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GOVERNMENT BUDGET MEANING It is defined as a financial statement showing expected receipts and expenditure of the government during the

period of a financial year. A budget contains the following features. It is a statement of expected revenue and proposed expenditure of the government. It possesses periodicity which is generally one financial year. It has a sanction of public authority Expenditures and sources of finance are planned in accordance with the objective of the government. NEED & IMPORTANCE OF GOVERNMENT BUDGET (1) Redistribution of income &Wealth:- Budget of the government shows its comprehensive exercise on the taxation and subsidies. The government uses fiscal instruments like taxation and subsidies to improve the distribution of income & wealth in the economy equitable distribution of income & wealth is a sign of social justice which is the principle objective of a welfare state like India. (2) Planned approach to government activities: - Government activities have increased tremendously which needs mobilization of large resources to meet the increased requirement of government expenditure. There has to be a definite planning for estimated revenue and proposed expenditure for the proper conduct of government activities. (3) Economic stability: - Free market forces are bound to general trade cycles also called as business cycle. These refer to the phases of recession depression and boom in the economy. The government of the country is always committed to save the economy from business cycles. Budget is used as an important policy instrument to tackle the situations of deflation & inflation and to achieve the state of economic stability. (4) Allocation of resources: - Through the budgetary policy the government of a country allocates the resources in a manner so that there is a balance between the goals of profit maximization and social welfare. Production of goods which are injurious to health is discouraged through heavy taxation on the other hand production of socially useful goods is encouraged through subsidies. (5) Public accountability:- Government budget has the purpose of public accountability of funds. Budgets proposal are discussed in the parliament and the parliament exercises control over the government budget through different committees like Public account, the estimate committee and a committee on public undertakings. (6) Instrument of economic policy: - Government budget is not only a statement of estimated revenue and expenditure of the government but it is a powerful instrument to be used as economic policy of the government. It is helpful in removal of inequality, economic instability etc. (7) Index of government functioning: - Through government budget we can easily make out the methods of government functioning. A proper planning regarding taxes and subsidies shows the efficiency of the government and durance of 1

corruption and other types of malpractices. It is considered to be a mirror of the performance of the government budget. TYPES OF BUDGET 1. Union Budget: - It is the budget prepared by central government for the country as a whole. This budget is presented in two parts. (1) Railway budget and (2) Main Budget. 2. State Budget: - It is repaired by state govt. such as one budget of Punjab govt. UP govt. etc. 3. Plan Budget: - It is a document which shows the budgetary provisions for important Projects, programmes and schemes included in the central plan of the country. Non plan Budgets relates to the budgetary provisions other than the plan expenditure. 4. Performance budget :- It presents the main projects programmes and activities in the light of specific objective and an assessment of the previous year budgets and achievement. 5. Supplementary budget:- Budget estimates of the coming year are based on the forecast with regard to revenue and expenditure. It is not always possible to foresee and provide for all emergencies such as riots, curfew, natural calamities or political instabilities which requires extra expenditure. In these circumstances government presents in the parliament a supplementary budget to deal with the expenditure related to emergencies 6. Vote on account budget: - Under article 116 of the Indian constitution the budget can be split up during the year. The reason may be political in nature. The existing government may or may not continue for the whole year on the account of the fact that elections are due then government prepares a lame duck budget this is called vote on account budget. 7. Zero base budget:- The government of India commenced Zero based budgeting 1987-88. It is a particular technique for the preparation of budget. It involves fresh evaluation of every item of expenditure on the government budget assuming it as a new budget. STRUCTURE OF GOVERNMENT BUDGET The budget is divided into two parts the revenue budget and capital budget. 1. Revenue budget: - Revenue budget comprises of revenue receipts and expenditure met from such revenue. Revenue receipts include all types of tax and non tax revenue. Revenue expenditure includes all types of plan and non plan expenditures of the government. Revenue account covers those items which are recurring in nature and are nonredeemable. They create no liabilities or involve no sale of assets. 2. Capital Budget:- It comprises of capital receipts & capital expenditures of the government. Capital receipts are the receipts of the government which creates liabilities or reduces financial assets for example foreign loan or repayment of loan. Capital expenditures refers to those expenditure of the government which lead to the creation of physical or financial asset or reduction in the financial liabilities for e.g.- expenditure on building and other constructions Purchasing machinery investment in shares etc. 2

