Unit 2: Public Revenue

 Meaning, Need, Sources, Principles of Public revenue

 Taxation: as a major source of Public Revenue

 Concept of tax
 Characteristic of good tax system
 Cannons of taxation
 Theories or Principle of taxation
 Benefit principle
 Ability to pay principle
 Objective of taxation in developing countries
 Growth, Equity , stabilization
 Types of taxation
Meaning and definition of Public Revenue
Public revenue is one of the branches of public finance. It deals with the various sources from which the state might
derive its income. these sources include incomes from taxes, commercial revenues in the form of prices of goods and
services supplied by public enterprises, administrative revenues in the form of fees, fines etc. and gifts and grants.

The income of the govt. through all source is called public income or public revenue. According to Dalton, however
the term “public income has two senses - wide and narrow. In its wider sense it includes all the incomes or receipts
which a public authority may secure during any period of time. In its narrow sense, however, it includes only those
sources of income of the public authority which are ordinarily known as “revenue resources”. To avoid ambiguity,
thus, the former is the “public receipts” and the latter is “public revenue”. As such, receipts from public borrowings
(or public debt) and from the sale of public assets are mainly excluded from public revenue.

Thus, in broad sense public revenues includes all the income and receipts, irrespective of their sources and nature,
which the govt. obtains during any given period of time. It will include even the loans raised by the govt. in a narrow
sense, it will include only those sources of income of govt. which are described as revenue resources. The sources
include Taxes, Fees, Price, Fines and penalties, Gifts etc.
Tax Revenue and Non Tax Revenue
TAX REVENUE:
A fund raised through the various taxes is referred to as tax revenue. Taxes are compulsory contribution
imposed by the govt. on its citizens to meet its general expenses incurred for the common good, without any
corresponding benefits to the tax payer.
 According to Seligman, “A tax is a compulsory contribution from a person to govt. to defray the expenses
incurred in the common interest of all, without reference to specific benefits conferred.
 NON-TAX REVENUE:
Non tax revenue is the recurring income earned the govt. from sources other than taxes. Public income
received through the administration, commercial enterprises, gifts and grants are the sources of non- tax
revenue includes:
Administrative Revenue
Profit from state enterprises
Gifts and grants.
Need and Importance of Public Revenue

Public revenue or govt. revenue is money received by a govt. it is an important tool of the fiscal policy of the govt.
public revenue is exactly income generated from sources of govt. in order to meet requirements of expenses of
public. Govt. uses revenue to better develop the country.

Modern states have to perform multifarious (varied/ miscellaneous) duties for promoting the welfare of their
citizens for the performance of these functions, money is needed. Therefore, every govt. tries to meets annual
expenditure from taxes and from sources of other than taxation. Hence public revenue is needed.

Public revenue is necessary to implement reform strategies.

To fund public goods and services.
To achieve policy goals.
Public revenue lay the ground for poverty reduction, sustainable development and financial independence from
other countries.
Sources of Public Revenue
Modern states have to perform multifarious (varied/ miscellaneous) duties for promoting the welfare of their
citizens. for the performance of these functions, money is needed. Therefore, every govt. tries to meets annual
expenditure from taxes and from sources of other than taxation. The revenue of the state can be broadly classified
under the following heads.
Revenue from private income:
A govt. derives revenue from citizens by taxation and from other non-tax sources such as fees, prices, special
assessment, rates etc.

Irregular revenue:
under this heading, we can include all items such as gifts, penalties, war indemnities, etc.

Revenue from state ownership:

A govt. also obtains income from the different assets which it owns. For instance, govt. receives money from state
building, crown lands, and other productive enterprises such as railways, postal service, canals etc.
Generally speaking, by public revenue is meant the income raised by the govt. through taxes from the public.
Taxes are not, however, the only sources of public revenue, there are also various other sources of revenue like
fees, price, special assessment, fines and penalties, gift and profit from govt. enterprises.
 Major Sources of Public Revenue
1. TAX: [Concept of Tax]
The most common method of financing the govt. activities is by taking recourse(remedy/alternative/option) to the
fruitful device of taxation. In some country, the largest part of the public revenue is raised through taxes. Taxes
may be imposed on a person income or wealth, they may be direct or indirect, and they may be of different rates
and nature.

