Public Revenue and Its Sources

Sources of Public RevenueThe income of government through all sources is called public income or public revenue.

However, Dalton has defined ‘Public Income’ in a broad and a narrow sense, i.e in terms of ‘Public Receipts’ and ‘Public Revenue’.

Public revenue includes income taxes, prices of goods and services supplied by public enterprises, revenue from administrative activities, such as fees, fines, etc and gifts and grants; while Public receipts include all the incomes of the government which it may have during a given period of time,

i.e., Public receipts = Public revenue + Income from all other sources, such as, public borrowing from individuals and banks and income from public enterprises.

Sources of Public Revenue

Various forms of Sources of Public Revenue

Taxes, Commercial Revenues, Administrative Revenues, Grants and Gifts

Taxes: Taxes are compulsory payments to governments without expectations of direct return or benefit to the taxpayer (P.E. Taylor).

Tax as a compulsory contribution of the wealth of a person or group of persons for the service of public power – Bastable

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 – Prof. Seligman

Characteristics of a Tax

A tax possesses three characteristicsFirst, a tax is a compulsory contribution to the State from the citizens. As it is a compulsory contribution, so no one can refuse to pay a tax on any ground. Therefore, every one has to pay a tax upon whom it is levied by the State.

Second, a tax imposes a personal obligation on the tax payer. It means that it is the duty of the taxpayer to pay the tax if he is liable to pay it and should in no case think to evade it.

Third, the contribution received from the tax payers, may not be incurred for their benefit alone, but for the general and common benefit.

Difference between Tax and Price

A tax is a compulsory contribution to be paid by the person upon whom it is levied, whereas the price is to be paid by the persons who purchase services or goods produced by the govt.

A tax does not guarantee for any benefit as to the amount and nature, while prices are the direct payment for goods and services and the amount paid depends upon the quantity of goods and services purchased.

2. Commercial Revenues

The revenues, which we call ‘commercial’, are received in the form of prices paid for government produced commodities and services, i.e, revenues, which are derived by govt. from public enterprises by selling their goods and services, are called commercial revenues. They are also known as prices, because they come in the form of prices of goods and services provided by the govt.

They include payments for postage, tolls, interest on funds borrowed from the govt. credit corporations, prices paid for liquor in govt. stores, electricity distributed by the govt., railway services and the like.

3. Administrative Revenues

The receipts placed in the category of administrative revenues, include fees, licenses, fines, forfeitures, escheat and special assessments.

They are characterized by more or less as a free choice on the part of the payer as to whether or not he will pay, and more or less on direct benefit (or penalty) conferred upon him.

Fees

A fee is a payment charged by the government to bear the cost of administrative services rendered primarily in the public interest, but conferring special benefits to the individuals.

Hence, fees are to be paid only by those individuals who receive some special benefits from the services rendered by the govt., e.g., a student has to pay fee for getting the benefit of education from government colleges.

Licence Fees‘A licence fee is paid in those instances in which the govt. authority is invoked simply to confer a permission or a privilege rather to perform a service of a more tangible and definite sort’.

The registration fee for motor vehicles, the payment for permits to operate automobiles etc.

The objective of the a fee may sometimes be the regulation or control of various types of activities, e.g., to maintain law and order, licences for guns are granted to responsible persons. In the interest of public safety, automobile drivers are asked to obtain driving licences, and these are granted only when an individual is fit for driving a particular vehicle.

Hence, the element of regulation or control is present in licence fee, which distinguishes it from fee and taxes both.

•Special Assessments

A compulsory contribution, levied in proportion to the special benefit derived to defray the cost of a special improvement to property undertaken in the public interest.

That is to say, when govt., undertakes certain activities of public improvements like roads, provision of drainage, street-lighting, etc., they may confer the common benefit to the community as a whole and special benefit on those whose properties are nearby. As a result of the improvements, the values or rents of these properties may rise. The govt., therefore, may impose some special levy to recover a part of the expenses incurred.

Such special assessment is levied, generally in proportion of the increase in the value of property.

Ex: More Property Tax is levied where Bangalore Metro Rail passes through

•Fines and Penalties: Not an important source of revenue. A fine refers to the punishment of penalty which is imposed for the infringement of law. It is meant to serve as a punishment for and a deterrent of crime.

•ForfeituresForfeitures of basic surety or bonds refer to the penalties imposed by courts for the failure of individuals to appear in the courts, to complete contracts as stipulated, etc.

•Escheats: These refer to the claim of a govt. to the property of a person who dies without having any legal heirs or without keeping a will. Thus, bank balances and other properties of such a person will pass to the govt. Under the rights of escheat, the govt. may also acquire unclaimed property of dissolved educational or other trusts, etc.

Ex: Swiss Bank

Gifts, Grants and Aid

Gifts are voluntary contributions from private individuals or non-govt. donors to the govt. fund for specific purpose, such as, relief fund or defence fund during a war or an emergency.

Grants and Aid

Aid and Grant is defined as consisting of flows of resources at concessional rates of interest and on liberal terms of repayment.

A substantial part of the external assistance originates in the rich countries and flows to the developing countries either directly or through multinational organizations or through unofficial private sources.

Assistance by individual countries is based on bilateral relations. Such assistance can be from a government to another government, or from a private source such as a trust or university or private individuals to a government, to a university

The various sources of Aid are classified into three categories:

multilateral sources, bilateral sources and private non-profit sources.