DIFFERENCE BETWEEN REVENUE RECIEPTS AND CAPITAL RECEIPTS The main difference between revenue receipts and capital receipts is that in case of revenue receipts govt. is under no obligations to return the amount. But in case of capital receipts which are borrowings govt. is under obligations to return the amount along with the interest. DIFFERENCE BETWEEN REVENUE EXPENDITURE AND CAPITAL EXPENDITURE A basic difference between capital and revenue expenditure is that the former is incurred on creation or acquisition of assets whereas the latter is incurred on rendering services. For instance expenditure on construction of a hospital building is capital expenditure but expenditure on medicines, salaries of the doctor s etc.for rendering services by the hospital is revenue expenditure. Balanced Budget, Surplus Budget and Deficit budget BALNACED BUDGET: A government budget is said to be a balanced budget in which govt. receipts (revenue and capital)are shown equal to the govt. expenditure Thus Balanced Budget = Estimated Govt. Receipts = Estimated Govt. Expenditure Two main merits of balanced budget are 1. It insures financial stability 2. It avoids wasteful expenditure Two main demerits are. 1. Process of economic growth is hindered. 2. Scope of undertaking welfare activities is restricted. Surplus Budget: When govt. budget receipts are more than government expenditure in the budget, the budget is called a surplus budget ,in other words a surplus budget implies a situation wherein government revenue is in excess of government expenditure. Thus Surplus Budget =Estimated Govt. Receipts > Estimated Govt. Expenditure A surplus budget shows that the govt. is taking away more money than what it is pumping in the economic system as a result aggregate demand tends to fall which helps in reducing price level. Therefore in times of severe inflation a surplus budget is the appropriate budget. But in the case of deflation and recession surplus budget should be avoided Deficit Budget When govt. expenditure exceeds government receipts in the budget the budget is said to be a deficit budget. DEFICIT BUDGET= Estimated Govt. Expenditure > Estimated Govt. Revenue 3

Deficit Budget has its 2 merits specially for developing economy. 1. It activates economic growth 2. It enables to undertake welfare programmes of the people. It has 2 demerits also 1. It encourages unnecessary and wasteful expenditure by the govt. 2. It may lead to financial & political instability. Types of Deficit in the Budget. There are three types of deficit in the budget 1. Revenue deficit:- the excess of revenue expenditure over revenue receipts is called revenue deficit. Thus, Revenue deficit =revenue expenditure Revenue receipts. It implies that resources have to be borrowed from other sectors of economy to cover this deficit. It may lead either to borrowing or sale of government asset thus high revenue deficit give a warning signal to the government either to curtail its expenditure or increase its revenue. 2. Fiscal deficit:- fiscal deficit is the excess of total expenditure over revenue receipts(revenue and capital receipts) excluding borrowing. Fiscal deficit = Total expenditure Revenue receipt Capital receipts (excluding borrowing) Fiscal deficit therefore is a compressive measure of the implications for in economy. It has serious implication for economy. The govt. has to borrow to meet this deficit a major part of fiscal deficit is financed by the deficit financing(printing extra currency notes). It leads to rise in the prices. 3. Primary deficit: - The excess of fiscal deficit over payments of interest is called primary deficit. Thus, Primary deficit = Revenue deficit Interest payments Primary deficit shows how much of the govt. borrowing is going to meet expenses other than interest payment. A lower primary deficit indicates that the interest payment has forced the govt. to borrow. Thus it indicates the real position of govt.


