Public Revenue

The income of the government through all sources is called

public income or public revenue.
According to Dalton, “Public Income” has two senses — wide
and narrow.
In its wider sense it includes all the incomes or receipts which
a public authority may secure during any period of time.
In its narrow sense, however, it includes only those sources of
income of the public authority which are ordinarily known as
“revenue resources.”
The former is termed “public receipts” and the latter “public
revenue.”
The Receipts of government of India are divided into revenue
receipts and capital receipts. Revenue receipts consist of tax
revenue and non-tax revenue.
Tax Revenue:
Taxes are the first and foremost sources of public revenue.
Taxes are compulsory payments to the government without
expecting direct benefit or return by the taxpayer. Taxes
collected by Government are used to provide common
benefits to all mostly in form of public welfare services. Taxes
do not guarantee any direct benefit for the person who pays
the tax. It is not based on a direct quid pro quo principle.
The main characteristic features of a tax are as follows:
(1) A tax is a compulsory payment to be paid by the citizens
who are liable to pay it. Hence, the refusal to pay a tax is a
punishable offense.
(2) There is no direct, quid pro quo between the tax-payers
and the public authority. In other words, the taxpayer cannot
claim reciprocal benefits against the taxes paid.
(3) A tax is levied to meet public spending incurred by the
government in the general interest of the nation. It is a
payment for an indirect service to be made by the
government to the community as a whole.
(4) A tax is payable regularly and periodically as determined by
the taxing authority.
Taxes constitute a significant part of public revenue in modern
public finance. Taxes have macro-economic effects. Taxation
can affect the size and mode of consumption, the pattern of
production and distribution of income and wealth. Progressive
taxes can help in reducing inequalities of income and wealth
by lowering the high-income group’s disposable income. Taxes
imply a forced saving in a developing economy. Thus, taxes
constitute an important source of development finance.
There are two types of taxes, direct and indirect taxes.
Direct taxes are imposed on income and wealth.
Example….. Income tax, wealth tax etc
Indirect taxes are imposed on purchase and sale of
commodities.
Example…sales tax, excise duty custom duty, or GST
NON-TAX REVENUE
The revenue obtained by the government from sources other
than the tax is called Non-Tax Revenue.
Public income received through the administration,
commercial enterprises, gifts, and grants is the source of non-
tax revenues of the government.
Nontax revenue includes
(i) Administrative revenue
(ii) Profit from state enterprises
(iii) Gifts and grants
Administrative Revenues:
Under public administration, public authorities can raise some
funds in the form of fees, fines and penalties, and special
assessments.
Fees:
Fees are charged by the government or public authorities for
rendering a service to the beneficiaries.
Eg. Court fees, passport fees, licence fees, import licence fee,
liquor permit fee, etc. Fees are to be paid by those who
receive some special advantages.
Generally the amount of the fee depends upon the cost of
services rendered.
Fines and Penalties:
Fines and penalties are levied and collected from offenders of
laws as punishment.
Special Assessments:
Sometimes when the government undertakes certain types of
public improvements such as construction of roads, provision
of drainage, street lighting etc., it may confer a special benefit
to those possessing properties nearby.
As a result, values of rents of these properties may rise. The
government, therefore, may impose some special levy to
recover a part of the expenses so incurred. Such special
assessment is levied generally in proportion to the increase in
the value of the properties involved. In this respect, it differs
from a tax.
In India, these special assessments are referred to as
“betterment levy.” Betterment levy is imposed on land when
its value is enhanced by the construction of social overhead
capital such as roads, drainage, street- lighting, etc. by the
public authority in an area.
Profits of State Enterprise:
Profits of state undertakings also are an important source of
revenue.For instance, the central government runs railways.
Surplus from railway earnings can be normally contributed to
the revenue budget of the central budget.
Likewise, profits from the state transport corporation and
other public undertakings can be important sources of
revenue for the budgets of state governments. Similarly, other
commercial undertakings in the public sector such as Bokaro
Steel Plant, State Trading Corporation etc. can make profits to
support the central budget.
