Meaning :

It deals with the income & expenditure of the public authorities and with the adjustment of one to the
other.
Scope of Public Finance : Public Revenue Income of government.
Public Expenditure
Public Debt
Financial administration It includes budget.
Economic stabilization & Fiscal Policy.
Importance of Public finance
Public finance helps us in understanding the functioning of the economy.
It helps in understanding the changed concept of the state
Useful in understanding the fiscal policy
Difference between Public & Private finance
Meaning
Scope Public finance has wide scope, private finance has narrow scope .
Public finance based on social welfare and private finance is based on the welfare of the private
individuals only.
Public Revenue The income of government from all sources is called public revenue or public income
Sources of Public Revenue: Taxes :- A Tax is a compulsory payment imposed on the people or company by government to meet
the expenditure incurred on providing common welfares to the people
Commercial Revenue Revenues which are derived by government from public enterprises by selling
their goods & services are called commercial revenues. They are also known as prices as they come in
the form of prices of goods & services provided by the government. They include the following.
Postage.
Railway faire
Irrigation charges
Prices paid for liquor in gov. stock etc .
It is not a very good source of the income of government
Sl. No.

Price

Tax

It is not a compulsory payment it is paid by It is a compulsory contribution to be

person who purchases goods and services paid by every tax payer upon whom at
sold by government.
is imposed

It gives direct benefit to the person who

pays it for buying goods services

Price is paid for goods & services which are It is used for the common benefit of
purchased by the consumer.
all people whether they pay tax or not

It does not give a directly benefit to

tax payer

(iii) Administrative Revenue:- It includes fee, fines. Special assessment and escheat
Fees :- It is a payment which is paid to you for special services rendered by them it sis only paid by
those people who receive special benefits from the services rendered by government com.
License Fee : - It is a payment not to perform a service but to grant a permission by a government.
The registration fee for motorcycle, license for keeping guns are some example of license fee.
Fines & Penalties :- They are not important source of revenue. A fine refers to the punishment
imposed for the violation of law Example Motorists are charged for violating traffic rules & regulation
Special Assessment : - Some times government undertake certain improvements such as
construction of road, provision of drainage, Street lightning etc. they offer common benefits to society

as a result of such improvements the values of these properties rise and imposition of changer in
proportion to increase wealth is called special assessment .
It may be termed as special tax but it is not same as tax . It is levied after the benefits have been
conferred upon the payers while tax has no guarantee of benefit. It is diff from fees, fees are the
payments for certain services rendered by government while special assessment lived for unrest in
one's property from some particular Services of government.
Forfeiture :- It refers to penalties imposed by courts for the failures of individual to appear in the
courts, to complete contracts as stipulated.
Escheat Under the right of escheat the govt. May acquire the property, bank balances etc. of a
person without having any legal successor or without writing a will this is also not an important source
of revenue.
Taxes :- A tax is a compulsory payment imposed on the person or the companies by the govt. to
meet the expenditure incurred on providing common benefits to the people
Characteristics of Taxes: Compulsory contribution: - Tax is a compulsory payment made by the people to govt. no one can
refuse the payment of tax to the government.
Personal obligation : - Tax is a personal obligation on the tax payer. It becomes his duty. To pay the
tax if he comes under the taxable capacity
General welfare : - Tax is a payment made by taxpayer which is used by the government for the
benefit of all the citizen.
No Quid pro Quo: A tax is not levied for any specific services rendered by the govt. to the taxpayer
and individual cannot ask for special benefit from the state in return for the tax payer by them thus
the tax payer cannot claim something equivalent to the tax paid from govt. Which means there is no
quid or quo in case of taxes ?
Regular Payment : - Tax is payable regularly by the tax payer as determined by the tax
department.
OBJECTIVES OF TAXES /IMPORTANCE/SIGNIFICANCT
Collection of Revenue : - The modern government performs a large no. of functions for the welfare
of societies for which they need income this income can be earned by the government only through
taxes which are considered as the main source of revenues. Of government.
Regulation of consumption & Production : - Taxation policy regulates consumption and production
of country. They are used to discourage production and consumption like require, pan masala etc. they
are also effective in diverting the resources from production of non-essential commodities to essential
commodities.
Protection to domestic industry : - custom duties are used to reduce the imports of those goods
which are domestically available and thereby encourage the domestic industry. These taxes protect the
domestic industry from cut-throat foreign competition, this will also have favorable effect on the
countries balance of revenue.
Reducing income inequalities :- Taxes are used for reducing inequalities of income and wealth in a
country by the following ways.
1.Progressive taxation on income would be great help in this regard it means imposing heavy taxes on
rich and low taxes on poor.
2. Inequality of income can also be reduced by imposing heavy taxes of luxury goods and by giving tax
concision on essentials goods which are purchased by the people.
Increasing the rate of capital formation :- The mains purpose of taxation in poor country is go
promote capital formation and economic development. The revenue collected through taxes by govt.
can be utilized for the development of agriculture and industry and it can be used for providing
infrastructural facilities like transport & communication power etc. on this entrepreneur can be
motivated to set up industry in backward regions of the country thus investment level goes up.
Price stability :- It is the prerequisite for economic development to take place taxes play a very
important role for maundering price stability in the times of inflation taxes reduced the purchasing
power of people which result to fall in aggregate demand in economy and thereby helps in controlling
prices. On the other hand taxes can be reduced during deflection increase the aggregate remand.
Development of backward region: - For the development of backward region govt. gives tax

