“CAUSES OF POOR REVENUE GENERATION IN INDIA”

FINAL DRAFT SUBMITTED IN THE FULFILMENT OF THE COURSE TITLED –

ECONOMICS

SUBMITTED BY:
SUBMITTED TO:
NAME: KUMARI DIKSHA CHANDRA
DR. SHIVANI MOHAN
COURSE: B.A., LL.B (Hons.)
ASSISTANT PROFESSOR
ROLL NO: 1930

SEMESTER: 3rd

CHANAKYA NATIONAL LAW UNIVERSITY, NYAYA NAGAR,

MITHAPUR, PATNA – 800001

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 DECLARATION BY THE CANDIDATE

I hereby declare that the work reported in the B.A., LL.B (Hons.) Project Report entitled
“CAUSES OF POOR REVENUE GENERATION IN INDIA” submitted at Chanakya
National Law University is an authentic record of my work carried out under the supervision
of Dr. Shivani Mohan. I have not submitted this work elsewhere for any other degree or
diploma. I am fully responsible for the contents of my Project Report.

SIGNATURE OF CANDIDATE

NAME OF CANDIDATE: KUMARI DIKSHA CHANDRA

CHANAKYA NATIONAL LAW UNIVERSITY, PATNA.

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 ACKNOWLEDGEMENT

I would like to thank my faculty Dr. Shivani Mohan. Whose guidance helped me a lot with
structuring my project.

I owe the present accomplishment of my project to my friends, who helped me immensely

with materials throughout the project and without whom I couldn’t have completed it in the
present way.

THANK YOU,

NAME: KUMARI DIKSHA CHANDRA

COURSE: B.A., LL.B. (Hons.)

ROLL NO: 1930

SEMESTER – 3rd

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INDEX

1. INTRODUCTION:

 AIMS AND OBJECTIVES

 HYPOTHESIS
 RESEARCH METHODOLOGY
 SOURCES OF DATA
 LIMITATIONS OF THE STUDY

2. GST Paradox : whether a solution to government fiscal policy or not

3. Government policies and its effect on Revenue

4. Globalization and Fiscal policy

5. CONCLUSION AND SUGGESTIONS

BIBLIOGRAPHY

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 1.INTRODUCTION:
A firm produces its product with a view to sell in the market .The money receipts
from the sale of the product are known as ‘revenue’ .There are three terms which are
commonly used with regard to revenue. They are:
1. Total Revenue
2. Average Revenue
3. Marginal revenue

Total revenue-

It may be defined as the total earnings of the firm from the sale of its products.. It can be
obtained by multiplying the price per unit of the product with the total number of units of the
product sold .Thus-

Total revenue = price per unit × Total numbers of units of the product sold.

For example, the price of the product is Rs. 5 per unit and the sales are 100 units,

Then,

Total revenue = Rs.5×100=Rs.500.

Average Revenue -

It is the revenue per unit of the product sold. It is determined by dividing the total revenue by
the number of units of the product sold. Thus-

Total revenue

Average Revenue= Total revenue by Total no. Of units sold

If the total revenue of the firm say, is Rs 1000 and total sales are 100 units, then

Average Revenue =∞

IT should be noted here that as the different units of the product are sold at the same price,
average revenue and price are equal. Thus, average revenue is just the same thing as price per
unit. Both are calculated by dividing the total revenue by the number of units of the product
sold. Both are equal in all circumstances and under all types of market situations. The
average revenue curve is also known as the consumer’s demand curve.

Marginal Revenue

It is the additional to the total revenue by selling an additional unit of the firm’s product.
Algebrasteally, we may say that marginal revenue is the addition to the total revenue earned
by selling n + 1 units instead of n units. Thus, for example, suppose a firms earns a total
revenue of Rs.1,000 by selling 10 units.

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Now if it sells one more unit, that is ,11 units and earns Rs.1,070, the marginal revenue will
be Rs.70. In short , marginal revenue is the difference between total revenue when n units are
sold and the new total revenue when n +1 units are sold.

Taxation system and government fiscal policy

The Finance Minister in his budget speech said that tax collections help the government “ to
provide education, healthcare, housing and other basic facilities to the people to improve their
quality of life and to address the problems of poverty, unemployment and slow
development”.

He also said that to achieve these objectives, the government endeavours to “foster a stable
taxation policy and non-adversarial tax administration.” He went on to say that an important
dimension of the tax administration is to “fight against the scourge of black money”.

