City Groups of Colleges

Lecture Plan (UNIT-III)

Course:- B.com Semester: 2nd
Paper: 9 Subject: Public Finance
Syllabus: Public Revenue: Main sources of revenue, Tax revenue, Direct and Indirect Taxes, Progressive,
proportional & Regressive Taxes, Value added tax and GST, The Division of tax burden- Impact and
Incidence of a tax, effects on production & distribution. Public Debt: Role and classification of Public
debt and methods of their redemption. Deficit Financing.

Lecture-1 Public Revenue: Main sources of revenue, Tax revenue

1. Explain briefly the different sources of public revenue.(2015)
2. What are the various sources of revenue to the government? (2015)
Lecture-2 Direct and Indirect Taxes, Progressive, proportional & Regressive Taxes, Value added tax
& GST
1. Distinguish between direct and indirect taxes and discuss their merits and
demerits(2013, 2020)
2. What are the merits of GST? Give the advantage of it over VAT. (2019, 20]
Lecture- 3 The Division of tax burden- Impact and Incidence of a tax, effects on production &
distribution. Public Debt: Role and classification of Public debt
Lecture-4 Methods of their redemption, Deficit Financing
What is deficit financing? Discuss the effects of deficit financing. (2009)
 Lecture 1

TOPIC- PUBLIC REVENUE: MAIN SOURCES OF REVENUE, TAX REVENUE

MEANING OF PUBLIC REVENUE :Government needs to perform political, social and economic
Duties so as to maximize social and economic welfare. In order to perform these duties and functions
government requires large amount of resources .These sources of revenue to the governments, viz. Central,
State and Local Governments, are called Public Revenues.
THE MAIN CHARACTERISTIC OF A TAX ARE AS FOLLOWS:
•A tax is a compulsory payment
•There is no direct, quid pro quo between the tax-payers and thePublic authority.
•A tax is levied to meet public spending incurred by the government in the general interest of the nation.
•It is a payment for an indirect service to make by the government to the community as a whole.
•A tax is payable regularly and periodically as determined by the taxing authority.
SOURCES OF PUBLIC REVENUE
The government derives revenue in different ways from the public. The common methods of raising the
resources are taxes, prices, fees,Fines and penalties, gifts , grants, special assessment.
Generally, tax revenue and non-tax revenue are considered as the Sources of government revenue. But in
a broader sense, the government also receives revenue from foreign aid.
TAX REVENUE
Tax is a compulsory contribution of the wealth of a person that is to say, it involves a sacrifice on the part
of the contributor. Tax Revenue is the income gained by governments through taxation.
DIRECT TAX
•Direct tax is a tax imposed and collected directly from person on whom it is legally imposed.
• The burden of it falls on one person and cannot be shifted to another person.
• Income Tax, Wealth Tax, Corporate Tax, Capital Gains Tax, Gift Tax, Estate Duty are Direct Taxes.
INDIRECT TAX
Indirect Tax
• An indirect tax is one that can be shifted by the taxpayer to someone else.
•Value Added Tax (VAT), Customs and Octroi Duties, Excise Duty, Professional Tax, Municipal Tax,
Entertainment Tax, Etc. are Indirect Taxes.
Fill in the blanks

1. The necessity of classification of public revenue lies in ______________

2. Adam Smith classified public revenue into _________ category.

3. _________ is collected by an intermediary from the person who bears the ultimate burden.

4. ________________ is the income gained by governments through taxation.

5. VAT stands for________________________.

6. An __________________ is one that can be shifted by the taxpayer to someone else.

7. A ____ is a compulsory payment.

8. ________ tax is a tax imposed and collected directly from person on whom it is legally imposed.

