UNIT 3

Public revenue

Q1) Explain main sources of revenue.

A1)

The two main sources of revenue are as follows

1)     Tax revenue

a)     Union exercise duties – Union exercise duties is the leading source of revenue for the Central Government and are imposed on commodities produced within the country, but excludes those commodities on which State excise is imposed (eg., liquors and narcotic drugs).

b)    Customs – Customs duties is the second important source of central government revenue which includes both import and export duties.

c)     Income tax – Income tax is levied on the income of individuals, Hindu undivided families and unregistered firms. It is another important source of income.

i)       Tax on foreign travel - New tax levied on foreign travel for conserving foreign exchange as well as to raise revenue.

2)     Non tax revenue

a)     Interest receipts – Interest receipts is the largest non-tax source of Central Government’s revenue which involves the receipts is the interest it earns mainly on the loans it has advanced to State Governments, to financial and industrial enterprises in the public sector.

b)    Surplus profits of the reserve bank of India - The surplus profits of the RBI is another part of the revenues of the Central Government. In recent years, borrowing by the government from the RBI against treasury bills for financing the Five-Year Plans.

c)     Currency, Coinage and Mint - The Government also derives income from running the Currency Note Printing Presses.

d)    Railways - The Government of India owns and run the railways of India. Accordingly, on the capital invested in the railways, they pay a fixed dividend to general revenues, i.e., to the Central Government. Also, a part of the net profits made by the railways is also payable to the Central Government.

e)     Profits of Public Enterprises - Public enterprises owned by the Central Government, e.g., the Steel Authority of India (SAIL), Hindustan Machine Tools (HMT), Bharat Heavy Electricals Ltd. (BHEL), State Trading Corporation (STC). The profits of such Public Sector Units (PSUs) are another source of revenue for the Government of India.

Q2) Explain tax revenue.

A2)

Tax revenue-

a)     Union exercise duties – Union exercise duties is the leading source of revenue for the Central Government and are imposed on commodities produced within the country, but excludes those commodities on which State excise is imposed (eg., liquors and narcotic drugs).

b)    Customs – Customs duties is the second important source of central government revenue which includes both import and export duties.

c)     Income tax – Income tax is levied on the income of individuals, Hindu undivided families and unregistered firms. It is another important source of income.

i)       Tax on foreign travel - New tax levied on foreign travel for conserving foreign exchange as well as to raise revenue.

Q3) Explain non tax revenue.

A3)

Non tax revenue-

a)     Interest receipts – interest receipts is the largest non-tax source of Central Government’s revenue which involves the receipts is the interest it earns mainly on the loans it has advanced to State Governments, to financial and industrial enterprises in the public sector.

b)    Surplus profits of the reserve bank of India - The surplus profits of the RBI is another part of the revenues of the Central Government. In recent years, borrowing by the government from the RBI against treasury bills for financing the Five-Year Plans.

c)     Currency, Coinage and Mint - The Government also derives income from running the Currency Note Printing Presses.

d)    Railways - The Government of India owns and run the railways of India. Accordingly, on the capital invested in the railways, they pay a fixed dividend to general revenues, i.e., to the Central Government. Also, a part of the net profits made by the railways is also payable to the Central Government.

e)     Profits of Public Enterprises - Public enterprises owned by the Central Government, e.g., the Steel Authority of India (SAIL), Hindustan Machine Tools (HMT), Bharat Heavy Electricals Ltd. (BHEL), State Trading Corporation (STC). The profits of such Public Sector Units (PSUs) are another source of revenue for the Government of India.

Q4) Explain direct and indirect taxes.

A4)

Taxation referred as imposing of tax on individual or entities by a taxing authority, usually a government. To raise the revenue for government expenditures (education, health, infrastructure, etc), tax are levied in almost every country of the world.  The government levy tax to enhance the country economy and to lift up the standard of living of the nationals.

Definition

Tax is defined as a compulsory contribution from individuals and or business organizations for the purpose of financing the expenditure of the government. Taxation is therefore the process of levying and collection of tax from taxable persons.

Types of tax

The government imposes such taxes directly on the individual or entity and it cannot be transferred to any other person or entity.  In other words, direct taxes collected directly from the income of the individual or company. The incidence and burden is on individuals or companies that pay the tax to the government.

Direct taxes are income tax, capital gains tax, securities transaction tax, perquisite tax, corporate tax.

a)     Income tax act is a tax imposed on earned income( wages, salary, commission) and unearned income(dividends, interest and rent)

b)    Levied by the federal, state and local government

c)     Direct taxes are imposed every year on your income

d)    The government has fixed various tax slabs for different groups of people.