Limited Fiscal Policy Space

The Union Budget 2015-16 with an estimated size of Rs 17,77,477 crore (12.6 per cent of
GDP) is Rs 96,319 crore more than the revised estimates of 2014-15. But relative to the size
of the Indian economy, the magnitude of Union Budget spending has seen a continuous
decline since a peak of 15.9 per cent of GDP in 2009-10. Even if we combine the budgetary
spending of the Centre and States, India’s total government spending compared to the size of
its economy is only 27.0 per cent (Indian Public Finance Statistics 2013-14), which is much
lesser than that of developedand most developing countries. It is also one of the lowest
among some of the fastest growing economies in the world, namely, BRIICSAM (Brazil,
Russia, India, Indonesia, China, South Africa and Mexico) countries .1

The low levels of government spending in India can be attributed to lower levels of
revenues, especially tax revenues. When there are more tax revenues, it increases the room in
a government’s budget so that it can spend more without borrowing. This lower fiscal space
is not expected to improve too much over the course of the next few years

Even when we compare across BRIICSAM countries, India has one of the lowest tax-GDP
ratios which constraints in fiscal policy space.

The Finance Minister said that “we are considered as having a high corporate tax regime but
we do not get that tax due to excessive exemptions” and also that “a regime of exemptions
has led to pressure groups, litigation and loss of revenue.”

The ‘Revenue foregone statement under the Central Tax System’ reframed as ‘Statement of
Revenue Impact of Tax Incentives under the Central Tax System’ shows that aggregate
revenue impact of tax incentives is Rs 5,49,984.1 crore for 2013-14 and is projected to be Rs
5,89,285.2 crore for 2014-15. The revenue foregone is estimated to be 43.2 per cent of total
tax revenue for the year 2014-15. There is a need for a White Paper on tax exemptions
providing detailed sectoral break-up of revenue foregone for different industries, with a

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comparative assessment regarding objectives of exemptions fulfilled visà-vis magnitude of
exemptions. The FM announced the phased reduction of corporate tax rate and phased
elimination of exemptions from next financial year onwards.2

Black Money

There were three major announcements to deal with the scourge of black money: (i) The
Black Money Bill intending to criminalise tax evasion in relation to foreign assets with
imprisonment upto 10 years and penalty of 300 per cent among other features; (ii)
Concealment of income/ evasion of income in relation to a foreign asset to be made a
‘predicate’ offence under Prevention of Money Laundering Act, 2002; and (iii) Benami
Transactions (Prohibition) Bill to be introduced to curb domestic black money.

Although, the increased focus on money held in offshore accounts, especially by the Special
Investigation Team on Black Money appointed by the Supreme Court is welcome, there is
still a lack of a comprehensive policy, mapping sectors generating black money in India and
the corresponding reforms required. The intent in the budget to curb generation of black
money in real estate is a step in the right direction.

Implementation of existing or new legislations in relation to black money requires that the
administrative machinery is significantly strengthened. But according to the White Paper on
Black Money published by the Central Board of Direct Taxes (CBDT) in 2012, staff shortage
across various agencies such as CBDT, Enforcement Directorate, Financial Intelligence Unit,
Central Board of Excise and Customs, etc. has been estimated to be 30,000. A report by
Asian Development Bank (ADB 2014), which analysed tax administration in Asia and the
Pacific, noted that India has one of the most under resourced and understaffed revenue
bodies, in proportion to the size of the population.

AIMS AND OBJECTIVES:

1. The researcher tends to analyse the structure of states non-tax resources

2. The researcher tends to examine all effective as well as ineffective policies taken by
the government.
3. The researcher tends to examine the structural reforms and suggesting a rational non
tax structure,which should be econonomically viable and should yield larger
resources.

RESEARCH QUESTION:

1. What are the causes of poor revenue generation in India ?

2. What are the role of Globalization and Fiscal policy?
3. What are the importance of Fiscal policy?

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HYPOTHESIS:

1. The researcher presumes that the Tax evasion leads to poor revenue generation in
India.
2. The researcher presumes that economic legislation and government policies affect
revenue generation .
3. The researcher hypothesis is that lesser export in comparison to more imports in the
economy leads to poor revenue.

LIMITATION:

The researcher has monetary sources and time limitation in completing the project.

Further emphasis will be given only on causes of poor revenue generation in India.

RESEARCH METHODOLOGY:

The researcher will be relying on doctrinal method of research to complete the project.

SOURCES OF DATA:

The researcher will be relying on both primary and secondary sources to complete the
project.

1. Primary source :Policies made by government

2. Secondary source: Books ,Newspaper AND websites

2.GST PARADOX : Whether a solution to Government Fiscal policy or not.

Fiscal policy is a crucial part of the American economics. Both the executive and legislative
branches of the government determine fiscal policy and use it to influence the economy by
adjusting revenue and spending levels.

