1. Government Revenue
2.1 Conceptof Government Revenue
Government revenue is money received by a government. It is an important tool of the fiscal
policy of the government and is the opposite factor of government spending. Revenues earned by
the government are received from sources such as taxes levied on the incomes and wealth
accumulation of individuals and corporations and on the goods and services produced, exports and
imports, non-taxable sources such as government-owned corporations' incomes, central
bank revenue and capital receipts in the form of external loans and debts from international financial
institutions. It is used to benefit the country. Governments use revenue to better develop the country,
to fix roads, build homes, fix schools etc. The money that government collects pays for the services
that is provided for the people. The sources of finance used by the central government are mainly
taxes paid by the public
Sources
Governments across the world earn "public revenue" from the following main sources:
Tax revenue
Non-tax revenue
Capital receipts
2.2 Tax Revenue and Non Tax Revenue
Tax Revenues
Tax revenues are either from direct taxes or indirect taxes. Direct tax generally means a tax paid directly to the
government by the persons on whom it is imposed. Income Tax, Gift Tax, Wealth Tax and Property tax etc. are
direct taxes. Indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears
the ultimate economic burden of the tax (such as the consumer). Sales tax, Value Added Tax (VAT), Goods
and Services tax (GST) or any other such tax is an indirect tax. Largest chunk of tax revenues of government
of India currently comes from Corporation Tax, followed by Income Tax, followed by Union Excise duties,
customs and thereafter service tax. The collection of service taxes is increasing over the last years. The
amount collected under Direct Taxes (Corporate/ Income/ wealth) is larger than that under Indirect taxes.
Non-Tax Revenue
Non Tax Revenue Receipts are those revenue receipts which are not generated by Taxing the
public.
Money which the Government earns as “Dividends and profits” from its profit making public
enterprises (PSUs).
Interest which the Government earns on the money lent by it to external or internal borrowers.
Thus this revenue receipts may be in foreign currency as well as Indian Rupees.
2. The money which the government receives out of its fiscal services such as stamp printing,
currency printing, medal printing etc.
Money which the Government earns from its “General Services” such as power distribution,
irrigation, banking services, insurance, and community services etc. which make the part of the
Government business.
Money which the government accrues as fees, fines, penalties etc.
Grants the Government of India receives from the external sources. In case of the state
Governments, it may be the internal grant from the central Government.
In recent times, spectrum auctions have been one of the major sources of non-tax revenues for
the government. We note here, that despite it looks that spectrum amount should be a capital
receipt, it is shown as a non-tax revenue receipt in budget documents as one time spectrum
charges levied on telecom players.
India’s Tax and Non-Tax Revenue
The above graphics shows the tax-revenue and non-tax revenue of the central government as per
the latest budget documents. We note from the above chart that (1) Tax Revenue is much higher
in comparison to the non-tax revenue. (2) In 2017-18 Budget year, the non-tax revenue are
expected to go down. This is mainly due to low expected spectrum receipts and privatization
proceeds.
2.3 Principles of Taxation
Taxation is principal method by which a government gains revenue into its budget. That revenue
goes into a vast number of items, from paying debt, deafening the potential for implementing certain
policies to paying for public services and welfare benefits and the military, etc. There are many
methods by which tax revenue can be gained, and different definitions and structures to taxation
which are outlined below. Also, conflicts in choosing methods and forms of taxation occur, pitting
priorities such as reducing iniquity of income against maximizing incentive for economic growth.
Taxes can also help to structure all sort of economic transactions, in a way that the state can exert
influence in all participants even over the currency used.
3. Principles of a Good Tax System
1. Efficient - A tax system should raise enough revenue such that government projects can be
adequately sponsored, without burdening the economy too much (not particularly the tax
payer), as not to become a disincentive for performance (internal and external investment,
work returns and savings).
2. Understandable - The system should not be incomprehensible to the layperson, nor should
it appear unjust or unnecessary complex. This is to minimize discontent and costs.
3. Equitable - Taxation should be governed by people's ability to pay, that is, wealthier
individuals or firms with greater incomes should pay more in tax while those with lower
incomes should pay comparatively less.
4. Benefit Principle - Those that use a publicly provided service (which is funding primarily
through taxation) should pay for it! However, conflicts in principle may and often do arise
between this and principle 2.
Direct and Indirect Taxation
Direct taxes are paid by taxation on the income of the wage earner. This form of taxation is
unavoidable, and for simplicity usually collected before the worker collect his/her wages.
Indirect taxation is often avoidable and is not taken from wages. An example of indirect
taxation is VAT (Value Added Tax) or sales tax placed on goods and services. This is tax, but
not all people have to pay it, and can choose not to.
The benefits and costs of both forms of taxation are many. Direct taxation reduces the incentive to
work, as 'take home' pay is reduced as a result of an increase in income tax compared to
unemployment benefits. On the other hand, indirect taxation may result in people with similar
incomes and wealth paying different amounts, simply as a result of slightly different circumstance.
