Welcome to Grade-XII

Economics Class
• Chapter-11
Government Finance

Today’s Topic Discussion:

Canons of Taxation/Features/Characteristics/Principle
Government Borrowing/Sources of Borrowing
Government Budget/Process or Steps of Budget Formulation
 Summary till now
• Government Finance: income and expenditure dealing
• Differences between Public Finance and Private Finance
• Importance of Government finance:
1. Reduce difference of living standard
2. Maintain Stability
3. Economic development
4. Increase agriculture and industrial production
5. Achieve favorable BOP
 Sources of Government Revenue
• Tax revenue
• Non Tax revenue
• Foreign Aid
 Importance of Government Expenditure

• Trick to remember (LINE)

• To maintain Law and order
Infrastructures
National Security
Economic Equality
 Headings of Government Expenditure
(AD)
• Administrative Expenditure: salary and allowance
• Development Expenditure: Development work
• (CG REC JD):- 1.Constitutional organs 4. Economic Administrations
2.General Administrations 5.Judicial Administrations
3. Revenue Administrations 6. Defence
 Types of Tax
1. Direct Tax
• Meaning: Tax paid by person or an institution (Example: income tax, profit tax, property
tax etc.

• (A) Merits:
1. Equity: A direct tax is an equitable tax. Through it the rich can be made to pay more
than the poor. In case of necessity, the poor people can be granted exemption from
payment of such taxes.
A direct tax is equitable in the sense that it is levied according to the taxable capacity of
the people. The rates of direct taxes, like the income tax, can be fixed in such a way that
the higher the income of a man, the greater is the rate at which he has to pay the tax. Such
a system is known as progressive taxation.
2. Certainty:
A direct tax satisfies the canon of certainty. For instance, a person liable to pay income tax knows how
much he will be required to pay; for that purpose he can appropriate steps beforehand.
3. Elasticity:
A direct tax has elasticity. It can be varied according to the needs of the government and changes in the
income of the people. When the income of the people goes up, the rate of income tax can also be
increased. If the income of the people falls, the rate of income tax can also be lowered.
4. Productivity:
Direct taxes constitute an important source of government revenue. Their collection charges are also
low. There­fore, direct taxes are productive.
5. People’s Consciousness:
A direct tax increases the civic sense of the people. When the people are fully aware of the payment of
taxes, they are also conscious of the way the government spends the money. They resent unproductive or
wasteful expenditure. As a result, the government becomes careful in its expenditure.
(B) Demerits of Direct Tax:

1. Difficult to Tax Prayers

2. Limited scope of revenue collection
3. Possibility of corruption
4. Reduce working spirit
5. Unscientific tax system
 Indirect Tax
• Meaning: The tax which is imposed on one person or an institution but its burden can
be shifted to another person is called indirect tax. The burden of indirect tax can be
shifted from one person to another person. For example: VAT, sales tax, customs duty
etc.
• Merits of Indirect Tax
1. Convenient to the tax payers
2. Impossible to avoid tax payments
3. Broad base of tax collection
4. Progressive in nature
5. Maintains social values and norms
 Demerits of Indirect Tax

1. Expensive tax system

2. Uncertainty in revenue
3. Unproductive tax system
4. Regressive in nature
5. Lack of feeling of tax payment
 Canons of Taxation
(A,C,D,E,P,P,S,U)
• Canons of ability
• Certainty
• Convenience
• Diversity
• Elasticity
• Economy
• Popularity
• Productivity
• Simplicity
• Uniformity
 Government Borrowing

1. Internal Borrowing -fund and loan collected by the

government from it’s people and financial institutions
a) Market borrowing (people)- Treasury bill, Bills of exchange, government
bond---issues to people by government to raise fund.
b) Non marketing (Financial institutions)- Bank, insurance companies etc.

Attractive interest return to people

 Government Borrowing
• 2. External Borrowing- Borrow loan by making agreement with
foreign countries and multinational financial institutions.
a. Bilateral Borrowing( foreign countries) - Agreement with nation

b. Multilateral Borrowing- borrow loan from multinational financial

institutions– World Bank, Asian Development Bank, European Union
etc. (WHO TO WHO Nepal-Unicef- ILO etc.)
 Objectives of Government Borrowing

1.To meet budget deficit

2.To meet war expenses
3.Solve problem of unemployment
4.To control inflation
5.To develop infrastructures
 Government Budget
• Budget- French word ‘ Bougette’ derive---also called bag—so small
leather bag itself called budget.
• Now days it means document…

• Budget means a document that contains the estimate of the

government income and expenditure for one fiscal year. Budget is
also called major financial plan of the government.
 Process/Steps of Budget Formulation
(VVVI)
Estimate of overall expenditure and income
Determination of priorities
Preparation and selection of new projects
Discussion
Final Document
Authorization and implementation
 COURSE COMPLETED

• Course has been completed….

• Best of luck for Examination!!!
• Revision Session will be held soon…
• THE END