Definition – Public revenue refers to the income received from all sources for the purpose of public expenditure. Public revenue is used by the government to perform various functions and maximize social and economic welfare.
Sources of Public Revenue
There are two sources
Tax revenue and Non- Tax revenue sources
Tax revenue is further classified into
- Direct Taxes
- Indirect Taxes
1. Tax Revenue
- Taxes are the main source of public revenue.
- Taxes refer to a mandatory payment levied by a public authority on individuals or companies to meet the expenditures required for the benefit of the people of the country.
- The taxpayer does not receive a definite and direct favour from the government in return for the tax paid by him.
- This implies that individuals must pay taxes regardless of any corresponding return of goods and services by the government.
Characteristics of a Tax
- It must be mandatorily paid to the government. Refusal to pay tax is a punishable offence.
- There is no quid-pro-quo between a taxpayer and public authorities, which means that the taxpayer cannot claim any specific favour in exchange for the tax paid by him.
- It involves some sacrifice from the tax payer’s side.
- A tax is not a fine or penalty for disobeying a law.
1.1 Direct Taxes
1.1.1 Corporation Tax
Corporation Tax is Levied on profits of companies or associations
1.1.2 Personal Income Tax
Personal Income Tax is levied on the total income of individuals and Hindu Undivided Families (HUFs) following some allowable deductions
In India, personal income tax is levied as a progressive tax, that is, individuals falling in higher income brackets are subject to a higher tax rate. This ensures the equitable distribution of tax burden in the country.
1.1.3 Wealth Tax
Wealth Tax is Levied on the net wealth of individuals and HUFs
1.1.4 Securities Transaction Tax (STT)
Securities Transaction Tax (STT) is imposed on the value of transactions involving delivery-based equity
1.1.5 Fringe Benefit Tax
Fringe Benefit Tax is imposed on the employer on the value of fringe benefits provided to employees for the latter’s collective enjoyment.
1.2 Indirect Taxes
1.2.1 Union (or Central) Excise Duties
Union (or Central) Excise Duties are Levied by the central government on the production of the commodities in India. In recent years, excise duty is imposed on a very large number of commodities.
1.2.2 Customs Duties
Customs Duties are Levied on both imports and exports. Import duties in India are typically levied on an ad valorem basis, that is, as a percentage of the price of the commodity.
1.2.3 Service Tax
Service Tax is Levied on services provided to individuals. Service tax was introduced in India in 1994–95 to generate revenue from the rapidly growing service sector.
2. Non-Tax Revenue
Non-tax revenue refers to all revenues from sources other than taxes, accruing to the government through its Ministries, Departments and Agencies from their operations.
Fees are charged by the government and public authorities in exchange for rendering a service to the citizens. Unlike a tax, the payment of fees is voluntary depending on whether the service is availed.
For example, Fees are charged for issuing passports and driving licenses.
2.2 Fines or Penalties
Similar to taxes, fines are mandatory payments without a quid-pro-quo. However, taxes are levied to collect revenue and fines are imposed as a form of punishment or to discourage people from breaking the law.
2.3 Special Assessment or Betterment Levy
It is a special charge imposed on certain members of the community who benefit from certain government activities or public projects.
For example, The construction of a public park in a locality may result in the appreciation of property value for the people in that locality. Betterment levy is a mandatory payment; however, unlike taxes, it has some element of quid-pro-quo.
2.4 Income from Investments
The government obtains revenue from its investments in the form of profits, dividends and interest on loans. Some element of quid-pro-quo is involved in the case of surplus from public enterprises.
The government also generates revenue in the form of rent on government lands, buildings and houses.
2.6 Donations and Contributions
These include voluntary contributions made by individuals or institutions to the governments. The central government may provide grants to state governments, and state governments to local bodies, and so on.
Pros and Cons of Direct Taxes
Merits and demerits of Direct Taxes are
- Direct taxes are equitable.
- Direct taxes satisfy the principle of certainty.
- Direct taxes are elastic.
- Direct taxes create civic awareness.
- Direct taxes are economical.
- Direct taxes are arbitrary.
- Honesty results in more taxes because the dishonest escape them.
- Direct taxes are inconvenient.
- They affect the willingness to work, save and invest.
- They tend to adversely affect investment.
Pros and Cons of Indirect Taxes
Merits and Demerits of Indirect Taxes are
- Indirect taxes are convenient.
- They are difficult to evade.
- They can be made equitable.
- They have greater coverage.
- They have a larger potential to generate revenue than direct taxes.
- They influence production and investment patterns.
- They may be unjust and inequitable.
- They have an element of uncertainty.
- They do not create social awareness.
- They are inflationary.