Earnings from state enterprises depend upon the prices charged
by them for their goods and services and the surplus derived
therefrom. Thus, the pricing policy of state undertakings should be
self-supporting and reasonably profit-oriented. Again, prices are
charged with an element of quid pro quo i.e., directly in
proportion to the benefits conferred by the services rendered.
A price is a form of revenue derived by the government by selling
goods and services of public enterprises. Thus, price is the revenue
obtained from business activity undertaken by the public
authorities. Many public enterprises like postal services run on
cost-to-cost basis. The prices are charged just to cover the cost of
rendering such services.
Gifts and Grants:
When grants are made by one country’s government to
another country’s government it is called foreign aid. Usually
poor countries receive such aid from developed countries,
which may be in the form of military aid, economic aid, food
aid, technological aid, and so on.
Deficit financing
Borrowing
Objectives of Taxation:
The primary purpose of taxation is to raise revenue to meet
huge public expenditure. Most governmental activities must
be financed by taxation. But it is not the only goal. In other
words, taxation policy has some non-revenue objectives.
Some of the objectives are
1. To raise revenue to meet expenditure
2. Reduce inequality of income
3. Eliminate absolute poverty
4. Economic development and full employment
5. Promoting saving and investment
6. Price stability
7. Control of imbalance of payments
Principles or Canons of Taxation:
By canons of taxation we simply mean the characteristics or
qualities which a good tax system should possess.
Adam Smith laid down the following canons of taxation:
Canon of Equality:
The canon of equality or equity implies that the burden of
taxation must be distributed equally or equitably in relation to
the ability of the tax payers.
Equity or social justice demands that the rich people should
bear a heavier burden of tax and the poor a lesser burden.
Hence, a tax system should contain progressive tax rates based
on the tax-payer’s ability to pay and sacrifice.
Canon of Certainty:
Taxation must have an element of certainty. According to
Adam Smith, “the tax which each individual is bound to pay
ought to be certain and not arbitrary. The time of payment,
the manner of payment, the amount to be paid ought to be
clear and plain to the contributor and to every other person.”
The certainty aspects of taxation are:
1. Certainty of effective incidence i.e., who shall bear the tax
burden.
2. Certainty of liability as to how much shall be the tax amount
payable in a particular period. This the tax payers as well as
the exchequer should unambiguously know.
3. Certainty of revenue i.e., the government should be certain
about the estimated collection of revenue from a given tax
levied.
Canon of Economy:
This principle suggests that the cost of collecting a tax should
not be exorbitant but be the minimum. Extravagant tax
collection machinery is not justified.
Owing to the complex and ever-changing nature of taxation
laws in India, government has to maintain elaborate tax
collection machinery with a large staff of highly trained
personnel involving high administrative costs and inordinate
delay in assessment and collection of tax.
Canon of Convenience:
According to this canon, tax should be collected in a
convenient manner from the tax payers. For example, it is
convenient to pay a tax when it is deducted at source from the
salaried classes at the time of paying salaries.
To these four canons, economists like Bastable have added a
few more which are as under:
Canon of Elasticity:
Taxation should be elastic in nature in the sense that more
revenue is automatically fetched when income of the people
rises. This means that taxation must have built-in flexibility.
Canon of Productivity:
This implies that a tax must yield sufficient revenue and not
adversely affect production in the economy.
Canon of Simplicity:
This norm suggests that tax rates and tax systems ought to be
simple and comprehensible and not to be complex and
beyond the understanding of the layman. This is what is rarely
found in the Indian tax structure.
Canon of Diversity:
Canon of diversity implies that there should be a multiple tax
system of diverse nature rather than having a single tax
system. In the former case, the tax payer will not be burdened
with a high incidence of tax in the aggregate.
Canon of Expediency:
This suggests that a tax should be determined on the ground
of its economic, social and political expediency. For instance, a
tax on agricultural income lacks social, political or
administrative expediency in India and that is why the
government of India had to discontinue it.
Direct Taxes:
Direct taxes are levied on a person’s or a firm’s income or
wealth and indirect taxes on spending on goods and services.
Thus, direct taxes are paid directly by the person or firm on
whom the assessment is made.