Multilateral sources include, United Nations Educational, Scientific and Cultural Organization (Unesco) regular budget, United Nations Development Fund (UNDP), World Bank (IBRD) Group including International Development Association (IDA), Inter-American Development Bank, UNICEF, World Food Programme (WFP), other agencies such as the European Development Fund, Organization of American States, Asian Development Bank, etc., and funds in trusts.

Major bilateral sources include member countries of the Development Assistance Committee (DAC) of the Organization for Economic Co-operation and Development (OECD), and centrally planned and socialist economies;

The private nonprofit sector comprises charitable foundations, voluntary organizations, commercial undertakings, operations by universities or other institutions; indeed it includes any form of aid which does not flow through the bilateral and multilateral official sources, e.g. the Ford Foundation, Rockefeller Foundation, etc. Bill and Malinda Gates Foundation,

Thus the international donor community is indeed large and complex.

Kinds of Taxes

Classification of Taxation Taxes can be classified on the basis of form, nature, aim and methods of taxation. The following classifications are commonly found in the modern tax system:

•Direct and Indirect Taxes•Specific and Ad Valorem Duties•Progressive, Proportional, Regressive and

Degressive Taxes

Direct and Indirect Taxes

Direct Tax: A direct tax is really paid by a person on whom it is legally

imposed. Thus, the term direct tax generally means a tax paid directly to the government by the persons on whom it is imposed. Examples include income tax, corporate tax, and transfer taxes such as estate (inheritance) tax and gift tax.

Indirect Tax: An indirect tax is imposed on one person, but paid partly or wholly by another, owing to a consequential change in the terms of some contract or bargaining between them. Ex: - Sales Tax, VAT, Customs Duty, Excise Duty etc

Two terminologies ‘Impact’ (Immediate money burden) and ‘Incidence’ (ultimate money burden).

In the case of Direct Tax the impact and incidence are on the one and the same person;

In case of indirect taxes, the impact and incidence of tax are on different persons.

Merits of Direct Taxes

•Economy – The administrative cost of collecting these taxes is low. •Certainty – The tax-payer is certain as to how much he is expected to pay, and similarly, the state is certain as to how much it has to receive as income from direct taxes. •Equity – It is considered to be just and equitable, because they are generally based on the principle of progression. Therefore, they fall more heavily on the rich than on the poor. •Reduce Inequalities: Since direct taxes are progressive in nature and therefore, rich people are subjected to higher rates of taxation, while poor people are exempted from direct tax obligations.

•Elasticity: As the government revenue may be increased simply by raising the rates of taxation. Moreover, the income from direct taxes will also increase with the increase in income of the people. •Civic Consciousness: Tax-payers may take intelligent and keen interest in the method of public expenditure, whether the revenue raised is popularly utilized or not. In a democratic country this civic consciousness check the wastage in the public expenditure.

Demerits of Direct Taxes:

•Unpopular: It is generally not shifted, and therefore, they are painful to the tax-payers. •Inconvenience: The tax payers has to submit the statement of his total income along with the sources of income from which it is derived, which is generally subject to complications.

•Possibility of Evasion:

•Possibility of Injustice:In practice it is difficult to assess the income of all classes accurately. Hence, the direct taxes may not fall with equal weight on all classes. Moreover, the rates of direct taxes are arbitrarily fixed by the govt. and they may not be determined on the basis of ability to pay.

Merits of Indirect Taxes: •Convenient: They are paid in small amounts and at intervals instead of in one lump-sum. They are generally included in the price of the commodity and hence the burden of these taxes is not felt very much by the taxpayers. •Elastic•No Evasion: : A person can evade an indirect tax only when he decides not to purchase the taxed commodity. However, indirect taxes can sometimes be evaded through smuggling and maintaining false accounts.

•Can be progressive: By imposing heavy taxes on luxuries and exempting articles of common consumption. •Wide Coverage: Through indirect taxes every member of the community can be taxed, so that everyone must provide something to the govt. to finance the services of public utilities. •Social Welfare: Heavy taxation on articles which are injurious to the health and efficiency of the people may restrict their consumption. For instance, the heavy taxation liquor and other intoxicants may restrict their use, which is in the interest of the community as whole.

Demerits of Indirect Taxes •Regressive: As they fall more heavily upon the poor than upon the rich.•Administrative Cost: Because, govt. has to be collected from millions of individuals in small amounts. Therefore, they may be uneconomical. •Discourage Savings•Uncertainty: The taxing authority cannot accurately estimate the total yield from different taxes. •No Civic Consciousness: They are collected in small amounts, hence they are not felt very much by the tax-payers and do not arouse civic consciousness.

II. Ad Valorem and Specific Duties

•Ad Valorem: If a tax is levied on the value of property it is known as ad valorem.

It is expressed as percentage of the value of the commodity. For instance, an export or import duty may be levied at the rate of 2 percent on the value of goods.

•Specific: If the tax is levied on the weight of the commodity or on some external measures, it is known as specific. It is expressed as a definite sum to be paid for a definite measure or weight of the commodity. For instance, specific excise duty on cloth may be levied as so many rupees per metre and on sugar, as so many rupees per quintal.

India, Canada, the US and Australia have mainly ad valorem customs duties, although in varying degrees. Ad Valorem duties have been abandoned in Germany and in some other countries and specific duties have generally taken their place.

Although, the tariff in India is an ad valorem tariff, certain articles, such as salt, kerosene oil, spirits, etc are subjected to specific duties while other articles, mainly sugar, metal, silk, chemicals, etc., are assessed by means of the system, known as ‘tariff valuation’ i.e., a combination of specific and ad valorem duties.