Public Revenues

Sources of Public Revenue

1. Tax Revenue
 Tax revenue forms the 1st part of the Public Revenue.
 Tax revenue is the result of applying a tax rate according to a tax base.
 A tax base is the overall value of assets, income (individual income or
corporate income), and economic activity that is subject to taxation.
 Tax Liability = Tax Base x Tax Rate
 Total tax revenue as a percentage of GDP indicates the share of the
country's output collected by the government through taxes.

There are Three types of Tax:

 A progressive tax: takes a larger percentage of income from high-income
groups than from low-income groups.
 A proportional tax: takes the same percentage of income from all income
groups.
 A regressive tax: takes a larger percentage of income from low-income
groups than from high-income groups.
 Tax revenue can be regarded as one measure of the degree to which the
government controls the economy's resources.
 Tax revenue is the income that is gained by governments through taxation

Page 1 of 6
Tax revenue:
a. Direct Taxes
 The term Direct tax generally means a tax paid directly to the government
by the persons on whom it is imposed.
 Merits of direct tax
o Equity
Providing economic and social justice to the people, that each person
should pay taxes to the government according to his ability to pay.
The rich class people should pay higher taxes to the government,
because without the protection of the government authorities (Police,
Defense, etc.) they could not have earned and enjoyed their income.
o Certainty
Tax which individuals have to pay should be certain, not arbitrary.
That means that tax payer should know in advance how much tax he
has to pay, at what time he has to pay the tax, and in what form the tax
is to be paid to the government.
o Creates Public consciousness (awareness)
According to certainty, direct tax creates social awareness among the
general public. Since you have to pay a certain sum of money to the
government, you expect something back as well.
Moreover, you tend to feel more socially aware and responsible, as it is
your money that is spent all around you.
Direct tax has been proven to be a positive contributing factor in lesser
crimes, littering and damaging public goods.
o Anti-inflationary
Modern economists considered taxation as a better anti-inflationary
measure as compared to public debt.
o Relatively elastic
Taxes should be elastic in nature. In other words, the revenue from tax
should be capable of increasing or decreasing according to the
requirement of the country. For example, if the government needs more
income at time of crisis, the tax should be capable of collecting more
income through increase in its rate.

Page 2 of 6
  Demerits of direct tax
o Tax Evasion
Tax evasion is the illegal non-payment or under-payment of taxes,
usually by deliberately making a false declaration or no declaration to
tax authorities– such as by declaring less income, profits or gains than
the amounts actually earned, or by overstating deductions.
o Inconvenient
That Convenience does not apply to direct taxes such as income tax or
wealth taxes.
They are required to be submitted on time, and each taxpayer is
responsible for keeping accurate records.
Additionally, paying these taxes in one lump sum is very inconvenient.
o Narrow Coverage “narrow based”
Most direct taxes have a narrow base; As a result, a significant portion
of the population remains unaffected, and as a result, they fail to
achieve their goal of fostering civic awareness among citizens.
o Affects Capital information
Since the assessment of direct taxes depends upon the voluntary
declaration of the tax payer about has income, wealth, etc., there is
great scope for tax evasion by concealing real income. Thus, in fact,
under direct taxation, honesty is taxed while dishonesty is rewarded.
Tax evasion in effects leads to corruption also.
o Effects on Willingness and ability to work
Taxes that reduce aggregate savings or raise aggregate investment
tend to raise a country’s net financing need and hence increase net
capital inflows.
There are several channels through which taxes may affect aggregate
savings.
In particular, an increase in income tax rates will reduce the degree to
which present consumption may be exchanged for future consumption,
and therefore tends to lower private savings.

Page 3 of 6
b. Indirect Taxes
An indirect tax is one in which the burden can be shifted to others. The tax
payers is not the tax bearer.
The impact and incidence of indirect taxes are on different persons. An
indirect tax is levied on and collected from a persons who manages on whom
the real burden of tax falls. For e.g. Commodity taxes or sales tax etc…., are
indirect taxes.
Sources of Indirect taxes:
 Central Excise Duties
 Customs Duties
 Service Tax
 Other taxes and Duties
 Taxes of Union Territories
 Value Added Tax (VAT)
 Merits of Indirect Taxes
o Universality.
o Influence on Pattern of production.
o Wide coverage.
o May not affect Motivation to work and Save.
o Social Welfare.
 Demerits of Indirect Taxes
o High cost of collection.
o Increase income inequalities.
o Lack of Social Consciousness.
o Affect consumption.
o Inflationary.
 Value Added Tax (VAT)
The VAT is a tax levied on the value added to the product at all stages.
Benefits of VAT
o Calculation of vat is easy and simple.
o It avoids double taxation.
o It brings more revenue to government.
o It avoids tax evasion.
o It brings uniform tax structure through out the country.

Page 4 of 6
2. Non-Tax Revenue
While taxation is a primary source of income for the government, it also
earns some recurring (cyclic) income other than tax, which is called non-tax
revenue.
Non-Tax Revenue is the recurring income earned by the government from
sources other than taxes.

3. Capital Receipts
When revenue Mobilized through tax and non-tax sources is insufficient to
meet its expenditures, the central government will try to mobilize income
through capital receipts.
Sources of capital receipts
 Internal and external borrowings
 Small savings
 Provident funds
 Loan recovery
 Public deposits

Page 5 of 6
 Test your understanding
Multiple Choice Questions (MCQs):
1. Tax revenue is the income that is gained by governments through ………..:
a. Fees
b. Fines and penalties
c. Taxation
d. None of the above
2. Merits of direct tax:
a. uncertainty.
b. Creates private consciousness
c. inflationary
d. None of the above
3. Which of the following is not an indirect tax?
a. Sales tax
b. Gift tax
c. Excise tax
d. VAT
4. Which of the following is not Demerits of Indirect Taxes:
a. Anti – inflationary
b. High cost of collection
c. Increase income inequalities
d. All the above
5. Sources of capital receipts:
a. Internal and external borrowings
b. Provident funds
c. Loan recovery
d. all the above
6. progressive tax:
a. Taxes a larger percentage of income from high income people than from low-
income people
b. Taxes the same percentage of income from low-income people than from low-
income people
c. Taxes the same percentage of income from high income people than from low-
income people
d. Taxes a larger percentage of income from low-income people than from high-
income people

Page 6 of 6