9. Example of direct tax ______________.

10. Example of indirect tax_______________.

 Lecture 2
TOPIC- DIRECT AND INDIRECT TAXES, PROGRESSIVE, PROPORTIONAL &
REGRESSIVE TAXES, VALUE ADDED TAX AND GST

Direct taxes are paid in entirety by a taxpayer directly to the government. It is also defined as the tax
where the liability as well as the burden to pay it resides on the same individual. Direct taxes are collected
by the central government as well as state governments according to the type of tax levied.
Major types of direct tax include :
 Income Tax: Levied on and paid by the same person according to tax brackets as defined by the income tax
department.
 Corporate Tax: Paid by companies and corporations on their profits.
 Wealth Tax: Levied on the value of property that a person holds.
 Estate Duty: Paid by an individual in case of inheritance.
 Gift Tax: An individual receiving the taxable gift pays tax to the government.
 Fringe Benefit Tax: Paid by an employer that provides fringe benefits to employees, and is collected by the state
government.
Indirect tax, as mentioned above, include those taxes where the liability to pay the tax lies on a person who then
shifts the tax burden to another individual. Some types of indirect taxes are :
 Excise Duty: Payable by the manufacturer who shifts the tax burden to retailers and wholesalers.
 Sales Tax: Paid by a shopkeeper or retailer, who then shifts the tax burden to customers by charging sales tax on
goods and services.
 Custom Duty: Import duties levied on goods from outside the country, ultimately paid for by consumers and
retailers.
 Entertainment Tax: Liability is on the cinema owners, who transfer the burden to cinemagoers.
 Service Tax: Charged on services rendered to consumers, such as food bill in a restaurant.
Progressive TaxesTaxes assessed under a progressive system are based on the taxable amount of an
individual’s income. They follow an accelerating schedule, so high-income earners pay more than low-
income earners. Tax rate, along with tax liability, increases as an individual’s wealth increases.
Proportional TaxesA proportional or flat tax system assesses the same tax rate on everyone regardless of
income or wealth. This system is meant to create equality between marginal tax rates and average tax
rates paid.
Regressive TaxesLow-income individuals pay a higher amount of taxes compared to high-income
earners under a regressive tax system. That’s because the government assesses tax as a percentage of the
value of the asset that a taxpayer purchases or owns. This type of tax has no correlation with an
individual’s earnings or income level.
Value added tax A value-added tax (VAT) is a consumption tax that is levied on a product repeatedly at
every point of sale at which value has been added. That is, the tax is added when a raw materials producer
sells a product to a factory, when the factory sells the finished product to a wholesaler, when the
wholesaler sells it on to a retailer, and, finally, when the retailer sells it to the consumer who will use it.
GST - GST stands for Goods and Services Tax. It is an Indirect tax which introduced to replacing a host
of other Indirect taxes such as value added tax, service tax, purchase tax, excise duty, and so on. GST
levied on the supply of certain goods and services in India. It is one tax that is applicable all over India.
Fill in the blanks

1._________ taxes are paid in entirety by a taxpayer directly to the government.

2. __________Paid by an employer that provides fringe benefits to employees, and is collected by

the state government.

3.GST stands for____________________.

4. ___________ levied on goods from outside the country, ultimately paid for by consumers and
retailers.

5._____________ is a consumption tax that is levied on a product repeatedly at every point of sale at
which value has been added.

6.Low-income individuals pay a higher amount of taxes compared to high-income earners under a
_______________.

7.Taxes assessed under a ______________ are based on the taxable amount of an individual’s
income.

8.______________ are collected by the central government as well as state governments according
to the type of tax levied.

9.________________ system assesses the same tax rate on everyone regardless of income or wealth.

10._______________Charged on services rendered to consumers, such as food bill in a restaurant.

 Lecture-3

Topic- The Division of tax burden- Impact and Incidence of a tax, effects on production &
distribution.Public Debt: Role and classification of Public debt

Meaning and definition of incidence of TAXATION : Incidence of taxation is also called tax burden.
The burden of the tax is on that person who pays the tax or in other words the one who bears the monetary
burden finally is called the tax burden.
According to Dalton, “ Tax burden is define as the direct money burden”.
Effect of Taxation on Production
According to Prof. Dalton taxation influence production in three different ways:-
1. Effect on ability to work and save : The immediate effect of taxation is reduction in disposable
income of the tax payer.
2. Effect on desire to work and save: A man earns money to fulfil it's desire. But when the government
imposes tax his willingness to work and save is adversely affected.
3. Diversion of Economic Resources: Sometimes Government imposes tax on one industry and ignores
the other. As a result in the producers start investing in that business which the government does not
imposed tax.
Effect on Distribution
According to Dalton, “ Other things remaining the same that taxation system is the best when if it
imposes the progressive tax on the rich and higher class of the society and then utilises the collected
money for fullfilling the need of poor section then the total social welfare is increased. “
Meaning and Definition of Public Debt
Public that is referred with those borrowings which are taken by the governments. These borrowing can
be internal and external both. when the loan is taken with in the country it is internal debt and when it is
taken from abroad it is external debt.
Role and Classification of public Debt
Public debt is an important measure of bridging the financing gaps of the government. Prudent utilization
of public debt leads to higher economic growth and adds to capacity to service and repay external and
domestic debt. It also helps the government to accomplish its social and developmental goals.
Classification of Public debt
Public debt can be classified as follows:
1.Internal and external debt
2.Sort term and long term debt-
3.Funded and unfunded debt
4.Redeemable and irredeemable debt
5.Productive and unproductive debt
Fill in the blanks

1.The burden of the tax is on that person who pays the tax or in other words the one who bears the
monetary burden finally is called the___________.