 A tax is a compulsory charge or payment levied or imposed by a public authority (central, state and local govt.)
on an individual or corporation.
 The payment of tax is made by the members of the community without any assurance given by the tax levying
authority that they will get direct benefit in return for paying the tax.
 There is no give and take relationship between a taxpayer and the tax- levying public authority.

 It worthy of note that

Tax is compulsory
It is paid by taxpayer for the benefit of all
It is not levied in return for any special service
 Characteristics of good tax system:
For any taxes system to be considered as good there must be certain characteristics it must possess. These are
known as canon, among which are:
Canon of equity canon of certainty canon of productivity canon of convenience
Canon of economical canon of elasticity canon of diversity
The tax is compulsory payment to the govt. without quid-pro-quo. The govt. does not repay back it to the
payers nor does it do anything for the personal benefit to the payers. It is very effective fiscal tool essential for
the achievement of different socio-economic objectives. There are mainly two types of taxes:
a. Direct Tax:
the tax that is not shift able in nature and paid by the payers who really take its burden is called direct tax. The
person or organization which faces the incident taxes the burden too. The tax imposed on income, wealth, profit,
land, houses, vehicles etc. are called direct tax. Direct tax is one which is paid by the person on whom it is
imposed or charged. Income tax, wealth tax, etc. are the example of direct tax.
b. Indirect tax:
it is the tax that is shift able in nature. The person or organization which faces the incident of tax is different from
person or organization who really takes the burden of tax. The incident is faced by the producers and traders but
the burden is taken by the final consumers. The tax is imposed on production, sales, excise duty, custom duty,
entertainment tax, octroi charges etc. are indirect taxes. The VAT is also indirect tax.
2. FEES:
some time govt. provides certain special services to the public of the country and in payment for these services, it
charges fees. Thus, fee is that revenue which is paid to the govt for the special services rendered by it.
Fees are different from tax. Because a taxpayer does not receive any service as a direct return for the tax paid by
him nor does the govt. guarantee any specific benefit to be conferred upon him in return for any particular tax paid
by him. A fee is the direct payment for the service rendered to the payer and the govt. guarantees the services to the
person who pays fees. Education fee, health fee, registration fee, license fee etc. are the example of fees.
3. PRICE:
The govt. sells some services and goods and received price in payment for them which are also the important
sources of revenue.
4. ESCHEATS:
The nationalized properties of people after death being unclaimed are called escheats. It is regular. The persons who
die without any legal heirs behind or without any special will, their properties are taken possession of by the govt.
such right of govt to acquire property is called the right of escheat and the properties so acquired are called escheat.
5. SPECIAL ASSESSMENT:
Sometimes the govt. performs certain services as a result of which the property or wealth of a particular group of
persons in the community is increased. A levy in proportion to this increment in the value of wealth is known as the
special assessment. The rent or price of houses in certain locality may increase due to the fact that the govt. has
made some development project in the area. Hence, in such condition the govt.
Cont….

6. FINES AND PENALTIES:

Fines and penalties are the payments made for the contravention of law. The distinction between taxes and
penalties lies in the motive. A public authority imposes taxes mainly to deter people from doing certain acts.
Against the violation of rules and regulations the govt. charges the fines but if there is violations of law and
order govt. charges penalties. They are not regular sources of govt. revenue.

7. BORROWING:
Another sources of public revenue in a sense of provisional or temporary source is the borrowing of money.
Just as individuals or firms may borrow in anticipation of other revenues, so also govt. burrow funds.
Generally speaking, as a source of public revenue taxes is better than borrowing because it is merely
transferring of funds from the private hands to public treasuries. There is an element of certainty in the case
of a tax. However, in practice, the democratic govt are frequently afraid of taxing people because if people do
not pay taxes, and if a govt. imposes heavy taxes, it becomes unpopular and people may vote it out of power.
Therefore, as a matter of practical expediency, govt. prefers borrowing to taxing people beyond the limits of
safety.
 8. ROYALTIES:
The govt. receives the royalties of its production right, copy right, public land and building, capital equipment and plants for use to
others. It obtains dividends from public enterprises, rent from public properties etc. this is also regular sources of public revenue.

9. CESS: the govt. collects different types of cesses like road cess, pool cess etc. in order to recover the construction cost and reach
the fund for maintenance of the construction.

