Public Revenue:
“Income of the government from all its sources is called public revenue.”
It includes income from taxes and receipt from non – tax revenue such as interest receipts, dividends and profits of public sector companies, revenue from services provided by the government etc.
These are the revenue sources of income i.e., they are the sources of government income which are not subject to repayment by the government.
Public revenue is different from public receipts. Public receipts. Public receipts include all the incomes of the government, including public borrowings and issue of new currency.
Instruments of Fiscal Policy:
These are mainly three instruments of fiscal policy namely:
1. Taxation
2. Public Expenditure
3. Public borrowing (debt).
All these three instruments work together in a right balance to make the fiscal policy sound and effective.
Taxation:
Meaning of Taxes:
- Taxes are compulsory payments to government by the people, to meet the expenditure incurred on providing common benefits to the people, without any corresponding direct return of services or goods by the government to the taxpayers.
- Definition :
“A compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all, without reference to special benefits conferred.”
Characteristics of Taxes:
1. Compulsory Contribution:
Tax is a compulsory contribution to the state from people on account of the income earned, ownership of property and certain economic activities carried on by the taxpayer.
No one can refuse to pay taxes. Refusal to pay taxes is liable to legal action and punishment by the government.
2. Personal Obligation :
Taxes impose a personal obligation on the taxpayer.
It is the duty of the taxpayer to pay taxes he is liable to pay.
He should not hide his income and should not try to evade taxes.
3. General Benefit:
The taxes received from the taxpayer may not be incurred by the government for only taxpayer’s benefit, but for general and common benefit.
Taxes collected by the government are spent by it for the general welfare of the people.
4. No Quid Pro Quo:
The taxes are no quid pro quo promised by the government to the taxpayers. Here no quid pro quo means nothing is given in return.
There is no direct give and take relationship between the government and the taxpayer.
The taxpayer doesn’t receive a definite direct and proportionate benefit from the government for payment of taxes.
Types of Taxes:
Taxes are classified in two categories :
1. Direct Tax
2. Indirect Tax
1. Direct Taxes:
On the basis of the incidence or impact of tax – the direct tax is that tax whose burden is borne by the same person on whom it is levied.
The impact of a tax refers to the burden of a tax on the person who pays it to the government in the first instance. The incidence of a tax refers to the money burden of a tax on a person who ultimately pays it.
The taxpayer can not shift or transfer the burden of direct tax on some other person, he has to pay it himself.
For example, income tax is a direct tax as it has to be paid by the person on whom it is levied.
A direct tax is the one which is levied on the income and property of a person.
Example: Income tax, corporation tax, property tax, capital gains tax, wealth tax etc. are the example of direct tax.
Indirect Tax:
An indirect tax is the tax which is initially imposed on and is paid by one individual, but the burden of which is passed over to some other individual who ultimately bears it.
Indirect taxes are imposed on and collected from producers and sellers, but producers and sellers can shift the burden of these taxes on the consumers.
For example, goods and services tax (GST) is an indirect tax levied in India on the sale of goods and services and it is levied at all points in the supply chain and final consumer will bear the GST paid by the last dealer in the supply chain.
An indirect tax, is the one which is levied on expenditure incurred.
Since GST is levied on the expenditure incurred it is an indirect tax.
Difference between Direct and Indirect taxes:
|
SN |
Parameter |
Direct Tax |
Indirect Tax |
|
1. |
Tax Imposition |
This tax is directly on the taxpayer’s income. |
This Tax is on the taxpayer for goods and services purchased.
|
|
2. |
Payment Course |
This tax is directly paid to the government. |
This tax is indirectly paid to the government through an
|
|
3. |
Paying Entity |
These taxes are paid by individuals and businesses.
|
These taxes are paid by end – consumers. |
|
4. |
Rate of Payment |
The rate of tax is decided by the government on profit
|
Tax rates are same for everyone. |
|
5. |
Transferability of Tax |
This type of tax is non – transferable.
|
This type of tax is transferable. |
|
6 |
Nature of Tax |
This is a progressive type of tax. This tax rate |
This is a regressive type of tax. The tax rate is not
|
|
7. |
Types of tax |
Income Tax, Wealth
|
Sales Tax, Goods and Service Tax(GST), Value Added Tax
|
|
8. |
Tax Collection |
Collecting this type of tax is difficult. |
Tax collection of this type of tax is relatively easier.
|
Merits of Direct Taxes:
1. Economical :
The cost of collecting direct taxes is relatively low as they are usually collected at source and they are paid to the government directly by the taxpayers.