DEFICIT FINANCING Meaning: Deficit financing is defined as financing the budgetary deficit through public loans and creation of new money. Deficit financing in India means the expenditure which in excess of current revenue and public borrowing. the government may cover the deficit in the following ways. 1. By running down its accumulated cash reserve from RBI. 2. Issue of new currency by government it self. 3. Borrowing from reserve bank of India and RBI gives the loans by printing more currency notes. Objectives of deficit financing: 1. To finance war:- Deficit financing has generally being used as a method of financing war expenditure. During the war time through normal methods of raising resources. It becomes difficult to mobilize adequate resources. Therefore government has to adopt deficit financing. 2. Remedy for depression: - In developed countries deficit financing is used as on instrument of economic policy for removing the conditions of depression. Prof. Keynes has also advocated for deficit financing as a remedy for depression and unemployment. 3. Economic development:- The main objective of deficit financing in an under developed country like India is to promote economic development. The use of deficit financing in fact becomes essential for financing the development plan especially in underdeveloped countries. 4. Mobilization of Resources: - deficit financing is also used for the mobilization of surplus, ideal and unutilized resources in the country. 5. For granting subsidies :- In a country like India government grants subsidies to the producers to encourage them to produce a particular type of commodity, granting subsidies is a very costly affair which we cannot meet with the regular income this deficit financing becomes must for it. 6. Increase in aggregate demand: - Deficit financing loads to increase in aggregate demand through increased public expenditure. This increase the income and purchasing power of the people as a consequence there is an increase availability of goods and services and the production and employment level also increase. 7. For payment of interest:- Loan which are taken by the govt. are supposed to be repaid with their interest for that government needs money deficit financing is an important tool to get the income for the repayment of loan along with the interest. 8. To overcome low tax receipts. 9. To overcome the losses of public sector enterprises 10. For implementing anti poverty programme. ADVERSE EFFECTS OF DEFICIT FINANCING Deficit financing is not free from its defects. It has its adverse effect on economy. Important evil effects of deficit financing are given below. 1. Leads to inflation: - Deficit financing may lead to inflation. due to deficit financing money supply increases & the purchasing power of the people also increase which increases the aggregate demand and the prices also increase. 2. Adverse effect on saving:- Deficit financing leads to inflation and inflation affects the habit of voluntary saving adversely. Infect it is not possible for the people to maintain the previous rate of saving in the state of rising prices. 3. Adverse effect on Investment ;- deficit financing effects investment adversely when there is inflation in the economy trade unions make demand for higher wages for that they go for strikes and lock outs which decreases the efficiency of Labor and creates uncertainty in the business which a decreases the level of investment of the country. 5

4. Inequality: - in case of deficit financing income distribution becomes unequal. During deficit financing deflationary pressure can be seen on the economy which makes the rich richer and the poor, poorer. The fix wage earners are badly effected and their standard of living detoriates thus no gap b/w rich & poor increases. 5. Problem of balance of payment: - Deficit financing leads to inflation. A high price level as compared to other countries will make the exports more expensive and thus they start declining. On the other hand rise in domestic income and price may encourage people to import more commodities from abroad. This will create a deficit in balance of payment and the balance of payment will become unfavorable. 6. Increase in the cost of production: - When deficit financing leads to the rise in the price level the cost of development projects also rises this means a larger dose of deficit financing is required on the port of government for completion of these projects. 7. Change in the pattern of investment:- Deficit financing leads to inflation. During inflation prices rise and reach to a very high level in that case people instead of indulging into productive activities they start doing speculative activities. Is Deficit Financing Inflationary? Deficit financing may not necessarily be inflationary there are certain conditions under which deficit financing may not lead to inflation. With increase in money supply due to deficit financing prices do rise but rise in price will only be temporary for about a period. As flow of goods and services increase prices will began to fall. deficit financing is an important device for financing development plans for underdeveloped countries and accelerate their rate of economic development. But If deficit financing is not kept with in limits It may give rise to prices, distorted investment and unequal and unjust distribution of income. therefore it is essential that deficit financing is kept within limits and its impact on prices and costs are softened through various controls.