10. Gifts:
A small portion of the revenue of the govt is also derived from the gifts made by individuals’ private organizations and foreign govt.
this is, however, not a certain and fixed source of revenue for the govt. and is also out of control of govt. its significance as a source
of public revenue has been gradually declining over the year.

11. GRANTS AND DONATION:

The govt. receives the grants and donation from the people, business organization, NGO, within the country or outside the country. It
obtains grants from foreign govt. too.
 
 
CANON OF TAXATION
• Canon of taxation were first presented by Adam Smith in his famous book “ The Wealth of Nations”. These canons of taxation define numerous rule and
principles upon which a good taxation system should be built. Although these canons of taxation were presented a very long time ago, they are still used as
the foundation of discussion on the principles of taxation. Adam Smith originally presented only 4 canons of taxation, which are commonly referred to as
the main canons of taxation or Smith’s canons of Taxation( they are canon of Equality, canon of certainty, canon of convenience and canon of economy).
Along with the passage of time, more canons were developed to better suit the economies.
1. Canon of Equality: The word equality here does not mean that everyone should pay the exact, equal amount of tax. What equality really means here is that
the rich people should pay more tax and the poor pay less. This is because the amount of tax should be in proportion to the abilities of the tax payer. It is
one of the fundamental concepts to bring social equality in the country. The canon of equality state that there should be justice, in the form of equality,
when it comes to paying tax. Not only does it bring social justice, it is also one of the primary means for reaching the equal distribution of wealth in
economy.
2. Canon of Certainty: The tax payer should be well-aware of the purpose, amount and manner of the tax payment. Everything should be made clear, simple
and absolutely certain for the benefit of the tax payer. The canon of certainty is considered a very important guidance rule when it comes to formulating tax
laws and procedure in a country. The canon of certainty ensures that the tax payer should have full knowledge about his tax payment, which includes the
amount to be paid, the mode it should be paid and the due-date. It is believed that if the canon of certainty is not present, it leads to tax evasion.
3. Canon on Convenience: canon of convenience can be understand as an extension of canon of certainty. Where canon of certainty states that the taxpayer
should be well- aware of the amount, manner and mode of playing tax, the canon of convenience states that all this should easy, convenient and taxpayer
friendly. The time and manner of payment must be convenient for the tax payer so that he is able to pay his taxes in due time. If the time and manner of the
payment is not convenient, then it may lead to tax evasion and corruption.
4. Canon of Economy: The whole purpose of collecting taxes is to generate revenue for the economy. This revenue, in turn, is spent on public welfare
process. The canon of economy- keeping in view the above mentioned purpose- states that the cost of collecting taxes should be as minimum as possible.
There should not be any leakage in the way. In this way, a large amount of the collection will go directly to the treasury and therefore, will be spent In the
govt. projects for the welfare of the economy, country and the people. On the other hand, if the canon of economy isn’t applied and the overall cost of
collecting taxes in unreasonably high, the collected amount will not be sufficient in the end.
5. Canon of productivity: By virtue of the canon of productivity, it is better to have fewer taxes with large revenues, rather than more taxes with lesser
amounts of revenue. It is always considered better to impose the only taxes that are able to produce larger returns. More taxes tend to create panic, chaos
and confusion among the taxpayer and it is also against the canon of certainty and convenience to some extent.
6. Canon of Elasticity: An ideal system of taxation should consist of those types of taxes that can easily be adjusted. Taxes, which can be increased or
decreased, according to the demand of the revenue, are considered ideal for the system. An example of such a tax can be the income tax, which is
considered very much ideal in accordance with the canon of equality.
7. Canon of Diversity: Canon of diversity refers to diversifying the tax sources in order to be more prudent and flexible. Being heavily dependent on a single
tax source can be detrimental for the economy. Canon of diversity states that it is better to collect taxes from multiple sources rather concentrating on a
single tax source. Otherwise, the economy is more likely to be confined, and hence, its growth will be limited as well.
8. Canon of Simplicity: The system of taxation should be made as simple as possible. The entire process should be simple, non-technical and straight
forward. Along with the canon of certainty, where the amount, time duration and manner of payment is made certain, the canon of simplicity avoids cases
of corruption and tax evasion if the entire method is made simple and easy.
9. Canon of Flexibility: canon of flexibility means that the entire tax system should be flexible enough that the taxes can easily be increased or lowered, in
accordance with the govt. needs. This flexibility ensures that whenever the govt requires additional revenue, it can be generated without much hassle.
Simplicity, when the economy isn’t booming, lowering taxes shouldn’t be a problem either.
Objective of Taxation in developing countries
 Tax is an important source of revenue in the developing countries. Hence, the following are the objectives of imposing tax in the developing countries.
1. Raise Revenue: The fundamental objective of taxation is to finance govt. expenditure. The govt. has to carry out various development and welfare
activities in the country. For this, govt. needs huge amount of funds. The govt. collects funds by imposing taxes. Hence, raising more and more revenues
has been an important objective of tax.
2. The Pursuit of Equity ( nyaya ko udesya): Tax is imposed on persons according to their income level. High earners are imposed on high tax through
progressive tax system. This prevents wealth being concentrated in a few hands of the rich. So, narrowing the gap between rich and poor is another
objective of tax.
3. Economic Growth: Tax serves as an instrument for promoting economic growth, stability and efficiency. The govt. controls or expands the economic
activities of the country by providing various concessions, redates and other facilities. The effective tax system can boost up the economy. Similarly, taxes
can correct for externalities and other forms of market failure ( such as monopoly). Import taxes may control imports and therefore help the country’s
international balance of payment and protect industries from overseas competition.
4. Remove Regional Disparities: Regional disparity has been a chronic problem to the developing countries. Tax is one of the ways through which regional
disparities can he minimized. The govt. provides tax exemption or concessions for industries established or activities carried out in backward areas. This
will help increase economic activities in those areas and ultimately regional disparity reduce to minimum.
5. The Pursuit of stabilization: inflationary pressure may raise in the developing countries due to developmental activities. Hence, to stabilize the economy,
these pressure must be control. For this both direct and indirect tax must be applied combinedly. The direct tax reduce aggregate demand. Thus maintain
economic stabilization is also the objective of taxation in developing countries.
6. Reduce Unemployment: Unemployment is the burning problem of developing countries. The govt. can reduce the unemployment problem in the country
by promoting various employment activities. Industries established in remote parts or industries providing more employment are given more facilities. As a
result, the unemployment problem can be reduced to a great extent through liberal tax policy.
7. Allocation of Wealth/Resources: Tax collected by the govt. is spent for carrying out various welfare activities. In this way, the weather of the rich is
allocated or redistributed to the whole community.
TYPES OF TAX