Fiscal policy is based on the theories of the British economist John Maynard Keynes, which
hold that increasing or decreasing revenue (taxes) and expenditures (spending) levels
influence inflation, employment and the flow of money through the economic system.3

The success of the economy is commonly measured by few factors, including gross domestic
product (GDP), which is the value of goods and services produced by a nation within a year.
Another factor is aggregate demand, which is the sum of goods and services produced by a
nation purchased at a certain price point. The aggregate demand curve dictates that at lower

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price levels, more goods and services are demanded, while there is less demand at higher
price points.4

Fiscal policy affects these measurements, with the goal to increase GDP and aggregate
demand in a sustainable manner. According to Investopedia, it does this by changing three
factors:
 Business tax policy – Taxes that businesses pay to the government affects profits and the
amount of investment. Lowering taxes increases aggregate demand and business
investment spending.
 Government spending – Aggregate demand is increased by the government's own
spending.
 Individual taxes – Taxes on individuals, such as income tax, affects their personal
income and how much they can spend, injecting more money back into the economy.

Fiscal policy typically needs to be changed when an economy is running low on aggregate
demand and unemployment levels are high.

The two main tools of fiscal policy are taxes and spending. Taxes influence the economy by
determining how much money the government has to spend in certain areas and how much
money individuals should spend. For example, if the government is trying to spur spending
among consumers, it can decrease taxes. A cut in taxes provides families with extra money,
which the government hopes will, in turn, be spent on goods and services, thus spurring the
economy as a whole.5

Spending is used as a tool for fiscal policy to drive government money to certain sectors
needing an economic boost. Whoever receives those dollars will have extra money to spend –
and, as with taxes, the government hopes that money will be spent on other goods and
services.

There are two main types of fiscal policy: expansionary and contractionary. Expansionary
fiscal policy, designed to stimulate the economy, is most often used during a recession, times
of high unemployment or other low periods of the business cycle. It entails the government
spending more money, lowering taxes or both. The goal is to put more money in the hands of
consumers so they spend more and stimulate the economy.

Contractionary fiscal policy is used to slow economic growth, such as when inflation is
growing too rapidly. The opposite of expansionary fiscal policy, contractionary fiscal policy
raises taxes and cuts spending.6

Businesses directly see the effects of an economy's fiscal policy whether it's in the form of
spending or taxation. Businesses can see investment opportunities from government spending

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as well as private investment. This commonly happens during an expansionary policy, when
more money is flowing into the economy from the government and from other sources since
taxation is also low. When a balance between price and demand are met, then businesses can
expect to thrive and grow.

According to Investopedia, fiscal policy impacts the amount of taxation on future generations
of individuals and businesses. Government spending that leads to greater deficits means that
taxation will eventually have to increase to pay interest. Inversely, when the government runs
on a surplus, taxes must eventually be lowered.

3. Government policies and its effect on revenues

Government economic policy, measures by which a government attempts to influence

the economy. The national budget generally reflects the economic policy of the
government, and it is partly through the budget that the government exercises its three
principal methods of establishing control: the allocative function, the stabilization
function, and the distributive function.7

Over time there have been considerable changes in emphasis on these different economic
functions of the budget. In the 19th century government finance was primarily concerned
with the allocative function. The job of government was to raise revenue as cheaply and
efficiently as possible to perform the limited tasks that it could done better than the
private sector. As the 20th century began, the distribution function acquired increased
significance. Social welfare benefits became important, and many countries introduced
graduated tax systems. In the later interwar period, and more especially in the 1950s and
’60s, stabilization was central, although equity was also a major concern in the design of
tax systems. In the 1970s and ’80s, however, the pendulum swung back. Once more,
allocative issues came to the fore, and stabilization and distribution became less
significant in government finance.

The allocative function in budgeting determines on what government revenue will be

spent. Because a high proportion of national income is now devoted to public
expenditure, allocation decisions become more significant in political and economic
terms.

Stabilization of the economy (e.g., full employment, control of inflation and an equitable
balance of payments) is one of the goals that governments attempt to achieve through
manipulation of fiscal and monetary policies. Fiscal policy relates to taxes and
expenditures, monetary policy to financial markets and the supply of credit money, and
other financial assets.

The Distributive Function

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Virtually everything that a government done has some effect on the distribution of income or
wealth at the various levels of society. Improvements in health care facilities benefit the sick,
the old, and those about to have children. An increase in taxes on tobacco and beer affects the
poor disproportionately, while an increase in capital taxes similarly affects the rich. Even
regulatory and legislative activity benefits one group out of proportion to another. The
redistributive consequences of the governmental budget can be reflected in a variety of ways;
sometimes they are explicit and sometimes they are cited in the debate that follows the
presentation of a budget. Usually however, these consequences are hidden, unintended, and
imperfectly understood.8

The incidence of taxes is a subject that has generated much academic debate. It is usual to
distinguish between the legal incidence of a tax and its effective, or final, incidence. The legal
incidence is on the person or company who is legally obliged to pay the tax. Effective, or
final, incidence refers to who actually ends up paying the tax; if, for example, the whole of
a sales tax can be passed on in higher prices to the consumer, then consumers bear the final
incidence of the tax.9

4.Allocation of budget

Meaning:

Government’s revenue the term budget is derived from the French word ’Bougette’. It means
’small bag’. As such, the Finance minister of a country carries a bag containing abstracts of
budget papers while presenting the budget in the Parliament or a State Legislature. The
governments, both Union and State, prepare their budget every financial year. Government
budget indicates the probable income and expenditure of the government, the financial
policies, taxation measures, investment opportunities, extent of saving, utilization of
resources, mobilization of capital etc.