Direct taxes cannot be legally evaded but in direct taxes can be
avoided because people can reduce their purchases of the
taxed goods and services.
Direct taxes are mainly collected by the central government.
Examples of direct taxation include income tax, corpora­tion
tax (on companies’ profits), capital gains tax (a tax on the
profits of sales of certain assets), wealth tax (which is a tax on
ownership of property or wealth) and a capital transfer tax (a
tax on gifts to replace death duties).
Merits of Direct Taxes
1. Equity
There is social justice in the allocation of tax burden in case of
direct taxes as they are based on the principle of ability to pay.
Persons in a similar economic situation are taxed at the same
rate. Persons with different economic standing are taxed at a
different rate. Hence, there is both horizontal and vertical
equity under direct taxation. Progressive direct taxation can
reduce income inequalities and bring about adequate social &
economic justice.
2. Certainty
As far as direct taxes are concerned, the tax payer is certain as
to how much he is expected to pay, as the tax rates are
decided in advance. The Government can also estimate the tax
revenue from direct taxes with a fair accuracy. Accordingly, the
Government can make adjustments in its income and
expenditure.
3. Relatively Elastic
The direct taxes are relatively elastic. With an increase in
income and wealth of individuals and companies, the yield
from direct taxes will also increase. Elasticity also implies that
the government's revenue can be increased by raising the
rates of taxation. An increase in tax rates would increase the
tax revenue.
4. Creates Public Consciousness
They have educative value. In the case of direct taxes, the
taxpayers are made to feel directly the burden of taxes and
hence take keen interest in how public funds are spent. The
taxpayers are likely to be more aware about their rights and
responsibilities as citizens of the state.
5. Economical
Direct taxes are generally economical to collect. For instances,
in the case of personal income tax, the tax can be deducted at
source from the income or salaries of the individuals.
Therefore, the government does not have to spend much in
tax collection as far as personal income tax is concerned.
6. Anti-inflationary
The direct taxes can help to control inflation. During
inflationary periods, the government may increase the tax
rate. With an increase in tax rate, the consumption demand
may decline, which in turn may reduce inflation.
Disadvantages / Demerits of Direct Taxes ↓
1. Tax Evasion
In India, there is good amount of tax evasion. The tax evasion
is due to High tax rates, Documentation and formalities, Poor
and corrupt tax administration.
It is easier for the businessmen to evade direct taxes. They
invariable suppress correct information about their incomes
by manipulating their accounts and evade tax on it.
In less developed countries like India, due to high rate of
progressive tax evasion & avoidance are extensive and led to
rise in black money.
2. Arbitrary Rates
The direct taxes tend to be arbitrary. Critics point out that
there cannot be any objective basis for determining tax rates
of direct taxes. Also, the exemption limits in the case of
personal income tax, wealth tax, etc., are determined in an
arbitrary manner. A precise degree of progression in taxation
is also difficult to achieve. Therefore direct taxes may not
always fulfill the canon of equity.
3. Inconvenient
Direct taxes are inconvenient in the sense that they involve
several procedures and formalities in filing of returns. For
most people payment of direct tax is not only inconvenient, it
is psychological painful also. When people are required to pay
a sizeable part of their income as a tax to the state, they feel
very much hurt and their propensity to evade tax remains
high. Further every one who is required to pay a direct tax has
to furnish appropriate evidence in support of the statement of
his income & wealth & for this he has to maintain his accounts
in proper form. Direct tax is considered inconvenient by some
people because they have to make few lump sum payments to
the governments, whereas their income receipts are
distributed over the whole year.
4. Narrow Coverage
In India, there is a narrow coverage of direct taxes. It is
estimated that only three percent of the population pay
personal income tax. Due to low coverage, the government
does not get enough funds for public expenditure. Estate duty
& wealth tax are equally narrow based and thus revenue
proceeds from these taxes are invariably small.
5. Affects Capital Formation
The direct taxes can affect savings and investment. Due to
taxes, the net income of the people gets reduced. This in turn
reduces savings. Reduction in savings results in low
investment. The low investment affects capital formation in
the country.