Public Debt
Meaning: Public debt refers to the loans raised by government from within or outside the country. Every govt. has to borrow when its expenditure exceeds its revenue. The borrowing or taking loans by the govt Is known as public debt. Comparison between Public and Private Debt : 1. Compulsion :- The government can compel the people or institution in a country to lend funds to it in case of war, economic crises or any other emergencies but no private individuals can force or compel another private individual to lend them money 2. Repudiation: - Under abnormal conditions the govt. can refuse the payments of loan taken by it from people but the private individuals cannot do so under any circumstances. 3. Time Period: - The government can borrow from public for longer periods because it is a permanent institution and people have faith in it. Private individual can barrow for short period of time due to risks involved on the part of the lender. 4. Rate of interest: - Because of its high credit worthiness government can borrow at lower rate of interest but it is not so in case of private borrower who has to pay a very high rate of interest because risk is involved in it. 5. Sources: - The government can take loan within the country and also from abroad but a private borrower can borrow only from within the country. 6. Mode of Payment: - The government repays its loan by taxiing the people but in case of private debt the borrower has to repay loan out of his own saving. 7. Effect on the economy: - Public debt makes its effect on production distribution of income and wealth in country but private loans make no such effects due to its micro nature. Need for public debt: In recent time government have been barrowing huge sums both internally and externally for the following reasons. 1. Deficit budget: - The government may borrow to cover budgetary deficit on account of large expenditure incurred on administration and for financing unforeseen events like floods famines epidemics. 2. To finance war: - Modern wars are very costly they cannot be financed unwarily through taxation thus public debt becomes necessary. 3. Natural calamities: - Natural calamities like earthquake, flood, famines etc. lead to increase in government expenditures in order to provide relief to the victims. It necessitates huge public barrowing by the government. 4. Economic development: - Public debt is considered a very important tool for the development of a country. Both developed and developing countries borrow for economic development. Developing countries do not have sufficient 7

resources to finance their plan they therefore borrow not only from within the country but also from foreign sources for the development of agriculture, industry, power, transport communication etc. Developed countries also borrow to modernized their infrastructure facilities like roads, railways power plant etc. 5. To finance Public enterprise :- Every country whether a socialist economy or missed economy runs certain public enterprises like railways, postage and telegrams, power work et. Which require large funds The government can meet them only through public borrowing rather than by taxation. 6. To check economic stability: - Government borrows to stabilize, to control inflationary conditions. The govt. borrows to take away excess money supply from the public. Since public borrowing is voluntary. This is a better method then raising taxes. Because loans from public do not increase the cost of production. Public borrowing also helps to lift the economy from depression. During depression ideal funds lying with the bank govt. borrows in order to spend on public work programmers. 7. To provide foreign exchange: - In case of deficit in the balance of payment. Foreign exchange is needed to correct it. In such a condition government borrow from foreign countries as well as from international financial institution in the form of foreign exchange.. 8. Soft Revenue option: - With increase in public expenditure government needs a lot of fund. Taxation is a source of income for the government but it cannot be increased at a very high rate to meet the expenses because it pinches a lot to the people. Therefore many a limes government chooses soft loan option of meeting its increasing expenditure by raising loans and thereby saving itself from public opposition. Sources of Public debt: There are 2 main sources. (1)Internal (2) external (1) Sources of internal debt: - It refers to govt. loans floated in capital markets within the political boundaries of the country. the main sources of internal borrowing are: i) Individuals. ii) Banking & non-banking institutions. iii) Central Bank. Sources of external debts:It refers to govt. loans floated in foreign capital market. The main sources are. i) Foreign governments. ii) International Monetary agency like world bank IMF, International finance corporation international development 8

association. Structure or classification of Public debt : (1) Internal & external debt (2) Productive & unproductive debt:Productive debt is defined as a loan, which is used for project which yields an income to the government like railways, construction, irrigation, power etc. Unproductive debt is defined as that loan which does not yield any income to the govt. like debt for natural calamities and to finance war etc. this debt is also known as dead weight debt. (3) Redeemable & Irredeemable debt : Redeemable debt refers to that loan which govt. promises to pay off at some future date. The interest on this loan is paid by the government regularly half yearly or annually. When the debt matures the govt. pays back the principal amount to the lender. Irredeemable debt is that loan in which the principle amount is never returned by the government although the interest is paid regularly for the period of its duration. (4) Short term and long term debt.:Short term debt is defined as that debt which may mature within a period of 3 to 4 months. This debt is like treasury bills & advances from central bank. Interest on such loans is generally low. Long term loans are repaid in a long period say roughly after 10 years or more. Usually such debt bears a higher rate of interest. (5) Funded and unfunded debt: Funded debt is a long term debt whose payment is made at least after a year. In order to repay a debt fund is created in which some money is deposited by the government and the debt is paid out of this fund at the time of maturity. Unfunded debt is for short period or less than a year. The govt. does not create any separate fund to repay the debt. Treasury bills are unfunded debt. (6) Voluntary & compulsory debt:Voluntary debt is defined as that debt which is paid without any legal enforcement in this the people voluntarily or willingly subscribe to govt. loans. In fact ,all public loans are voluntary. Compulsory debt are those debt which are forcibly taken by the government. Such loans are taken only during wars and 9