Definition: Various definitions have been formulated for the concept of Budget.

Prof Dimock says, ”A budget is a balanced estimate of expenditures and receipts for a given
period of time. In the hands of the administration, the budget is record of past performance, a
method of current control and a projection of future plans”.

To quote Gladstone, ”Budgets are not merely matters of arithmetic but in a thousand ways
go to the root of prosperity of individuals and relation of classes and the strength of
Kingdom”. Therefore, the budget is a document containing preliminary approval plan of
public revenue and expenditures. It bridges the proposed revenue and proposed expenditure
for the budget period.10

Kinds of Budget

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Textbook on Economics for Law students,Dr,Kalpana Satija

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Balanced budget and unbalanced budget

(1) Balanced Budget: A balanced budget is that, over a period of time, revenue does not fall
short of expenditure. In other words government budget is said to be balanced when its tax
revenue and expenditure are equal.

(2) Unbalanced Budget (Surplus or deficit): An unbalanced budget is that, over a period of
time, revenue exceeds expenditure or expenditure exceeds revenue. In other words, the
government’s income or tax revenue and expenditure are not equal. When there is an excess
of income over expenditure, it is called a surplus budget. On the other hand, when there is an
excess of expenditure over income, it is a case of deficit budget. Classical economists
advocated balanced budget. But it is not always helpful in achieving and sustaining economic
growth. Modern economists argue that an unbalanced budget is very useful for achieving and
maintaining economic stability.

Revenue Budget and Capital Budget: Budgeting is the most important constituent of the
financial administration. Preparation of the budget is one of the main operations of budgeting.
It is mandatory for the government to make a Statement of estimated receipts and
expenditures which must be laid before the parliament every financial year. It has to
distinguish expenditure on revenue account and capital account from other expenditures. so
government budget comprises Revenue Budget and Capital Budget.

Revenue Budget: Revenue budget consists of revenue receipts of the government (tax
revenue and non-tax revenue) and the expenditure met from these revenues. Expenditures
which do not result in creation of assets are called revenue expenditure. (e.g., current
revenues and current expenditure for normal functioning of the Government departments,
interest charges on debt incurred by Govt. and other non-developmental expenditure).

Capital Budget: Majority of the government expenditures form the capital expenditure.
Capital budget consists of receipts and payments. Capital receipts are loans raised by
government from the public which are called market loans, borrowings from the RBI, sale of
treasury bills, loans received from foreign governments etc. Capital payments are expenditure
on assets creation such as land, buildings, machinery, equipment investment loans to
government companies and State Governments and other developmental expenditures.11

Performance Budgeting

The process of fund allocation of governments in various countries has been Changed from
traditional expenditure budgeting to new forms and expenditure decisions are presented in the
budget. Budget, being an essential and important element of planning and development,
provide the specific development objectives *0 be pursued and the required policy direction.
They are necessary because income and expenditure do not occur simultaneously.

Thus, ’budget’ has been defined as the annual financial statement of the estimated receipts
and proposed expenditure of the government in a financial year, usually April 1 to March 31
0f the next year, of rationalistic budgeting, such as Performance budgeting, programme
budgeting and zero based budgeting. Under performance budgeting, various activities of the

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government is necessary to ascertain the relationship between input and output and to assess
the performance in relation to cost.

Zero based Budgeting

Traditional technique of budgeting have been found to be inadequate to, the reason that, the
previous year’s cost level is taken as the base for current year budget. The traditional methods
have not completely addressed the problem of efficiency in the matter of allocation of funds
for various divisions. There is therefore a need for a new technique of budgeting which
devices and uses a meaningful base for budgeting. Zero-based-budgeting is one such
technique of budgeting. In zero based budgeting, every year is considered as a new year thus
providing a connectin link between the previous year and the current year. The past
performance and programmes are not taken into account. The budget is viewed as entirely a
fresh and Whole fiscal initiative. From zero bases.

Zero-based budgeting evaluates and prioritizes the programmes of action at different levels.
Each department has to justify its budget from its perspectives; evaluating feasible
alternatives, before final selection and execution, the funds will be allocated for the selected
programmes.12

Budgetary allocations

Budgetary allocations are integral components to an annual financial plan, or budget, of all
organizations. They indicate the level of resources an organization is committing to a
department or program. Without allocation limits, expenditures can exceed revenues and
result in financial shortfalls. Anyone working with budgets should understand how they are
used and the limitations they provide.13

What is a Budget Allocation?