6. Effect on Willingness and Ability to Work
Highly progressive direct taxes reduce people's ability and
willingness to work and save. This in turn may have a negative
impact on investment and productive capacity in the
economy. If tax burden is high, people's consumption level
gets adversely affected and this has an impact on their ability
to work and save. High taxes also discourage people from
working harder in order to earn and save more.
7. Sectoral Imbalance
In India, there is Sectoral imbalance as far as direct taxes are
concerned. Certain sectors like the corporate sector is heavily
taxed, whereas, the agriculture sector is 100% tax free. Even
the large rich farmers are exempted from payment of personal
income tax.
Indirect Taxes
An indirect tax is one in which the burden can be shifted to
others. The tax payer is not the tax bearer. The impact and
incidence of indirect taxes are on different persons. An
indirect tax is levied on and collected from a person who
manages to pass it on to some other person or persons on
whom the real burden of tax falls. For e.g. commodity taxes or
sales tax, excise duty, custom duties, etc. are indirect taxes

Advantages / Merits of Indirect Taxes

1. Convenient
Indirect taxes are imposed on production, sale and
movements of goods and services. These are imposed on
manufacturers, sellers and traders, but their burden may be
shifted to consumers of goods and services who are the final
taxpayers. Such taxes, in the form of higher prices, are paid
only on purchase of a commodity or the enjoyment of a
service. So taxpayers do not feel the burden of these taxes.
Besides, money burden of indirect taxes is not completely felt
since the tax amount is actually hidden in the price of the
commodity bought. They are also convenient because
generally they are paid in small amounts and at intervals and
are not in one lump sum. They are convenient from the point
of view of the government also, since the tax amount is
collected generally as a lump sum from manufacturers or
traders.
2. Difficult to evade
Indirect taxes have in built safeguards against tax evasion. The
indirect taxes are paid by customers, and the sellers have to
collect it and remit it to the Government. In the case of many
products, the selling price is inclusive of indirect taxes.
Therefore, the customer has no option to evade the indirect
taxes.
3. Wide Coverage
Unlike direct taxes, the indirect taxes have a wide coverage.
Majority of the products or services are subject to indirect
taxes. The consumers or users of such products and services
have to pay them.
4. Elastic
Some of the indirect taxes are elastic in nature. When
government feels it necessary to increase its revenues, it
increases these taxes. In times of prosperity indirect taxes
produce huge revenues to the government.
5. Universality
Indirect taxes are paid by all classes of people and so they are
broad based. Poor people may be out of the net of the income
tax, but they pay indirect taxes while buying goods.
6. Influence on Pattern of Production
By imposing taxes on certain commodities or sectors, the
government can achieve better allocation of resources. For
e.g. By Imposing taxes on luxury goods and making them more
expensive, government can divert resources from these
sectors to sector producing necessary goods.
7. May not affect motivation to work and save
The indirect taxes may not affect the motivation to work and
to save. Since, most of the indirect taxes are not progressive in
nature, individuals may not mind to pay them. In other words,
indirect taxes are generally regressive in nature.
Therefore, individuals would not be demotivated to work and
to save, which may increase investment.
8. Social Welfare
The indirect taxes promote social welfare. The amount
collected by way of taxes is utilized by the government for
social welfare activities, including education, health and family
welfare. Secondly, very high taxes are imposed on the
consumption of harmful products such as alcoholic products,
tobacco products, and such other products. So it is not only to
check their consumption but also enables the state to collect
substantial revenue in this manner.
9. Flexibility and Buoyancy
The indirect taxes are more flexible and buoyant. Flexibility is
the ability of the tax system to generate proportionately
higher tax revenue with a change in tax base, and buoyancy is
a wider concept, as it involves the ability of the tax system to
generate proportionately higher tax revenue with a change in
tax base, as well as tax rates.
Disadvantages / Demerits of Indirect Taxes
1. High Cost of Collection
Indirect tax fails to satisfy the principle of economy. The
government has to set up elaborate machinery to administer
indirect taxes. Therefore, cost of tax collection per unit of
revenue raised is generally higher in the case of most of the
indirect taxes.