national emergencies. (7) Marketable and Non-Marketable debt. Marketable debt is defined as one in which the securities are negotiated in open market. for example, all types of securities sold in the secondary market Non- Marketable loans are such loans where securities cannot be sold in the stock exchange market, for example, PPF, PF,NSC etc. (3) Gross debt and Net debt:Gross debt consists of the total amount of all the debt out standing at any time Net debt is balance amount of gross debt after exclusion of sinking fund and other assets meant for repayment of debt. Debt Redemption or Debt Management : Redemption of public debt means repayment of debt. Public debt is to be repaid by the government within the time limit fixed for its repayment. The various methods of debt redemption are. (1) Repudiation of debt: - it means refusal to pay a debt all together. The government refuses to pay the interest as well as the principle amount. This method of debt redemption is not practical because the government reputation may be at stake the consequences of this method may be dangerous. Debt repudiation is not popular in modern times. Russia did so in 1971. (2) Debt conversion :- In this method the debt with high interest rate is converted into new debt when the market rate of interest falls. The government borrows at low rate of interest and repays the past debt even before it matures. The lender is free to take his money back or get his loan converted into a fresh loan. However conversion can be successfully carried out ,if the credit of the good. (3) Budgetary surplus A policy of surplus budget may be followed annually for clearing of public debt gradually instead of creating a fund for its repayment on maturity. But in recent years due to rapidly increasing public expenditure, surplus budget is a rare phenomenon (4) Terminal annuity: - under this method the physical authorities clear off. Part of public debt on the basis of terminal annuities into equal annual installments including interest along with the principle amount. This is the easiest method similar to sinking fund. According to this method, the burden of debt goes on diminishing and by the time of maturity, it is already fully paid off. (5) Refunding:- In this method. There is issue of new bonds and securities by the government in order to repay the matured loans. Refunding is the process by which the maturing bonds are replaced by new bonds .A major drawback of this method is that the govt. would be tempted to postpone its obligations of debt redemption and the total burden of debt would continue to increase in future. 10

(6) Sinking fund: - In this system the government establishes a separate fund known as sinking fund. A fixed amount of money is credited by the government to this fund every year. By the time one debt matures. There is enough amounts in fund to pay off loans along with the rate of interest. In practice sinking funds are not accumulated, Government do not create such fund if even if they create they utilize it for the other purposes whenever they are in need of funds. (7) Capital levy: - It refers to a very heavy tax on property and wealth. It is a once for all taxes imposed on the capital assets above the certain value. in fact capital levy is advocated immediately after the war to repay the unproductive war debts. (8) Reduction of rate of interest: sometimes the govt. takes statuary decision to reduce the rate of interest. Payable on its public debt. The creditors are forced to accept the reduced rate of interest. This method is normally used by the govt. during financial crisis. (9) Additional provision of taxation: - In this method new taxes are imposed to collect revenue. It is a method of redistribution of income by transferring it from the tax payer into the hands of bonds holders. Debt Trap: It refers to a phenomenon where the government of a country has to raise fresh loan just in order to pay the interest charged on the earlier loan borrowed by govt. and it is very difficult to repay to the amount. The govt. is trapped in vicious circle of borrowing. Burden of public debt: It tells both internal & external debt may be direct money burden, indirect money burden, direct real burden and indirect real burden. i. Direct Money Burden: - It refers to the amount of money to be raised to meet the revenue requirements. In case of internal public debt there is no direct money burden because in this case money changes hands only. But in case of external debt money burden is heavy. ii. Indirect money burden: - When govt. spends the loans it result in the creation demand for certain commodities as a consequences the prices of goods and services rise imposing additional burden on the society. iii. Direct Real burden: - It is in the form of reduction in economic welfare and this strains and stresses tax payers. iv. Indirect Real burden:- The indirect real burden of a debt is also felt through the ultimate effects on production when the govt. imposes taxes to repay loans and interest it discourages the willingness of the tax payers to work more & save more, thus it adversely affect the production in a country and the indirect real burden of a tax will be heavy. POSITIVE EFECTS OF PUBLIC DEBT: 1 Mobilization of resources: - Public borrowing is very helpful in implementing 5 year plans and various other projects. with the help of borrowing govt. can easily make various types of plans to mobilizes the resources efficiently. 2 Increase in the productive capacity: - With increase in barrowing productive capacity of a country can easily be increased. Borrowing is very much helpful in using capital intensive techniques to increase the productive capacity of a 11