2. Reducing Inequalities:
Direct taxes are progressive in nature. Rich people are subjected to a higher rate of taxation as compared to the poor people. Hence these taxes can be used for reducing inequalities of income and wealth in the economy.
3. Certainty:
Direct taxes satisfy the canon of certainty. The taxpayers know how much they have to pay and on what basis they have to pay taxes. Similarly, the government also knows the definite amount of tax revenue it will receive. Thus, direct taxes satisfy the canon of certainty.
4. Elastic:
Direct taxes are elastic in nature as the tax revenue can be increased by raising the tax rates in times of crisis.
Also the revenue from direct taxes goes up with the increase in income of the people.
5. Simplicity :
Direct taxes are generally easy and simple to understand. They are easily understandable even by the laymen.
Demerits of Direct Taxes:
1. Unpopular :
Direct taxes are directly imposed on the individuals and they can not be shifted. So the taxpayers feel their pinch directly and hence they are not popular among the people.
2. Inconvenient:
Direct taxes are inconvenient and irksome to the taxpayers. Sometimes the taxpayers are required to pay the entire tax in one instalment, which causes inconvenience to the taxpayers.
Apart from this, the taxpayers have to maintain elaborate accounts to the satisfaction of the tax authorities. Hence these taxes are sometimes inconvenient for the taxpayers.
3. Possibility of Tax Evasion:
Direct taxes encourage tax evasion. People conceal their real income from the tax officials so as to pay less tax. People also adopt fraudulent practice to save themselves from paying taxes. This leads to the generation of ‘black money’ or ‘unaccounted income’.
At the same time, tax evasion also causes the loss of revenue to the government.
4. Adverse Effects on the will to work and save:
Direct taxes may have adverse effects on the will to work. High rates of income tax, may discourage people from working hard and working overtime to increase their income. These taxes are likely to discourage saving and investment as well.
Direct taxes reduce the ability to save because after paying taxes, people are left with less income available for saving. It means that capital accumulation in the economy will be affected adversely
5. Narrow in scope:
Direct taxes have narrow and limited scope because they are imposed only on certain group of people like higher income earners, corporation rather than on all the groups.
Merits of Indirect Taxes:
1. Convenience :
Indirect taxes are paid in small amount and at intervals instead of one lump – sum amount and they are paid when the goods and services are purchased.
The amount of tax is included in the price of the commodity, hence their burden is not felt very much by the tax payers.
Indirect taxes are very convenient to collect by the government since these taxes are generally collected by sellers, manufacturers and importers.
2. Less Chances of Tax Evasion:
With proper administrations, the chances of tax evasion of indirect taxes are less. They are difficult to evade as they are included in the price of the commodity.
3. Wide Coverage:
Indirect taxes has to be paid by everyone who buys the goods on which the tax is imposed. Indirect taxes are imposed on a large variety of goods. So a large number of people contribute to the revenue of the government.
4. Equity:
Indirect taxes can be made equitable by imposing heavy taxes on luxury goods consumed by the rich consumers and low taxes on the essential goods.
Therefore, indirect taxes can be made equitable by adopting the principle of ability to pay.
5. Social Welfare:
Indirect taxes can be used to increase the social welfare. Heavy indirect taxes can be levied on the articles which are undesirable and injurious to health like wine, cigarettes etc. So their consumption can be restricted by raising their prices.
Prevention of consumption of harmful goods increase social welfare.
Demerits of Indirect Taxes:
1. Regressive and unjust:
The main drawback of indirect taxes is that they are regressive in nature a unjust.
Indirect taxes are imposed on the consumption of goods, and tax rates are uniform for the rich and the poor alike.
They are indiscriminately in the sense that the poor people have to pay as much as rich people. But their burden is more on the poor as the poor people has the lower ability to pay than the rich. Thus, these taxes are unjust to the poor and are inequitable.