For example, someone who has to travel 50km to work every day will pay more tax over the year
than another who can walk, even though they may earn the same amount and use the same public
services, etc.
2.4 Characterististics of an effective Tax System
To judge the merits of a tax system, it must be looked at as a whole. For, a tax system to be a
good one just cannot have all good taxes but none bad at all. The state cannot raise sufficient
revenue and, at the same time, please the tax payers.
As a noted philosopher Edmund Burke once remarked, “It is difficult to tax and to please as it is
to love and to be wise.” In a tax system, therefore, different taxes, good and bad may be
combined together which tend to correct and balance one another’s effects.
4. Hence, it should be noted that a good tax system does not mean a perfect tax system which
contains only the good taxes based upon the canons of taxation, fetching adequate revenues and
causing no hurt to the tax payer.
A good tax system is one which has predominantly good taxes and which fulfills most of the
canons of taxation: it must yield sufficient revenue, but cause minimum aggregate sacrifice to the
people and minimum obstruction to incentives for production.
A good tax system should possess the following characteristics:
1. It should ensure maximum social advantage. Taxation should be used to finance public
services.
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2. It should cause minimum aggregate sacrifice. In a good tax system, the allocation of taxes
among tax payers is made according to the ability to pay. It falls more heavily on the rich and
less on the poor. It should be reasonably progressive so as to minimise the gap of inequality of
income and wealth in the community, thereby ensuring their better distribution.
3. In a good tax system, taxes are universally applicable in the sense that persons with same
ability to pay are treated in the same way without any discrimination whatsoever. In the Indian
tax system, however, this attribute is lacking to some extent. For instance, income tax is not
universal in India, as no income tax is levied on agricultural incomes.
4. It should contain a predominance of good taxes satisfying most of the canons of taxation. That
is to say, the taxes imposed should be more or less equitable, convenient to pay, economical,
certain, productive, flexible and simple as far as possible.
5. 5. The entire structure of the tax system should have built-in flexibility, so that changes are
possible according to the changing conditions of a dynamic economy. It should be possible to
add or withdraw a tax without destroying the entire system and its balancing effect. A rigid tax
structure is very unsatisfactory. Taxation must cope with the changing needs of the modern
government. The capacity to adjust itself to the dynamic conditions of an economy is a virtue of
a good tax system.
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6. A good tax system should be a balanced one.
It means there must exist not one kind of taxes but all types in the right proportion. In other
words, it should not contain just progressive, regressive or proportional taxes only, but a healthy
combination of all such taxes. Similarly, it should have a balance of direct and indirect taxes.
7. The tax system should be multiple, but then took a great multiplicity is not desirable. Dalton,
however, suggests that a good tax system has to be also a reasonably efficient administrative
system.
8. Further, in a good tax system there is simplicity, implying the absence of any unnecessary and
avoidable complexities.
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9. A good tax system should not hamper the development of trade and industry, but instead help
the rapid economic development of the country. Taxation is designed to mobilise the surplus
resources in the economy and not deprive the private sector of its resources.
6. Above all, the most fundamental characteristic of a good tax system is the appreciation of the
rights and problems of the tax payer. A good tax system must contain the majority of such taxes
which produce good effects on production and equitable distribution of national income and
wealth. To achieve the socialistic goals of public policy a good tax system plays a very important
role.
It should effectively balance the weight and burden of taxation. The weight refers to absolute
sacrifice, in terms of purchasing power of real income surrendered by the tax-payer. The burden
implies the relative capacity of the tax-payer to bear the tax.
Thus, the tax system should contain taxes which are strictly in relation to the tax payer’s ability
to pay. In Dalton’s opinion, in a good tax system, there should be a double illusion that rich
should pay more than what they think they should, so that the rich will be contented and the poor
become virtuous; in this way, the incentive to work and save will be sustained.
Various factors have to be considered in determining the tax system of a country. The tax system
of a country develops according to the tax ideals of the government and the goals of public
policy, which the system has to incorporate in its structure. The practical shape of the tax system
of a country depends on its historical background.
As such, the tax system of one country differs from that of another, depending on the
institutional and historical differences. Nevertheless, as a guiding policy, a good tax system in
any country with any background must seek the maxim of least aggregate sacrifice in its taxation
policy.
In a less developed country, the tax system should be designed for the mobilization of economic
surpluses for economic development. Taxes should be such that they help in raising the
incremental savings ratio. Taxes should work as a measure to prevent the flow of funds into
undesired channels of production.
7. In the developing country, taxes have to serve as a means of curbing consumption and tapping
the resources for development. The tax policy in an underdeveloped country should aim at
stepping up capital formation and mobilizing economic surpluses through the diversion of
resources from private consumption to public investment.
Though a tax system may basically be designed to reduce inequalities of income and wealth,
especially in a poor country, it should not conflict with the object of augmenting production and
providing incentives to work hard and save more.
Thus, the test of a good tax system is its ability to inspire that confidence in the fiscal basis of the
government which sustains public morale and promotes productive efforts, individual zeal and
economic progress.