2.Sums owed to the citizens and institutions are called ______________.

3.sums owed to foreigners comprise the ______________.

4._____________is the loan repayable after a long period of time, usually more than a year.

5. ________Loans are those which are repayable within a short period, usually less than a year.

6.Loans given to the government by the people on their own will and ability are called
______________.

7.During emergencies (e.g., war, natural calamities, etc.,) government may force the nationals to
lend it. Such loans are called ___________.

8.___________refers to that debt which the government promises to pay off at some future date.

9. __________refers to that loan which is raised by the government for increasing the productive
power of the economy.

10. ________ debt is productive when it is used in income-earning enterprises.

 Lecture 4

TOPIC-METHODS OF REDEMPTION OF PUBLIC DEBT

Redemption of debt refers to the repayment of a public loan. Although public debt should be paid, debt
redemption is desirable too. In order to save the government from bankruptcy and to raise the confidence
of lenders, the government has to redeem its debts from time to time.
i. Refunding:Refunding of debt implies issue of new bonds and securities for raising new loans
in order to pay off the matured loans (i.e., old debts).
ii. Conversion: This method tends to reduce the burden of interest on the taxpayers.
ii. Sinking Fund:One of the best methods of redemption of public debt is sinking fund. It is the fund
into which certain portion of revenue is put every year in such a way that it would be sufficient to
pay off the debt from the fund at the time of maturity
iv. Capital Levy: A capital levy is just like a wealth tax in as much as it is imposed on capital assets.
v. Terminal Annuity: It is something similar to sinking fund. Under this method, the government pays off
its debt on the basis of terminal annuity. By using this method, the government pays off the debt in equal
annual instalments.
vi. Budget Surplus: By making a surplus budget, the government can pay off its debt to the people.
vii. Additional Taxation: Sometimes, the government imposes additional taxes on people to pay interest
on public debt.
viii. Compulsory Reduction in the Rate of Interest: The government may pass an ordinance to reduce the
rate of interest payable on its debt. This happens when the government suffers from financial crisis and
when there is a huge deficit in its budget.
Debt financing
Debt financing occurs when a firm sells fixed income products, such as bonds, bills, or notes. Debt
financing is a time-bound activity where the borrower needs to repay the loan along with interest at the
end of the agreed period. The payments could be made monthly, half yearly, or towards the end of the
loan tenure.
Definition: When a company borrows money to be paid back at a future date with interest it is known as
debt financing. It could be in the form of a secured as well as an unsecured loan. A firm takes up a loan to
either finance a working capital or an acquisition. Examples of debt financing include traditional bank
loans, personal loans, loans from family or friends, credit cards, government loans, lines of credit, and
more.
Types of Debt Financing
 Non-Bank Cash Flow Lending,
 Recurring Revenue Lending
 Loans From Financial Institutions, bonds
 Loan From a Friend or Family Member
 Peer-to-Peer Lending, credit card
Fill in the blanks

1.________ refers to the repayment of a public loan. Although public debt should be paid, debt
redemption is desirable too.

2.When a company borrows money to be paid back at a future date with interest it is known as
_____________.

3.___________implies the issue of new bonds and securities by the government in order to repay the
matured loans.

4.A ___________is a fund created by the government and gradually accumulated every year by
setting aside a part of current public revenue in such a way that it would be sufficient to pay off the
funded debt at the time of maturity.

5.____________refers to a very heavy tax on property and wealth. It is once- for-all tax on the
capital assets and estates.

6.In a ________loan, the company’s assets are kept as a collateral or safety deposit with the lender.

7.__________ loans carry very high risk as there is no collateral asset against the loan.

8.__________bond is a financial instrument which guarantees that the borrower will repay the loan
after a fixed period of time and also make timely interest payments.

9._________ bonds are bonds which do not carry the name of the lender.

10. _____________can be a good option for companies to meet temporary liquidity issues or fund
new projects without diluting its equity ownership.