A budget is a financial plan used to estimate revenues and expenditures for a specific period
of time. It is a management and planning tool, not just an accounting document. It assists in
the allocation of resources.

A budget allocation is the amount of funding designated to each expenditure line. It

designates the maximum amount of funding an organization is willing to spend on a given
item or program, and it is a limit that is not to be exceeded by the employee authorized to
charge expenses to a particular budget line.

Developing Budgetary Allocations

Budgets are usually developed for 12-month periods. When developing a budget, revenues
are usually estimated first to determine the level of resources that will be available in the

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upcoming budget year. Based on the estimated resources, expenditure limits, also called
budgetary allocations, are assigned to each budget category. When developing budgetary
allocations, all needs of the organization are taken into account and decisions are made where
best to allocate available money.

Budget Category Allocations

Budgets are usually divided into departments and program units. This allows for easier
identification of the resources allocated to specific programs and functions. Each category
can be made of several budget allocations, referred to as line items, for the specific needs
necessary to support the program or overall department operation.

Adjusting Budgetary Allocations

Budgetary allocations might not always be sufficiently estimated. This can happen when
adequate funding for predictable or reoccurring expenses are not included in the budget. This
might require the budget to be modified after adoption to account for the shortfall. Typical
corrections will include transferring funds from other allocation categories or from the
organization's surplus, sometimes referred to as savings.

Just as budgetary allocation estimates can be insufficient, revenues can be underestimated.

This can happen if a downturn in the economy occurs after a budget is adopted, thus harming
revenue streams. Insufficient revenues might require the need to reduce budgetary allocations
in order for expenditures not to exceed revenues at the end of the budget year.

Monitoring Budgetary Allocations

Budgetary allocations should be routinely monitored to ensure the amounts budgeted are
sufficient to meet expenditures. It is important to have a tracking system in place for all
purchase orders and bills. The purchase orders and bills should be matched regularly against
the budgetary allocation to ensure sufficient funds exist for the remainder of the budget
year.14

Fiscal Policy Meaning

Fiscal policy is the set of principles and decisions of a government regarding the level of
public expenditure and mode of financing them. It’s about the effort of government to

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influence the economy’s output, employment and prices by altering the level of public
expenditure, taxation and public debt. Arthur Smithies points out, ”Fiscal policy is a policy
under which the government uses its expenditure and revenue programmes to produce
desirable effects and avoid undesirable effects on the national income, production and
employment”.

The Importance of Fiscal Policy

The significance of this policy was not at all recognized by economists before the
publication of Keynes's General Theory of Employment, Interest and Money. Keynes gave
the concept of fiscal policy new meaning and operation of the public finance a new
perspective.

He made it clear that taxation, public spending and public debt are the effective instruments
of public policy capable of determining the level of output and employment. The importance
of fiscal policy in modem economies arises from the fact that the State under democracy is
called upon to play an active and important role in promoting economic development and
providing a vast number of essential public utilities and services like drinking water,
sanitation, civic services, primary education, public health, social welfare, defense, etc. Most
of these goods are characterized by the property viz. non-marketable; that it cannot be sold in
the market to the consumer. But payment has to be regulated in another way, through
taxation. In the underdeveloped economies, public finance has to assume yet another role,
whereas in developed economies, it aims at maintaining economic stability“ underdeveloped
economies, desirous of achieving rapid economic development. the function of public
finance is to promote rapid economic development of the country besides maintaining
economic stability.

Objective of Fiscal policy

The principle objective of fiscal policy in an economy as follows:

1. Mobilize Resources for Financing the Development Programmes in the public Sector

Tax policy is to be directed towards effective mobilization Of all available resources and to
harness them in the execution of development programmes. This implies on the one hand,
diversion of wasteful and luxury spending to saving and and on the other hand productive
investment of increments that accrue to production as result of development efforts. Taxation
can be a most effective means of increasing the total quantum of savings and investments in
any economy where the propensity to Consume is normally high.

2. To Promote Development in the Private Sector

In a mixed economy, private sector forms an important constituent 0f the economy In spite
of the growing importance of the publicsector in accelerating the process of economic
development, the interest of the private sector cannot be neglected. Therefore rebates, relief
and liberal depreciation allowances may be granted to boost the private sector.

3. TO bring about an Optimum Utilization of Resources

The above objective can be achieved through proper allocation of resources. We must direct
investment in the desirable channels both in the public and private sectors by providing

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suitable incentives. Productive resources are, within limits capable of being used in various
ways, which may accelerate economic growth. The available resources must find their way
into the socially necessary lines of development.

4. T0 Restrain Inflationary Pressures in the Economy to Ensure Economic Stability .

The fiscal policy must be used as an instrument for dealing with inflationary or deflationary
situations. One way to achieve this is to devise a tax structure, which will automatically
counter the economic disturbances as they arise.

