting Railway Bridges.

(vi) Cost of (a) Forest Surveys carried out by the Survey of India, and (b) Forest maps prepared by that Department.

(vii) Leave Salary and Pension Contributions recovered in respect of Government servants lent on Foreign Service.

Rule 102. Reaudit : As a convention, a period of three years has been accepted by the Central and State Governments for the reaudit of past transactions involving errors in classification.

Rule 103. When adjustment necessary : Adjustment shall always be made unless otherwise agreed upona) If a commercial department or undertaking or a regularly organised store department or store section of a department is concerned, or (b) If under the operation of any rule or order, an adjustment would have been made if the particular transaction with State Government were a transaction between two departments of the Central Government.

Rule 104. Petty and isolated claims for services rendered not to be preferred: The Central Government (which includes Union Territories) and the State Governments have agreed under reciprocal arrangements not to prefer petty and isolated claims for an amount not exceeding Rupees two thousand five hundred against one another.

Rule 105. Criteria in determining whether a particular claim is covered by the reciprocal arrangement : The significant criterion in determining whether a particular claim is covered by the reciprocal arrangement mentioned above, will be that the claim shall be both petty and of an occasional character and shall cover services rendered and not supplies made unless the latter forms part of service.

The term “service rendered” will be taken to mean an individual act of service, like providing police escort to a high dignitary and will not apply to supply of stores etc. Claims relating to Commercial undertakings under the Government of India or the State Governments such as those of the Railways, the Department of Post, the Electrical undertakings, etc., shall fall outside the purview of the proposed reciprocal arrangements and shall continue to be settled as hitherto.

If a doubt arises as to whether a particular claim would fall within or outside the purview of the proposed arrangement, it shall be decided by mutual consultation. The above arrangements will remain in force without any time limit in respect of all State Governments.

Rule 106. Projects jointly executed by several State Governments : In the case of Projects, jointly executed by several Governments, where the expenditure is to be shared by the participating Governments in agreed proportions, but the expenditure is ab-initio incurred by one Government and shares of other participating Governments recovered subsequently; such recoveries from other Governments shall be exhibited as abatement of charges under the relevant expenditure Head of Account in the books of the Governments incurring the expenditure initially.

Rule 107. Claims of State Governments, on account of the extra cost of agency functions : Claims of State Governments, on account of the extra cost of agency functions entrusted to them under Article 258 of the Constitution shall be dealt with and settled in accordance with such directions as may be issued by the President in this regard from time to time.

Rule 108. Principles to be observed in dealing with State Government claims : The following principles shall be generally observed in dealing with claims preferred by State Governments under Clause (3) of Article 258 of the Constitution:a) If the agency work involves the employment of a State Commercial Department, it would be open to that department to charge its normal commercial costs.

(b) Public Works Department agency costs shall be represented by such percentage charges on the cost of Central Works executed by the State as may be agreed between the Central and the State Government concerned, works outlay being treated as an amount placed at the disposal of the State Government for actual expenditure on the execution of the work.

(c) The cost of regular joint establishment shall be shared as far as practicable on the basis of fixed annual sums settled in agreement with the State Government concerned.

(d) In other cases, the following procedure shall be adopted unless there are special orders to the contrary:i) Details of claims preferred by State Governments shall be ascertained.

(ii) If the work has been performed by the State Government in the past, the charges shall be compared with those charged in the past but it is not necessary to be meticulous in the matter.

(iii) If the charges are found to be reasonable and do not exceed Rupees twenty thousand per annum for any individual item (or connected group of items), a five years’ contract shall be offered to the State Government during which the Central Government would pay the fixed sum per annum for the work.

The amount will be subjected to review at the end of each period of five years.

(iv) If the amount agreed upon exceeds Rupees twenty thousand, it shall be necessary to have an annual statement of proposed charges from the State Government at the time of preparation of the Budget.

However, if in any individual case, the charges are obviously static, then the contract system may be adopted in these cases also.

(e) In exceptional cases in which arbitration has to be resorted to, the Finance Ministry will make the requisite arrangement in the matter.

(f) The Finance Ministry shall be consulted on all matters arising under Article 258 (3) of the Constitution.

Rule 109. Principles governing transactions in connection with the agency functions entrusted to State Government : The following procedure shall be followed in regard to transactions arising in connection with the

agency functions entrusted to the State Governments under Article 258 of the Constitution:

(a) The expenditure on extra staff or contingencies which the State Government have to incur.-The extra cost to the State Government arising mainly in respect of the additional staff employed or contingent and other expenditure, as in the case of work devolving on the State Governments in connection with the administration of the Census Act, is reimbursable under Article 258 (3) of the Constitution. Expenditure in this regard shall be provided in the State Budget in the first instance and adjusted in the accounts of the State Governments under the normal Heads of Accounts. These will be reimbursed in lump to the State Governments, necessary provision being made under a distinct sub-head” Amounts paid to other Governments, Departments, etc.”, under the concerned Demand of the Ministry administratively concerned with the subject. In computing the extra cost, the element of leave and pensionary charges can also be included, provided the relevant service and financial rules of the State Governments provide for this.

(b) The expenditure on work entrusted to the State Government, such as expenditure on construction and maintenance of National Highways, expenditure on Defence Works, Aviation Works, etc. -The expenditure directly connected with the execution of the scheme or work entrusted to the State Government such as expenditure on the construction or maintenance of National Highways, etc., will be adjusted direct in the accounts of the Central Government under the relevant Head of Account. The question of including the estimates in this regard in the Budget of the State Governments and subjecting them to the vote of the State Legislature will not arise. The expenditure will be adjusted under the Head “8658 – Suspense Accounts –PAO Suspense” in the Remittance Section of the State Accounts in the first instance pending their eventual clearance in accordance with the prescribed procedure.

Note: In the converse case relating to the entrustment of a State function to the Central Government under Article 258-A of the Constitution, a procedure similar to that indicated in the Rule 109 above shall be followed. The extra cost on staff and other contingent expenditure, etc., will accordingly have to be provided in the Budget of the Central Government in the usual manner and recovery made in lump from the State Government concerned. The other expenditure on execution of the work proper should be debited to the State Government concerned direct and the question of obtaining a vote of the Parliament for the same will not arise.

Rule 110. Crucial date for closure of inter-Government adjustments : Inter-Governmental adjustments can be carried out upto the 15th of April on which date the books of the Reserve Bank are closed for the month of March.

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