• Taxes may be categorized on to various basis. The following are the types of taxes on the basis of their nature.
1. Direct Tax: A direct tax is the one, which is paid by the person or entity on whom it is legally imposed. It is collected from the persons or entities on the
income they have earned exceeding a certain specified limit. Tax is generally calculated at a certain percentage on the income. Income Tax, Corporate Tax,
Land Revenue Tax etc. are the example of it.
2. Indirect Tax: An Indirect Tax is the one, which is imposed to one person or entity but paid partly or fully by others. The tax is collected from customers by
including it in the price of the goods or services they have purchased. The producers collect such a tax from wholesalers, the wholesalers from the retailers
and the retailers from the final consumers. Excise duty, Customs duty, VAT etc. are the example of indirect tax.
3. Personal Income Tax: Personal Income Tax refers to the tax imposed on individuals or families who earn income exceeding a certain specified limit subject
to charge as per the provisions made in financial rules and regulation.
4. Corporate Tax: Corporate tax is the tax imposed on the income of a business entity. It occupies the most part of the govt. revenue collected from taxes.
Corporate tax rates are generally applied in flat system with high rate of large undertakings and low rates for smaller ones. The small and large
undertakings are categorizes as per the size of the activities.
5. Excise Duty: Excise Duty is the tax levied on luxurious products. It is intended to discourage the consumption of harmful products on one side and to
collect govt. revenue in considerable extent on the other side.
6. Custom Duty: Custom Duty is the tax charged on the goods dealt in the foreign trade especially on the imported goods to encourage and promote export
and to protect national industries. Govt. simply give exemption of this tax on export trade and imposes on import trade. Custom duty may be export duty
or import duty as its nature and imposed to the trading goods.
7. Land Revenue Tax: Land Revenue Tax is the one, which is imposed to the landlords on the revenue generated from the land especially while selling or
purchasing land.
8. Value Add Tax ( VAT ) : Value added tax is the tax levied on value added on the price of the goods at each stage of production or distribution activities.
Value added is the difference between sales value and purchase value or the conversion cost plus profit. Conversion cost means the expenses on rent,
depreciation, maintenance, insurance, salary etc. it is imposed on the goods at import, production and selling stages.
TYPES OF TAX
9. Ad Valorem Tax : An ad valorem ( Latin word meaning “according to value”) is a tax whose amount is based on the value of a transaction or of property.
It is typically imposed at the time of a transaction, as in the case of a sales tax or value added tax(VAT). An ad valorem tax may also be imposed annually,
as in the case of a real or personal property tax, or in connection with another significant event ( example inheritance tax, expatriation tax, or tariff). In
some countries a stamp duty is imposed as an ad valorem tax.
10. Progressive Tax: A progressive tax is a tax in which the tax rate increases as the taxable amount increases. The term progressive refers to the way the rate
progresses from low to high, with the result that a taxpayer’s average tax rate is less than the person’s marginal tax rate. Progressive taxes are imposed in an
attempt to reduce the tax incidence of people with a lower ability to pay, as such taxes shift the incidence increasingly to those with a higher ability to pay .
The opposite of a progressive tax is a regressive tax, such as a sales tax, where the poor pay a larger proportion of their income compared to the rich.
Income tax, wealth tax, sales tax on luxury goods etc. are the example of progressive tax.
11. Regressive Tax:
THEORIES OR PRINCIPLES OF TAXATION