The second is to make changes in the tax system in order to deal with inflationary or
deflationary situations. In countries like India, it is through the direction of the public
expenditure rather than taxation that more effective action can be taken to remove the effect
of a deflationary spiral. In terms of inflation, anti inflationary taxes such as excess profit tax
and commodity taxes on articles of both general and luxury consumption can be imposed.

5. To Improve Distribution of Income and Wealth in the Community for lessening Economic
Inequalities

The national income should be properly distributed so that the fruits of development are fairly
shared by all people. Equality in income, wealth and Opportunities must form an integral part
of economic development and social advance. Moreover: redistribution 0f income in favour
of the poorer sections of the society is essential. These can be achieved through taxation. We
can also achieve this through an increase in. Pubhc expenditure for promoting welfare to the
less privileged class. Expenditure on agriculture, irrigation, education and health and medical
expenses will Improve the economic conditions of the weaker sections of the society. Fiscal
policy can affect total spending. (Aggregate demand determinant) in two ways The first is the
direct change in total spending brought about by the government increasing or decreasing its
own expenditure. And the second one is increasing or reducing private spending by varying
it's own tax revenue. 15

4. GLOBALIZATION AND FISCAL POLICY

Globalization and Fiscal Policy

globalization and fiscal policy plays a significant role in stabilizing the output of Capital
mobility and exchange rate system. Fiscal policy is quite unlike the aditional monetary
system. A truly flexible exchange rate system is barely experienced by the economic sector of
many countries.

The concept of the fiscal policy stabilizing the output of capital mobility and change rate
system has been formulated by the Mundell-Fleming open economy model. Fiscal policy is
defined as the system by which the federal government uses its annual budget to deal with the
economic activities, allotment of the assets, and distribution of income. Fiscal policy is used
by the government of every country with the aim to influence the total demand level in the
economy of the country, to attain economical objectives in the steadiness of price sector, and
lastly ensure full employment for the majority of individuals that will boost the economic
growth.

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Textbook on Economics for Law students,Dr. Kalpana Satija

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This budget strategy of fiscal policy affects to a great extent, the government’s aim to
stimulate internal and external balance in the financial sector and uplift the economic growth
thereafter. Fiscal policy possesses 2 devices, viz., payments made by the government and tax
revenue. Fiscal policy can operate under 3 possible positions. These 3 positions of fiscal
policy include the neutral form, expansion form, and contraction form.

Rodrik, another researcher on the globalization and fiscal policy found in 1998, that there is a
strong bond existing between the openness in trade and the size of government, which
implies that the disbursement of government contributes largely in reducing the risk rate in
open economy of every country. Globalization on fiscal policy had great impacts in terms of
trade and capital inflows which has microeconomic significance. There is a big gap between
the income level of high-profile skilled workers and labour class who are not so highly
skilled. This difference puts huge demands on the fiscal policy in 2 aspects; first in the form
of social insurance in short-term policies and second as the investment made by public in
academic 88ctor in the long-term policies. Public investment on infrastructure is an important
attribute in the developing countries for attracting the attention of foreign direct iI'tVestment
and entry in to the global market.

The financial aspects of globalization during the 1990s characterize the fact that the
developing countries underwent an upsurge of private capital inflows and these inflows were
highly volatile. The 1970 fiscal policy of the developing countries defines that the exchange
rate system of the countries mostly centralized around Single Or a bulk of major currencies,
whereas the 1980s and 1990s witnessed a much more flexible exchange rate system. This is
known to be one of the most marked developments caused by globalization on fiscal policies
of various countries. The large financial markets such as the United States, Japan, and the
New European
monetary Union witnessed less flexible exchange rate system as has been stated by the fiscal
policy of 1980s and 1990s. Globalization and fiscal policy had always plaYed a very
influential role in the financial system of many countries. Globalization 0f the fiscal policy,
especially that of the developing countries, has been immensely beneficial especially the
formulation of a revised and flexible form of the exchange rate system.16

Fiscal policy is carried out by the legislative and/ or the executive branches of government.
The two main instruments of fiscal policy are government expenditures and taxes. The
government collects taxes in order to finance expenditures on a number of public goods and
services-for example, highways and national defense.

Budget Deficits and Surpluses. When government expenditures exceed government tax
revenues in a given year, the government is running a budget deficit for that year. The budget
deficit, which is the difference between government expenditures and tax revenues, is
financed by government borrowing; the government issues long-term, interest-bearing bonds
and uses the proceeds to finance the deficit.