2. Increase income inequalities
Generally, the indirect taxes are regressive in nature. The rich
and the poor have to pay the same rate of indirect taxes on
certain commodities of mass consumption. This may further
increase income disparities among the rich and the poor.
3. Affects Consumption
Indirect taxes affects consumption of certain products. For
instance, a high rate of duty on certain products such as
consumer durables may restrict the use of such products.
Consumers belonging to the middle class group may delay
their purchases, or they may not buy at all. The reduction in
consumption affects the investment and production activities,
which in turn hampers economic growth.
4. Lack of Social Consciousness
Indirect taxes do not create any social consciousness as the
taxpayers do not feel the burden of the taxes they pay.
5. Uncertainty
Indirect taxes are often rather uncertain. Taxes on
commodities with elastic demand are particularly uncertain,
since quantity demanded will greatly affect as prices go up
due to the imposition of tax. In fact a higher rate of tax on a
particular commodity may not bring in more revenue.
6. Inflationary
The indirect taxes are inflationary in nature. The tax charged on
goods and services increase their prices. Therefore, to reduce
inflationary pressure, the government may reduce the tax rates,
especially, on essential items.
7. Possibility of tax evasion
There is a possibility of evasion of indirect taxes as some
customers may not pay indirect taxes with the support of sellers.
For instance, individuals may purchase items without a bill, and
therefore, may not pay Sales tax or VAT (Value Added Tax), or may
obtain the services without a bill, and therefore, may evade the
service tax.
Tax Base
A tax base is the total amount if assets or income that can be taxed by a
taxing authority, usually by the government. It is used to calculate tax
liabilities. This can be of different forms, including income or property.
If the minimum amount is lowered, the tax base automatically
increases. If the minimum amount is raised, the tax base gets
narrowed, it means the number of people required to pay tax is
increased or decreased.
The governments , specially in developing economies widens the tax
base. It means bring more people into tax net or makig them legally
liable to pay taxes.
Tax Rates
The tax rate is the ratio (usually expressed as a percentage) at
which a business or person is taxed.
Amount of tax = tax base x tax rate
A tax base measures the capacity to bear the tax burden and
the tax rate distributes the burden according to equity.
The tax rates are of following types.
1. Proportional taxations 2. Progressive taxation
3. Regressive taxation 4. Digressive taxation
Proportional tax
A proportional tax is a tax imposed so that the tax rate is fixed, with no
change as the taxable base amount increases or decreases. The amount
of the tax is in proportion to the amount subject to taxation.
“Proportional” describes a distribution effect on income or
expenditure, referring to the way the rate remains consistent (does not
progress from “low to high” or “high to low” as income or consumption
changes), where the marginal tax rate is equal to the average tax rate.
Progressive Taxes:
Taxes in which the rate of tax increases are called progressive
taxes. Thus, in a progressive tax, the amount of tax paid will
increase at a higher rate than the increase in tax base or
income, for the taxation amount is the product of multiplying
the base by the rate and both these increase in a progressive
tax. Thus, a progressive tax extracts an increasing proportion
of rising income.
Regressive Taxes:
When the rate of tax decreases as the tax base increases, the
taxes are called regressive taxes. In regressive taxation,
though the total amount of tax increases on a higher income
in the absolute sense, in the relative sense, the tax rate
declines on a higher income. As such, relatively a heavier
burden (sacrifice involved) falls upon the poor than on the
rich. Generally, taxes on necessaries are regressive as they
take away a greater percentage of lower incomes as compared
to higher incomes. Thus, regressive taxation is unjust and
inequitable. It does not comply with the canon of equity. It
tends to accentuate inequalities of income in the community.
Digressive Taxes:
Taxes which are mildly progressive, hence not very steep, so that high
income earners do not make a due sacrifice on the basis of equity, are
called digressive. In digressive taxation, a tax may be progressive up to
a certain limit; after that it may be charged at a flat rate.
In digressive taxation, thus, the tax payable increases only at a
diminishing rate.
Diagrammatically, differences in progressive, proportional, regressive
and digressive taxation are shown in the figure.