concessions to the entrepreneur for setting up industries in these regions.

Economic growth : - Tax collected by govt. can be used in promoting economic development of
country. It can also be used for increasing the productive capacity of diff. sectors of economy. Which
with definitely improve the growth rate of economy also.
TYPES OF TAXES: Proportional tax: - In this type of tax all incomes are taxed at the uniform rate. and it is not linked
with the income of tax payer it is a simple tax system and dose not have any harmful effects on
willingness to work and save but it is not based on principle of equality and revenue collected through
this tax is very less.
Progressive tax : - Tax is said to be progressive when the rate of tax increases as the taxpayers'
income increases. Acc. to Dalton in progressive taxes the higher the income the tax payer has higher
proportionate tax to pay. Progressive tax is based on principle of equity and it reduces the inequality
of income & health in helps in controlling inflation also. On the other hand it has some disadvantages
like there is an harmful effect on willingness to work and save. On case of progressive taxation tax
evasion is common this case.
Regressive Tax : - It is one in which the rate of tax decreases as the tax payers' income increases. It
is just opposite of progressive taxes regressive tax are adjust and inequitable. They do not the
principle or equity and they promote inequalities of income in the surety.
Digressive Taxation : - Under this system the rate of tax increases up to action limit but after that a
uniform rate is charged. It is formulate on slab system in this case higher income group people have to
make will sacrifice as compared to lower income grow up people this is the case of income tax in India
as well.
Now the question arises out of above stated categories of tax systems which is the best the answer
would be we have to select the tax system which will distribute tax system most equitably Regressive &
digressive taxation can not be accepted on the ground of equity but there has been heated.
Controversies regarding proportional and progressive taxation however most of the economists are in
favor of progressive taxation system.
DIRECT TAXES
Direct Taxes are those under which burden falls on the same person on whom it is imposed, i.e. impact
and incidence falls on the same person. eg:- income tax, wealth Tax, Property Tax etc.
Merits of Direct Taxes: Equitable: - Direct Taxes are based on the principle of equity or ability to pay. The burden of a
direct tax is equitably distributed on different people & institutions as they are progressive in nature.
Which means as income increases the rate of income tax also increases
Certainty: - Direct taxes are certain the tax payer knows how much tax is due from him and when
and how can he adjust his income and expenditure. The govt. also knows fairly well the amount of
revenue coming to it
Economical: - Direct Taxes are economical in the sense that the cost of collection of these taxes is
relatively low in the case of income tax it is deducted at the source from salary of people. No separate
staff is needed for tax collection .
Elasticity: - Direct Taxes are flexible and thus satisfy the canon of elasticity. The govt. can increase
or decrease rate of direct taxes according to the requirement of economy. In case of war natural
calamities or emergency the state can raise the rate of these taxes in order to have larger tax revenue
and during depression rate of tax can be decreased.
Civic consciousness: - Direct Taxes inculcate the spirit of civic responsibilities among tax payers.
Since tax payers provide funds from their own pockets to the govt. they take been interest in seeing
that these funds are properly utilized. This public awareness plays an important tool in checking the
wastage of public expenditure .
Simplicity: - Direct Taxes are very simple on nature it is easy to calculate and understand these
taxes.
Reducing inflationary pressure: - Direct taxes are anti inflationary in nature they help in controlling
inflation by moping up the excessive purchasing power of community.
Reduces inequalities As we know the 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
obligation. Hence these taxes help to reduce inequalities in income