The total stock of government bonds and interest payments outstanding, from both the
present and the past, is known as the national debt. Thus, when the government finances a
deficit by borrowing, it is adding to the national debt. When government expenditures are less
than tax revenues in a given year, the government is running a budget surplus for that year.
The budget surplus is the difference between tax revenues and government expenditures. The

16
Id.

17
revenues from the budget surplus are typically used to reduce any existing national debt. In
the case where government expenditures are exactly equal to tax revenues in a given year, the
government is running a balanced budget for that year.

Expansionary and Contractionary Fiscal Policy.

Expansionary Fiscal Policy is defined as an increase in government expenditures and/ or a

decrease in taxes that causes the government’s budget deficit to increase or its budget surplus
to decrease. Contractionary fiscal policy is defined as a decrease in government expenditures
and / or an increase in taxes that causes the government’s budget deficit to decrease or its
budget surplus to increase.

Classical and Keynesian Views of Fiscal Policy.

The belief that expansionary and contractionary fiscal policies can be used to influence
Marco Economic performance is most closely associated with Keynes and his followers. The
classical view of expansionary or contractionary fiscal policies is that such policies are
unnecessary because there are market mechanisms-for example, the flexible adjustment of
prices and wages-which serve to keep the economy at or near the natural level of real GDP at
all times. Accordingly, classical economists believe that the government should run a
balanced budget each and every year.

Combating a Recession using Expansionary Fiscal Policy.

Keynesian theories 0f output and employment were developed in the midst of the Great
Depression of the 1930s. when unemployment rates in the US. and Europe exceeded 25% and
the growth rate of real GDP declined steadily for most of the decade. Keynes and his
followers believed that the way to combat the prevailing recessionary climate was not to wait
for prices and wages to adjust but to engage in expansionary fiscal policy instead. 17

5.CONCLUSION AND SUGGESTION

Tax is the major source of Revenue for the government ,the development of any country’s
economy largely depend on the tax structure it has adopted. A Taxation Structure which
facilitates ease of doing business and having no chance for tax evasion brings prosperity to a
country’s economy. 0n the other hand taxation structure which has provisions for tax evasion
and the one which does not facilitate ease of doing business slows down the growth of
country’s economy. Therefore as taxation structure plays an important role in country’s
development. India has a well-developed tax structure. The power to levy taxes and duties is
distributed among the three tiers of Government, in accordance with the provisions of the
Indian Constitution. Indian taxation structure has gone through many reforms and still it is
very far ahead from being a ideal taxation structure. Many problems like Tax Evasion,
Reliance an indirect taxes, Black money, existence of parallel economy show that Indian

17
Id.

18
taxation system requires some major reforms in the future ahead to address all this
problems. It is seen that there are various no. Of taxes and different tax authorities is in
india.Also seen that there is major dependent on indirect taxes for tax collection than the
direct taxes,Both direct and indirect taxes have their own advantage and disadvantage.

After Independence in 1947 India has developed in open market economy in early 1990 s, the
Process of liberalization and reduced controls on foreign trade and investment. It has
served to accelerate the country's growth rate with a forecast to rise to 7.5% in financial year
2015/16.
India has a well-developed tax structure. The power to levy taxes and duties is distributed
among the three tiers of Government, in accordance with the provisions of the Indian
Constitution. The main taxes/duties that the Union Government is empowered to levy are:-
Income Tax (except tax on agricultural income, which the State Governments can levy),
Customs duties,Central Excise and Sales Tax and Service Tax. The principal taxes levied by
the State Governments are:-
Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on transfer of property), State
Excise (duty on manufacture of alcohol), Land Revenue (levy on land used for
agricultural/non-agricultural purposes), Duty on Entertainment and Tax on Professions &
Callings. The Local Bodies are empowered to levy tax on properties (buildings, etc.), Octroi
(tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on
Markets and Tax/User Charges for utilities like water supply, drainage, etc.

Tax, is the payment we make to the Government, for a good/service. It is this money that
Govt uses for all the functions it is expected to do. Military, Infrastructure - Economic
and social, Basic amenities, Welfare etc
In India, the Taxes are classified in to two types, direct taxes and indirect taxes.
Direct Taxes are those which are paid directly by the individual or organization to
the imposing authority. They are levied on income and profits
Indirect Taxes are those which are not paid directly by the individual or organization to the
imposing authority. They are levied on goods and services and not on income and profits.

A) Direct Taxes

a) Corporation tax
b) Taxes on income
c) Estate duty
d) Interest Tax
e) Wealth Tax
f) Gift Tax
g) Land Revenue
h) Agricultural tax
i) Hotel receipts tax
j) Expenditure tax
k) Other’s

B) Indirect Taxes

a) Customs

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b) Union excise duties
c) Service tax
d) State Excise duty
e) Stamp and registration fees
f) General Sales tax
g) Taxes on vehicle
h) Entertainment tax
i) Taxes on goods and passengers
j) Taxes and duties on electricity
k) Taxes on purchase of sugarcane
l) other
Advantages of Indirect taxes:-
Indirect taxes are imposed on Manufacturers, sellers ad traders but their burden is
imposed on the consumers of the goods and services and thus this consumers are the
final tax payers. They are convenient from point of view as tax payer as he pays indirect
taxes in small amounts. Also they are convenient to government as they collect these taxes in
lumpsum from the manufacturers.