country. 3 To promote Investments: - Public borrowing helps in promoting investments, borrower fund can be utilized for strengthening infrastructure and promoting economic development of country. 4 Developmental expenditure: - Barrowing can be used to meet the developmental expenditure like roads, communication system, railways telecom, finance etc. 5 Obtaining foreign exchange: - Borrowing in the form of foreign exchange can be used to meet developmental activities. For development purpose govt. tries to acquire money capital, raw material from foreign countries. It can then only be possible if we have good stock of foreign exchanges with us. ADVERSE AFFECTS OF PUBLIC DEBT: 1) Inflationary impact: - With increase in the public borrowing money supply in the market also increases which increases the prices of the commodity. 2) Additional tax burden: - To repay the old loans. Government has to impose new taxes on people which will be extra tax burden on the people and it pinches a lot. 3) Adverse effect on saving and investment: - for the repayment of loan when govt. imposes new taxes on the people there will be adverse effect on saving and investment b/c more saving & more investment means more tax. 4) Effects on distribution of income: - Public debt may sometime effect distribution of income among people. Govt. raises loans from higher income group people and the return of it is also given to them only. Thus rich becomes richer and poor becomes poorer. 5) Unproductive debt:- a part of the loan taken by the govt. is used to meet the non developmental expenditure which never helps in increasing the production in the country. Thus it is called dead weight debt which is very difficult to repay. 6) Debt servicing burden: - The annual interest paid by the govt. in lieu of debt increase is known as debt servicing burden. There is very large increase in debt servicing burden in every country in modern times which has very dangerous consequences.



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 1 It is not a compulsory payment it is paid It is a compulsory contribution to be by person who purchases goods and paid by every tax payer upon whom services sold by government. at is imposed 2 It gives direct benefit to the person who It does not give a directly benefit to pays it for buying goods services tax payer Price is paid for goods & services which It is used for the common benefit of are purchased by the consumer. all people whether they pay tax or not


(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. Ex-checker 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. 1 Meaning Basis Direct 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 can't be shifted They fall on the same person It inculcates civic consciousness They are imposed on income of the taxpayer They are compulsory in nature Wealth tax , income tax & Property tax etc. Indirect 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 They can be shifted It falls on two different people. It does not inculcate civic consciousness They are imposed on expenditure of tax payer They are not compulsory. Sales Tax, VAT, custom duty etc.

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Shifting of tax Impact &incidence Civic consciousness Income & expenditure Nature of Tax Examples

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 1. It refers to the initial burden of the tax 2. It is upon the person who pays it in the first instance 3. It can be easily shifted. Incidence of Tax It refers to the ultimate burden of a tax It is felt by the person who actually bears the burden of tax. It cannot be shifted


FACTOR PRICING There are four factors of production which are land, labour, capital and entrepreneur. These factors of production get reward for their services in the form of rent, wages, interest and profit. A basic problem which a producer faces with it is how the share of different factors of production in the total product be determined? This is called the problem of distribution. There are two types of income distributions: 1. PERSONAL DISTRIBUTION : It refers to the distribution of national income among various individuals .It implies the distribution of income according to the size of income received by different individuals irrespective of sources of income. 2. FUNCTIONAL DISTRIBUTION: It deals with the distribution of income among four factors of production for services or functions performed by them. The most important theory for functional distribution is the marginal productivity theory of distribution. It helps in the distribution of all factor payments like rent, wages, interest and profit.