Demerits of Direct Taxes: Unpopular: - Direct Taxes pinch to the tax payer because they have to pay them directly out of their
income or salaries they can not be shifted on to others thus they are very much unpopular among tax
payers and are generally opposed by the tax payers.
Inconvenient: These taxes .are also inconvenient in nature because the tax payer has to submit the
statement of his income along with the source of income from which it is derived, which is generally
subject to complications. Moreover the payment of these taxes in lump sum is not as convenient to the
tax payers as the frequent payment of small amount of indirect taxes. Hence these are said to be
inconvenient to the tax payers .
Possibility of injustice: - In practice it is difficult to asses the income of all the 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.
Evasion: - A direct tax is said to be a tax on honesty, it is not evaded only when the tax payer is
honest, otherwise it can be evaded through fraudulent practices. Hence it is found that it can be
evaded if the taxpayer decides to become dishonest.
Discourages Saving & investment: Direct Taxes adversely affect saving & taxes when people know
that with increase in income & wealth they will have to pay a large portion of their income in the form
of taxes. They all be reluctant to save & invest more this way direct taxes adversely affect the will to
work save & invest.
Narrow in Scope: - Direct taxes or generally imposed on rich people low income group cannot be
approached through these taxes. In this way direct taxes have their limited applicability .
INDIRECT TAXES:The tax which is initially imposed on one person and paid by another. In case of indirect taxes impact
and incidence fall on 2 different people for eg- custom duty Sale Tax, Vat, etc.
Merits of Indirect Taxes: Connivance :- Indirect Taxes are more convenient than direct taxes they are paid in small amount
and at some intervals. they are generally included in price of the commodity & hence not much burden
is felt by tax payer.
Wide coverage :- These taxes reach to the all income groups low, middle, high they are imposed on
all type of commodities thus they have a wide coverage & every consumer pays to the state. Exchecker acc. to his ability to pay thus they are equitable also to some extent.
Elastic: - Indirect taxes are also elastic in nature the govt. Can reduce or increase the rate of taxes,
acc. to the requirements. The govt. can obtain adequate tax revenue by increasing tax rate on those
commodities which are highly in demand & they have inelastic demand however, this will go against
common of equality .
No evasion :- Indirect Taxes are difficult to be evaded as they are in included in price of the
commodity as a person can evade an indirect taxes only when he decides not to purchase a taxed
commodity
Diversity : - Indirect Taxes satisfy the canon of diversity. They can be imposed on verity of
commodities and services. Thus govt. can earn continuous and sufficient revenue from indirect taxes
Direct the consumption of commodities :- Indirect taxes check the consumption of harmful goods
like wine tobacco & other such substances. The state imposes heavy duties on such articles of
consumption which are injurious to health & efficiency of people as a result, their price rise &
consumption is reduced.
De-merits of indirect Taxes : Regressive & unjust :- Indirect Taxes on necessities, which are consumed by poor are regressive in
nature. The rich & poor are required to pay the same amount of tax on such commodities like
matchbox, soap, toothpaste, blades etc. but the burden is heavy on poor than on the rich, thus they do
not satisfy the canon of equity.
Inflationary Impact :- Another demerit of indirect taxes is that they feed inflation. Imposition of
these taxes tends to raise the price of commodities there by leading to higher cost to higher wages and
again to higher prices, thus price wage cost spiral sets in the economy.
Uneconomical :- These taxes are uneconomical because the cost of collection is very high the state
has to appoint many tax collectors to check the accounts and stock of producer, wholesalers & retailers
in order to find out whether they are paying taxes or not.