Difficult to evade

As in many cases the selling price is inclusive of indirect taxes , it is very difficult to evade
these taxes

Wide Coverage: Indirect taxes have more wide coverage than the direct taxes as majority of
the goods and services have indirect taxes included in their price. So the consumers have to
pay them

Elastic: Some of the indirect taxes are elastic in nature, when government wants to raise the
revenue, they increase the indirect taxes.

Universality - lndirect taxes are paid by both rich and poor people so they have the universal
appeal

Pattern of Production: By Imposing taxes on certain commodities or sectors, government can

control the pattern of production

Individuals may not demotivated to work and save:

As indirect taxes are not depend on Income, Individuals may not get demotivated to work and
save

Disadvantages of Indirect Taxes

Inequitable:

The Burden of Indirect Taxes is more on poor people than Rich People. Hence Indirect Taxes
are considered to be Inequitable

Uneconomical :

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As government has to make a lot of expenses for collection of the Indirect Taxes, This Taxes
are Considered as uneconomical. Final Consumer has to pay much higher amount than
received by the government.

Uncertainty :

Amount of indirect Tax Collection cannot be predicted as increase in Indirect Tax Results in
Increase in Prices of the commodity and thus reduces the demand of the commodity. Hence
there is always
uncertainty over the amount of indirect taxes coliected.

Inflationary :

As indirect Taxes increases the prices of the commodity, they are considered as inflationary.
If. Government depends more on indirect taxes, then inflation will keep on increasing.

Non-Awareness:

There iS lack of awareness among the tax payers of Indirect taxes as no body knows that he is
paying taxes as it is included In the price.

Evasion:

There Is more chance of Tax Evasion as Manufacturers can collect taXes from
people and pay only fewer taxes with the understanding of government officials.

Unemployment:

Due to increase in prices demand gets reduced discouraging industries as a result of which
unemployment increases.

Advantages of Direct taxes:

Equitable:

The Burden of direct taxes cannot be shifted hence they are progressive and equitable in
nature

Economical:

The Cost of collection of direct tax is low. Mostly they are collected at source. Hence the
direct taxes are economical

Certain:

There is certainty on the amount of direct taxes to be collected from both the sides. Tax
Payers know their income and thus know the amount of taxes they would be required to pay.
Similarly tax authorities also know about the income expected from direct taxes.

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Productive:

Direct Taxes are Productive in nature. As the community grows in numbers and prosperity,
the return from direct taxes also grow.

Means of developing civic sense:

In case of Direct taxes the people know that they are paying taxes and it develops
consciousness among the people. They know their right to ask government how the
government is using the money for development of the nation. Thus Direct Taxes Increases
the civic consciousness.

Due to Multiplicity of taxes there is unhappiness among citizens of India regardirg tax
structure. Taxes by Union Government, State Governments and the local governments have
resulted in difficulties and harassment to the tax payer. He has to contact several authorities
and maintain separate records for each of them.

An Ideal Tax system must follow Adam smith's canons of taxation .but due to over
dependence on indirect taxes, the tax systems suffers from the problems like Inequality,
regressive, uneconomical, inflationary, etc.

The Tax System has failed to stop tax evasion and curb the growth of parallel economy.
White paper issued by Indian government on black money in 2012 tells that parallel economy
exist the same amount of Indian GDP.

Suggestions:

1) Government should focus more on structural reforms than policy reforms

2) GST should be implemented soon to reduce the number of indirect taxes and facilitate ease
of doing business in India.

3) There should be effective implementation of Anti Tax evasion Bill.

4) Innovative Tax Systems like Banking Transaction Tax system Suggested by Arthakranti
Pratishthan Should be givens Serious thought upon as they can be future alternatives
5) Administrative expenses incurred on Tax Collection needs to be brought down by making
reduction in the number of taxes and tax collection authorities

BIBLIOGRAPHY:

The researcher has consulted following sources to complete the rough proposal:

SECONDARY SOURCES:

1. BOOKS:
Textbook on Economics For law students ,Dr. Kalpana Satija

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 Economics for law students ,Surbhi Arora ,Central law publication

2. WEBSITES:
a. https://www.researchgate.net/publication/301477841_INDIAN_TAX_STR
UCTURE-_AN_ANALYTICAL_PERSPECTIVE
b. https://smallbusiness.chron.com/budgetary-allocation-31340.html
c. https://www.investopedia.com/insights/what-is-fiscal-policy/
d. https://www.britannica.com/topic/government-economic-policy/The-
distributive-function

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