Tax slab for general tax payers

Tax slab for senior citizens (age between 60 to 80 years)

Tax slab for senior citizens (age above 80 years)

ii.            Capital gains tax:

a)     Such tax is paid when you receive a large sum of money

b)    It could be from an investment or large sum of money.

c)     Capital gains tax are of two types – long term capital gains and short-term capital gains

d)    Long term capital gains refer to investment made for more than 36 months

e)     Short term capital gains refer to investment made within 36 month

f)       Long term capital gain tax is 20%. On the other hand short term gain tax is calculated on the basis of income bracket you fall in.

iii.            Securities transaction tax

a)     Securities transaction tax refers to tax payable on income received from trading on stock market or exchange securities.

b)    This tax is imposed by combining the share price and the tax

c)     Under this tax is paid every time on the purchase and sell of share

iv.            Perquisite tax

a)     Perquisite are the fringe benefits received by the employees on and above the salary

b)    The fringe benefits can be taxable or non taxable depending upon the nature

c)     Perquisite tax are 30% of the value of fringe benefit

d)    It can be a company or association of person or individual

e)     Taxable perquisites are rent free accommodation, water, electricity, medical expenses

f)       Non taxable fringe benefits are travel allowances, health club, sport club, telephone lines, etc.

v.            Corporate tax

a)     Corporate tax refers to tax paid by the company from its revenue earned.

b)    Corporate tax has its own tax slab which depends on the revenue earned by the companies

c)     Domestic firm which do not earn more than 1 crore per annum will not have to pay corporate tax

d)    International firm will have to pay tax rate of  41.2% of the revenue earned.

e)     There are four types of corporate tax

Minimum alternate tax – MAT refers to companies to make minimum payment of tax that is 18.5% presently to the income tax department

Fringe benefit tax – It refers to tax applied on all the fringe benefits that the employee received from the employer

Dividend distribution tax- Tax imposes on the gross income of the investor received from the investment made by them on the companies. Presently, the DDT rate is 15%

Banking cash transaction tax – This tax has been scrapped by the government of India.  Under this tax, 0.1% of tax imposed on every bank transaction

2.     Indirect Tax

Indirect tax refers to taxes imposes on goods and services. This is different from direct tax as the tax is not levied directly on the individual, its imposed on the products which the individual sell and collect the tax.

Example – Sales tax, value added tax

Such tax are imposed by summating them with the price of the product.

Types of indirect tax

a)     Tax imposed on the sale of the product is called sales tax

b)    Sales tax imposed on the products seller which goes to the individual who buys the product.

c)     Tax is imposed on the particular product means if the product is resold, seller cannot apply sales tax on it.

ii.            Service tax

a)     Tax imposed on the service offered by the company is called service tax.

b)    The rate of service tax is 14%

c)     Payment of service tax is made on the bills paid by the customer

iii.            Value added tax

a)     VAT are known as commercial tax, not charged on the goods and services

b)    VAT ii imposed at all step of supply chain, from manufacturers to dealers to distributors to end user

iv.            Custom duty and octroi

a)     Tax charged on importing anything from abroad is called custom tax

b)    Custom duty means goods from different countries are levied taxes

c)     Octroi means goods from different state within India are taxed

v.            Excise duty

a)     Such tax imposed on all goods manufactured in India

b)    Government collect tax from the producer of goods and also from the receiver of manufactured goods

c)     Excise taxes are taxes required on specific goods or services like fuel, tobacco, and alcohol.

d)    Excise taxes are primarily taxes that must be paid by businesses, usually increasing prices for consumers indirectly.

Q5) Explain direct taxes.

A5)

The government imposes such taxes directly on the individual or entity and it cannot be transferred to any other person or entity.  In other words, direct taxes collected directly from the income of the individual or company. The incidence and burden is on individuals or companies that pay the tax to the government.

Direct taxes are income tax, capital gains tax, securities transaction tax, perquisite tax, corporate tax.

a)     Income tax act is a tax imposed on earned income( wages, salary, commission) and unearned income(dividends, interest and rent)

b)    Levied by the federal, state and local government

c)     Direct taxes are imposed every year on your income

d)    The government has fixed various tax slabs for different groups of people.