 Uncertain: - The Revenue from indirect taxes is uncertain because it is not possible to estimate
accurately the effect of such taxes on demand for products. When the commodity is taxed its market
price rises which results in lower demand so it is quite difficult to anticipate the income from indirect
taxes.
Discourages Saving: - Indirect Taxes discourage saving as they are included in price so people will
spend more on consumption expenditure, hence saving reduces.
Lack of civic consciousness: - A person who purchase a commodity does not know that he is paying
a tax to government in price of commodity, therefore such taxes do not inculcate civic consciousness
among majority of tax payers who are ignorant of the fact that they are contributing something the
state treasury .
Difference between Direct & indirect taxes
Sl.

Basis

Direct

Indirect

Meaning

Direct Taxes are those under

which burden falls on the
same person on whom it is
imposed, i.e. impact and
incidence falls on the same
person

The tax which is initially

imposed on one person and
paid by another. In case of
indirect taxes impact and
incidence fall on 2 different
people

Shifting of tax

The can't be shifted

They can be shifted

Impact &incidence

They fall on the same person It falls on two different

people.

Civic consciousness

It inculcates civic
consciousness

Income & expenditure

They are imposed on income They are imposed on

of the taxpayer
expenditure of tax payer

Nature of Tax

They are compulsory in

nature

They are not compulsory.

Examples

Wealth tax , income tax &

Property tax etc.

Sales Tax, VAT, custom duty

etc.

It does not inculcate civic

consciousness

Canons of Taxation / Principles of Taxation / Characteristics of good tax system :

A good tax system should follow certain principles which become its characteristics thus a good tax
system is based on certain principles which are known as canons of taxation. Adam Smith was probably
the first economist who stated the general principles of taxation or rules of taxation. They are even
now considered as the Characteristics of taxation of good tax system. According to Adam Smith father
of economics there are 4 main cannons of taxation which are as fallows
Canon of Equality: - The cannon of equality equity or justice is most important cannon of taxation.
It means that every person should pay tax according to his ability and not the same amount. it also
means that every body should not pay at the same rate rather every tax payer should pay the tax in
proportion to his income. The rich should pay more than the poor whose income is less.
Canon of Certainty : - Acc to smith there should be certainty in taxation because uncertainty breeds
corruption. The certainty aspects of a tax are
Certainty of effective incidence i.e. who shall bear the tax burden.
Certainty of tax amount payable in a certain time period
Certainty of Revenue to the government how much govt. shall have estimated collection of revenue
during a given time period.
3. Canon of economy -: every tax should satisfy the canon of economy in two ways
It should be economical for the state to collect it
It should be economical for the tax payer it means he should have sufficient money left with him