RENT : In simple words rent is a regular payment for the use of land, furniture and machine. In economics, rent is used in a very narrow or restricted sense and is referred to the price paid for the services of land and other free gifts of nature. There are two view points regarding rent 1 CLASSICAL VIEW: According to David Ricardo Rent is that part of the produce of the earth which ism paid to the land lord for the use of the original and indestructible power of the soil . Main points of rent according to Ricardo s definition are; (a )Rent arises on land only because of its inelastic supply (b ). A tenant makes the payment to the land lord for the original and indestructible powers of the soil. (c.) The fertility of land will determine the amount of rent. 2. MODERN VIEW: Economic rent is defined as any payment made to the factor of production in excess of the minimum amount necessary to keep the factor of production in its present employment. Thus RENT= Actual earning Transfer earning. Transfer earning is the amount which a factor of production must earn in its present occupation to prevent it from transferring to another occupation. It is also known as opportunity cost. Actual earning on the other hand is what the factor of production earns in its present employment. Some different concepts of rent are: 1. ECONOMIC RENT: According to prof. Boulding Economic rent may be defined as payment made to a factor of production in excess of the minimum amount necessary to keep the factor in its present occupation 2. GROSS RENT: It is the rent which is paid for the services of land and capital invested on it .It includes the following: (a) Payment for the use of land (b) Interest on capital invested on it (c) Wages for the services of land lord for supervising the investment in land. 3. CONTRACTUAL RENT: It is the payment made to the land lord by tenants under a contract through agreement between the two. Or is the total rent which is agreed upon between land owner and user of land on the basis of some contract which may be verbal or written .It may be more or less than the economic rent. 4. SCARCITY RENT: It applies to all the factors of production whose supply is less elastic .Scarcity rent arises due to the scarcity of factors of production. 5. DIFFERENTIAL OR SITUATION RENT: It refers to the rent arises due to the difference in the fertility of land .This type of rent arises under extensive cultivation. The surplus enjoyed by more fertile land over and above the less fertile land is known as differential rent. More fertile land is known results in more production thus they pay more rent. It is enjoyed by intra marginal land and not by marginal land. 21

6. QUASI RENT: The concept of quasi rent was developed by prof. Marshall .According to him quasi rent is the surplus earned by man made factors of production whose supply is inelastic or fixed in the short run but elastic in the long run. Factors like machines, buildings. Whose supply is inelastic in the short run earn rent which is termed as Quasi rent i.e. something like rent on land but not the same. The supply of land always remains fixed both in the short run and long run. But the supply of man made factors is inelastic in the short run. Their supply can fully be changed in the long run. Thus man made factors of production earn rent only in the short run which disappears in the long run. If demand for these factors increases in the short run, supply being constant the price will rise consequently they will start getting additional payment called quasi rent. As we know price must cover the variable cost in the short run, but in the long run it has to cover both fixed cost as well as variable cost. In short run variable cost must be recovered otherwise producers would stop producing .Whatever a firm earns over and above the variable cost is earned received by the fixed factors of production. Therefore quasi rent is measured by the excess of total revenue earned in short run over and above the total variable cost. Symbolically Quasi rent= TR- TVC. It can be explained with the help of following graph also SIMILARITIES BETWEEN RENT AND QUASI RENT 1. Both rent and quasi rent have an element of surplus income. 2. Rent and quasi rent arise due to inelastic supply of factors of production. 3. Both rent and quasi rent arise due to increase in demand. WAGES: The payments which are made for the productive services of labour.Labour in economics is all kind of mental and physical exertion taken for the sake of earning money. KIND OF WAGES: MONEY WAGES: Wages paid and received in term of money are called money wages or nominal wages It includes monetary payments only. REAL WAGES: It refers to the basket of goods and services which the labor is able to purchase with the given income. Thus the amount of goods and services a given money wage can buy in the market at any particular time is called real wage. Infect real wage is the amount of purchasing power received by workers through his money wages. PIECE WAGES: These are wages paid according to the number of units produced of a commodity by the worker. TIME WAGES: These are the wages paid for the services of laborers according to the time spent. WAGES IN KIND: When the laborer is paid in terms of goods rather than cash is called wages in kind. Factors determining real wages: (i) purchasing power (ii) working hours (iii) no. of leaves (iv) vacations (v) working conditions(vi) chances of promotion(vii) housing facility (viii) medical facility (ix) conveyance free education for children (x) THEORIES OF WAGES : There are two theories of wages 1.MARGINAL PRODUCTIVITY THEORY OF WAGES: According to this theory each worker is paid wages equal to its marginal productivity. 2. MODERN THEORY OF WAGES: Under the conditions of perfect competition both in labor and product markets wages are determined by the forces of demand and supply. COLLECTIVE BARGAINING Collective bargaining is defined as a situation in which conditions of employment are determined by the agreement between the representatives of trade union on one hand and the representatives of employees association on the other .In other words when trade union bargains with the employers association for wage determination .It is called collective bargaining.