Tax slab for general tax payers

Tax slab for senior citizens (age between 60 to 80 years)

Tax slab for senior citizens (age above 80 years)

ii.            Capital gains tax:

a)     Such tax is paid when you receive a large sum of money

b)    It could be from an investment or large sum of money.

c)     Capital gains tax are of two types – long term capital gains and short-term capital gains

d)    Long term capital gains refer to investment made for more than 36 months

e)     Short term capital gains refer to investment made within 36 month

f)       Long term capital gain tax is 20%. On the other hand short term gain tax is calculated on the basis of income bracket you fall in.

iii.            Securities transaction tax

a)     Securities transaction tax refers to tax payable on income received from trading on stock market or exchange securities.

b)    This tax is imposed by combining the share price and the tax

c)     Under this tax is paid every time on the purchase and sell of share

iv.            Perquisite tax

a)     Perquisite are the fringe benefits received by the employees on and above the salary

b)    The fringe benefits can be taxable or non taxable depending upon the nature

c)     Perquisite tax are 30% of the value of fringe benefit

d)    It can be a company or association of person or individual

e)     Taxable perquisites are rent free accommodation, water, electricity, medical expenses

f)       Non taxable fringe benefits are travel allowances, health club, sport club, telephone lines, etc

v.            Corporate tax

a)     Corporate tax refers to tax paid by the company from its revenue earned.

b)    Corporate tax has its own tax slab which depends on the revenue earned by the companies

c)     Domestic firm which do not earn more than 1 crore per annum will not have to pay corporate tax

d)    International firm will have to pay tax rate of  41.2% of the revenue earned.

e)     There are four types of corporate tax

Minimum alternate tax – MAT refers to companies to make minimum payment of tax that is 18.5% presently to the income tax department

Fringe benefit tax – It refers to tax applied on all the fringe benefits that the employee received from the employer

Dividend distribution tax- Tax imposes on the gross income of the investor received from the investment made by them on the companies. Presently, the DDT rate is 15%

Banking cash transaction tax – This tax has been scrapped by the government of India.  Under this tax, 0.1% of tax imposed on every bank transaction

Q6) Explain indirect taxes.

A6)

Indirect tax refers to taxes imposes on goods and services. This is different from direct tax as the tax is not levied directly on the individual, its imposed on the products which the individual sell and collect the tax.

Example – Sales tax, value added tax

Such tax are imposed by summating them with the price of the product.

Types of indirect tax

a)     Tax imposed on the sale of the product is called sales tax

b)    Sales tax imposed on the products seller which goes to the individual who buys the product.

c)     Tax is imposed on the particular product means if the product is resold, seller cannot apply sales tax on it.

ii.            Service tax

a)     Tax imposed on the service offered by the company is called service tax.

b)    The rate of service tax is 14%

c)     Payment of service tax is made on the bills paid by the customer.

iii.            Value added tax

a)     VAT are known as commercial tax, not charged on the goods and services

b)    VAT ii imposed at all step of supply chain, from manufacturers to dealers to distributors to end user.

iv.            Custom duty and octroi

a)     Tax charged on importing anything from abroad is called custom tax

b)    Custom duty means goods from different countries are levied taxes

c)     Octroi means goods from different state within India are taxed.

v.            Excise duty

a)     Such tax imposed on all goods manufactured in India

b)    Government collect tax from the producer of goods and also from the receiver of manufactured goods

c)     Excise taxes are taxes required on specific goods or services like fuel, tobacco, and alcohol.

d)    Excise taxes are primarily taxes that must be paid by businesses, usually increasing prices for consumers indirectly.

Q7) Explain Progressive, Proportional & Regressive Taxes, Value added tax.

A7)

Progressive tax

Progressive tax refers to individual have to pay higher tax as the income increases. In other words, as the taxable income increases, the tax rate gets progressively higher. The income tax bracket mentioned above are the example of progressive tax.  It also referred as graduated income tax.

The progressive tax is based on the tax payer’s ability to pay, low-income group pay low tax rate compared to high income group.

The advantage of progressive tax is

a)     That it reduces the burden of low-income earners to maintain the standard of living.

b)    Ability to collect more tax than flat taxes or regressive taxes.

Regressive tax

It is opposite of progressive tax. Such tax takes the large percentage of income from the low-income group than those with high income earner. Regressive tax effect low-income group severely because its applied uniformly to all situations.

Example – sales tax are imposed on the product and services . tax is uniform for higher and lower income groups. Property tax are set at flat percentage regardless who ever purchase.

Proportional tax

Regardless to the income of the people, same percentage of tax is imposed on all taxpayers is called as proportional tax.  It applies same tax to lower middle- and higher-income group. It is also called flat tax. Proportional tax carries higher burden on low-income individual.

Example – Sales tax because all consumer pay fixed rate regardless of their income.

Value added tax

VAT is value added tax and is a common form of indirect tax levied on services and goods. At every stage in the supply chain it is paid to the government by the producers. VAT tax is applicable only on goods sold within a particular state, which means that the seller and the buyer need to be in the same state. VAT is an integral part of the GDP of any country. VAT is a multi-stage tax which is implied at each step of goods and services production which involves sale/purchase.