2. Inflationary Impact:
The imposition of indirect tax on a commodity increases its price. This may lead to an increase in the cost of living as a result of which trade union may demand higher wages to maintain real income of the workers.
Thus, the inflationary forces are fed through higher prices, higher costs, higher wages and again higher prices.
3. Uneconomical:
The administrative cost of collecting indirect taxes is generally heavy because they have to be collected from a large number of persons.
Government must keep a watch on the production and and sale of the commodity.
4. Uncertainty :
The revenue from indirect taxes cannot be estimated accurately. The imposition of indirect taxes may lead to a rise in the market price of the commodity. This results in the fall in demand for that commodity. But it is difficult to know the extent to which the demand for the commodity will fall as a result of imposition of the tax. There is always an uncertainty in estimation of revenue from indirect taxes.
5. Lack of Civic Consciousness :
Since indirect taxes are included in the prices of the commodities and are collected in small amounts indirectly through the traders and manufacturers.
The taxpayers are not conscious about the burden of these taxes and are indifferent to their responsibility and civic consciousness.
Proportional, Progressive and Regressive Taxes:
On the basis of the degree of progression of a tax, taxes may be classified as:
1. Proportional Tax
2. Progressive Tax
3. Regressive Tax
4. Degressive Tax
1. Proportional Taxation :
- “A tax is called proportional when the rate of taxation remains the same as the income of the taxpayer increases.”
- In this system all the incomes are taxed at a single uniform rate, irrespective of whether the taxpayer’s income is high or low.
- Example, if the rate of income tax is 20 % every person will be taxed at the same rate of 20% whether he earns Rs. 5lakh/ year or 10 lakh / year.
- The liability increases in the same proportion in the absolute terms, as the increase in income, but the proportion of income taxed remains the same.
2. Progressive Taxation:
- “A tax is called progressive when the rate of taxation increases as the taxpayer’s income increases.”
- In this case, lower income is taxed at a lower rate, whereas higher income is taxed at a higher rate.
- In this system, larger the income of a person larger will be the tax rate on his income. Example, a person earning an income of Rs. 5 lakh a year may be taxed at a rate of 10% and a person earning an income of Rs. 20 lakh a year may be taxed at a rate of 30% and so on.
- In case of progressive taxation, tax liability increases with the increase in income not only in absolute term, but also as a proportion of the income.
3. Regressive Taxation:
- “A regressive tax is the one in which the rate of taxation decreases as the taxpayer’s income increases.”
- A regressive tax takes a smaller percentage of people’s income the larger their income is.
- The rate of tax falls with the increase in income.
- Lower income is taxed at a higher rate whereas higher income is taxed at a lower rate.
- Example, a person earning Rs. 5 lakh/ year may be taxed at a rate of 15% while a person earning Rs. 10 lakh / year may be taxed at a rate of 15% and so on.
- Absolute tax liability may increase with increase in income.
- This, regressive tax falls more heavy on the poor people.
4. Degressive Taxation
- “A tax is called degressive when the rate of progression in taxation does not increase in the same proportion as the increase in income.”
- Some times degressive tax is a combination of progressive and proportional taxation.
- Example, if taxable income increases from Rs. 5 lakh to Rs. 10 lakh / year, then the tax rate may increase from 5% to 10% ( increase in same proportion). But if the income increases from 10 lakh to 15 lakh / year but the rate increases from 10% to 14% only (income increases by 50% but tax rate increases by 40%). It is mildly progressive.
- In the case of degressive taxation, the rate of tax increases up to a certain limit beyond which a uniform rate is charged.
Regressive and degressive taxes are not approved for reasons of equity. They impose more burdens on the poor.
The proportionate tax system is simple and easy to understand. However it does not lead to equitable and just distribution of burden of taxes both the poor and the rich are taxed at the same rate.
Progressive taxation is popular and universally accepted because certain advantages:
1. Progressive taxation is equitable and just because it imposes higher tax burden on the rich.
2. Progressive taxes help in reducing inequalities of income and wealth.
3. Progressive taxes are elastic because the revenue of the government increases substantially with the increase in the tax rate.
4. It is productive because increase in income brings in more revenue.
5. Progressive taxes are economical because the cost of tax collection does not increase with the increase in tax rates.
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