NEEDS FOR COLLECTIVE BARGAINING: Collective bargaining is needed for the following reasons: 1.To enable the employer to secure cooperation expected from workers and for keeping cordial relations between employers and employees. 2. To save the workers from exploitations in the hands of employees. 3. Mutual negotiations become essential for the solutions of the problem 4. Collective bargaining puts a check on the one sided decisions of the employers 5 It is needed for maintaining a peaceful industrial atmosphere. INTEREST : Interest is the payment for the use of money or for the use of loan able funds .It means interest is the reward for the use of capital but it is not the income of the whole capital .It is the income of only that part of capital which is used for lending purpose. TYPES OF INTEREST: NET INTEREST: It is the price paid for the use of capital only. It is the payment which is made by the borrower to the lender purely for the use of money capital.Net interest is also known as pure interest. GROSS INTEREST : It signifies the total payment made by the borrower to the lender of the capital .It includes rewards like rewards for risk, for management, for inconvenience, other than net interest. Thus; GROSS INTEREST= NET INTEREST+REWARD FOR MANAGEMENT+REWARD FOR RISK+REWARD FOR INCONVINIENCE COMPONENTS OF GROSS INTEREST : Gross interest includes the following components: (i) Net interest: It is the price paid for the use of money capital for a particular period of time (ii) Rewards for risk taking : When a lender lends some amount of money to the borrower he has to bear risk to some extent .According to prof. Marshall these risks can be divided into two: (a) PERSONAL RISK :These are those risks which arise due to credibility and economic positions of the borrowers. (b) BUSINESS RISK /TRADE RISK: These are those risks which arise due to business fluctuations in which money is invested. In small scale business and small trading activity risk is greater than the big corporate companies. Higher the risk higher will be the rate of interest and vice versa (iii) REWARD FOR MANAGEMENT: The lender is required to spend some amount of money for maintaining accounts of loans and recovery of loans etc.They have to spend some money to buy stationery ,stamps etc. They have to pay wages to the staff working for them for this lender charges extra amount from the borrower in the form of management rewards. (iv) REWARD FOR INCONVINIENCE: The lender while giving loans has to suffer many inconveniences like physical and mental exertion for undertaking money lending business .Thus the lender charges some extra money to get himself compensated for inconvenience. Greater the inconvenience higher will be the reward for it. PROFIT: Profit is the reward given to the entrepreneur for his services .Every entrepreneur incurs various expense for producing goods and services and by selling them he gets revenue. The difference between TR and TC is called profit. In a technical form profit implies the positive residual of an entrepreneur after deducting TC from TR Thus Profit= TR-TC TYPES OF PROFIT (a) GROSS PROFIT: It is the difference between TR and explicit cost. It is that part of the income of a businessman which is available to him after all payments made the contractually hired factors of production. Thus Gross Profit = TR Explicit cost Components of gross profit 1. Reward for factors of production contributed by entrepreneur himself 2. Rent on entrepreneur s own land : Generally when an entrepreneur starts a business he uses his own land and building .Thus the imputed rent on his own land and building will be included in the gross profit. 3. WAGE INCOME: These are the wages for the services of the family members of the entrepreneur. 23

4. INTEREST ON OWN CAPITAL: When the entrepreneur uses his own capital the interest on such capital in an imputed form will be a part of gross profit. 5. DEPRECIATION CHARGES: Depreciation is known as consumption of fixed capital .It refers to the fall in the value of fixed assets due to the normal wear and tear .Thus depreciation charges should be deducted from gross profit to arrive at net profit. (b) NET PROFIT: Net profit is that part of profit which is calculated by deducting the implicit cost and the depreciation charges from the gross profit. Thus, Net profit = Gross profit depreciation implicit cost of production Net profit is also known as pure profit. © NORMAL PROFIT: It is the minimum profit which is required by entrepreneur to remain in the business. This reward for the entrepreneur forms the part of the cost of production as the price is calculated on the basis of these costs. Thus Net Profit = TR=TC OR AR =AC (D) SUPER NORMAL PROFIT / ABNORMAL PROFIT: The profit which is earned over and above the normal profit is known as supernormal profit. These profits are usually available to the entrepreneur only in the short run. Super normal profit = TR...> TC OR AR> AC.