How is VAT calculated?

VAT has two components, viz.

VAT = Output Tax – Input Tax

Output VAT - It is charged on the taxable sales to the customer made by the dealer. Here, the dealer or seller can be the manufacturer, wholesaler, or the retailer registered under VAT. Once the dealer is registered, it is chargeable on all the taxable sales for a given tax period, usually every month.

Input VAT: Input VAT is the tax that is paid on the eligible purchases made by the dealer. Thus, when a dealer is registered under VAT, the VAT liability is to be paid for a particular month in cash to the state government.

Q8) Explain incidence of tax.

A8)

The concept of impact and incidence of tax

Impact of taxation refers to immediate burden of the tax. It implies on the person who pays the tax in the first instances.

Incidence of the tax is the one who finally bears it. Therefore incidence is on the final consumers. The incidence tax remains on the person who cannot shift the burden to other person.

Impact of taxation is the producer while incidence of tax is the consumer. The impact of tax can be shifted while incidence of tax cannot be shifted.

Dalton classifies incidence of tax in two categories

 Money burden is classified into direct money burden and indirect money burden.

Direct money burden means the person who pays the tax also bears the burden

Indirect money burden means incidence of tax involves shifting. For example, government imposes tax on sugar manufacturing. The tax is imposed on manufacturer directly. The manufacturer shift money burden to the wholesaler. Wholesaler shifts it to the final consumer. Thus the final consumer bears the tax.

2.     Real burden:

Direct real burden is the sacrifice of economic welfare made by the tax payer as a result of payment of tax

Indirect real burden is the reduction of consumption of good due to imposition of tax.

Effect of the tax:

Effect of tax is the consequence of imposition of tax on individual and on community.

For example, if the government impose a tax on necessary goods. The seller will increase the price of the goods as a result consumer has to spend more to buy the same product or reduce the consumption because their income is limited and their standard of living is decreased.

The effects also depends on demand and supply of goods

Q9) Explain taxation effect on production and distribution.

A9)

Economic effect of taxation on production

Thus taxes on liquor and tobacco are necessary as it improve person health. While taxes in necessary goods are undesirable as necessities are essential for survival. Lower income is not subject to tax as it affects their ability to work and save.

A person invest depends on the savings available to them. Tax reduces the income and they will be able to save less and hence their capacity to invest also decreases.

2.     Effect on desire to work, save and invest – On the basis of the tax imposed, the person may be motivated to work more or demotivated to work less.

If income elasticity of demand is inelastic – a person will work more and earn more to meet his requirements.

If it is elastic – A person may not work hard to increase its income

If it is unity – Irrespective of imposition of tax, the desire to work remain same

3.     Effect on distribution of economic resources – Production depends on the resources allocated to different sectors, industries, regions, etc. of an economy. Taxation on liquor and tobacco will discourage production and consumption. Thus tax is desirable to improve human health.  While taxes in necessary goods are undesirable as necessities are essential for survival.

Effects of taxation on distribution

Taxation effects the distribution of income and wealth depending upon (a) the nature of tax and tax rate (b) kind of tax

a)     The nature of tax and tax rate-

Under progressive taxation -the rich people beards more burden of taxation than the lower income group. Thus inequalities of income distribution are less.

Under proportional tax – inequalities increases with un proportional increase in income of individuals and remain the same if income of individuals remain the same.

Under regressive taxation – inequalities increase as the tax burden is borne by the poor and less by the rich.

b)    Kind of taxes –

Direct taxes are progressive in nature , thus, the rich people beards more burden of taxation than the lower income group.

Indirect taxes are regressive in nature, as the tax burden is borne by the poor and less by the rich.

Q10) Explain the division of burden tax:

Solution-

Tax burden is the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to fall upon the group that ultimately beards the burden of, or ultimately has to pay the tax. It is thus ultimately resting of the tax upon individual or class who cannot shift it further.

a)     A tax may be imposing on same person.

b)    It may be transferred by him to a second person.

c)     It may be ultimately borne by this second person or transferred to others by whom it is finally consumed.

Definition

Shifting – The process of transfer of tax, while its impact lies on the person who pays it at first instance. Or shifting is the process through which a taxpayer escapes the burden of a tax.

Forward shifting – Tax burden from the producer to the consumers in the form of higher price of the commodity. Price serves as a vehicle through which a tax is shifted.

Backward shifting – When the imposition of a tax caused a reduction in the prices paid to the factor – owner.