after paying the tax

4.Canon of convenience: - According to Adam Smith every tax ought to be levied at the time or in the
manner in which it is more likely to be convenient for the contributor to pay it .it implies that taxes
should be imposed in such a manner and at the time which is the most convenient for the tax
payer,e.g. the best time for the collection of land revenue is the time of harvest.
Some other writer like Bastable added a few more canons of taxation to the Adam Smith's four canons
of Taxation these are
Canon of productivity: - The productivity of a tax may be observed in two easy ,in the first place ,a
tax must yield a sufficient revenue for the maintenance of the government. Secondly, the taxes should
obstruct and discourage production in the short as well as in the long run.
Canon of Elasticity: Taxation should be elastic in nature this canon implied that the yields of the
taxes may be increased or decreased according to the changing needs of the govt. The govt. resources
can be raised in emergencies like war floods droughts etc quickly only when the tax system is elastic.
Taxes on property and commodities are not so elastic as income tax .
Canon of Simplicity :- this canon suggest that tax system should be easily understandable to tax
payer i.e its nature, its aim, time of payment, methods and basis of estimation should all be easily
followed by the each tax payer. However it is not very easy to observe this canon in the modern tax
system, which has become quite complex in nature.
Canon of expediency : - Acc to this cannon a tax should be based on sound principles so that it
requires no justification from the side of government. the possibility of imposition of taxes should be
taken from different angles, i.e. its reaction upon tax payers .some times it may be desirable and may
have most of the characteristics of a good tax system but the govt. may not find it expedient to impose
it,e.g. progressive agriculture income tax is very much desirable in India, but it has not been imposed
so far in the manner it should have been imposed.
Canon of diversity: - There should be variety of taxes a single tax. Would neither meet the revenue
requirement of state nor satisfy the canon of equity thus there should be a variety of taxes so that all
citizens should contribute towards state revenue acc to their ability to pay.
Canon of co-ordination : In a democratic country taxes are imposed by central, state and local
govts. It is therefore very much desirable that there is vo-ordination between different taxes that are
imposed by different taxing authorities. it is very much needed considering the interest of tax payer
and the govt. both .
Main Sources of Revenue of central govt .
Tax Revenue
Income Tax(on income of the individual as well as joint Hindu families)
Corporation Tax (on income of the companies both domestic and foreign companies operating in
India )
Interest Tax (on the gross interest income of the financial institutions like Bank)
Expenditure Tax(expenditure incurred in luxury hotels and restaurants)
Wealth Tax(total wealth of individuals and Hindu undivided families)
Custom Duty.(import and export duty)
Central excusive Duty.(duties on industrial products)
Service Tax.(on services provided by hotels,telephones,port services etc.)
2. Not Tax Revenue
(i) Interest received(on loans given by central govt. to other govts.)
(ii) Dividends & Profits
Barrowing both from internal & extra source.
Income from Railways
Post & Telegram
Commercial & non-commercial under
Grants in Aid(from foreign countries as well as from international organizations)
Sources of Revenue of State government
Tax Revenue.
Land Revenue
Tax on agriculture resources.
Estate duty.

 Excise duty on liquors, OPM and other nonce

Motor Vehicle Tax
Entertainment Tax
Electric city Duties
Taxes on profession,
Toll Tax
Taxes on income
Non Tax Revenue
Borrowing within country and loans from govt. of India .
Incomes from govt. undertaking, owned by State govt.
Royalties from mines, forest, etc.
Grant in Aid from central govt.
Interest received.
Dividends from public sector undertaking
Administrative receipts
VAT :The value added Tax is a Tax on the Value added to a commodity or service at each stage from
production to retail stage
MOD VAT;The modified value added scheme allows the manufacturer to obtain instant and complete
reinvestment of the excise duty paid on the components of the commodity.
Specific Tax :Taxes which are levied on the basis of specific qualities or attributes such as Weight, size, volume etc
are called specific taxes.
Ad. Valorem Tax :Taxes which are imposed. Acc to the value of commodity are known as advalorem taxes. For eg. import duty.
CEN VAT :Central Value added Tax was introduced in 2000-2001 and 20001 2002 budgets by replacing. The 3
advalorem rates with a single rate of 16%
Impact of a Tax :- The impact of a tax is upon the person who pays it in the first instance in other
words the person who pays the tax to govt. in first instance bears its impact.
Shifting of a Tax :The process of passing on the money burden of a tax to another person is called shifting of a tax.
Incidence of a Tax :It refers to the money of tax on the person who ultimately pays it. In the words of Dalton . The
incidence of a tax is upon those who bear the direct money burden of tax.
Difference between impact and incidence
Impact of Tax

Incidence of Tax

1. It refers to the initial burden of the tax

It refers to the ultimate burden of a tax

2. It is upon the person who pays it in the first

instance

It is felt by the person who actually bears the

burden of tax.

3. It can be easily shifted.

It cannot be shifted