• THE Criteria used for constructing a good tax structure are called principles of taxation. The principle of taxation relate to the distribution of taxation or
allocation of tax burden to different categories of tax payers. Some important principles are explained below
• Principle of equity (samajik nyaya ko sidhanta)
• The Benefit Approach or Quid-Pro-quo) principle [ laav pahunch sidhanta]
• Ability to pay principle [tirne chhyamata sidhanta]
1. PRINCIPLE OF EQUITY: This Principle implies the fairness or justice in the distribution of burden of taxation. In other words, equity in taxation means all tax
payers should bear an equal sacrifice in the payment of tax. There are two types of equity- Horizontal equity and Vertical equity.
 Horizontal equity: it implies the treatment of like people in a like manner. That is, persons who are equally well-off should be treated equally. To secure
horizontal equity, persons with same income should pay equal amount of taxes.
 Vertical equity: This implies that unlike people should be treated in an unlike manner. That is, the person who are well-off should pay higher taxes than the
worse-off people. The theory is very difficult to practice through it looks to be pretty.
2. THE BENEFIT PRINCIPLE: Also known as quid-pro-quo principle, this Benefit principle, explains that tax should be paid in accordance with benefits each
would receive. For expenditure programs to be financed by tax revenues by the govt. according to this principle people receiving equal benefits should pay
equal amounts of taxes and these who receive greater benefit should pay higher taxes.
• Merits:
I. Justification for taxes: this principle is justifiable because taxes are imposed only when benefits are conferred on taxpayers out of the revenue.
II. Equity Principle Satisfied: it is equitable that individual receiving benefits from the state expenditure should contribute in proportion with the benefit
enjoyed by them.
III. No discouragement to work and investments: taxes are imposed on the basis of benefits, they do not discourage the willingness to work and invest.
IV. Basis for allocation of taxes: Taxes are allocated to the extent of benefits received.
• Demerits
Demerits
I. Injustice to poor : since modern govt. are aiming at welfare states, more benefits will be provided for the poor people. When taxes are imposed on the
basis of benefit, tax burden will heavily be upon poor. Hence, J.S. Mill rejected this theory blaming as it is regressive in nature.
II. Non-applicability of market principle: The market principle of demand and supply is not applicable on social goods like education, defense, public
health etc. they are supplied equally by govt. for collective consumption. Therefore, it is difficult to estimate benefit.
III. Satisfaction of merit wants: The benefit principle of taxation is not applicable to merit wants since it result in interference in consumers’ sovereignty.
IV. Benefits are community based or group based: Benefits from social goods are enjoyed by community, through by individuals. So beneficiaries cannot
be individually identified.
V. Certain benefits are immeasurable: Some benefits of public expenditure can not be quantified for example, benefits from public parks, museums
research centers etc.
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3. ABILITY TO PAY PRINCIPLE ( OR SACRIFICE THEORY):
3. ABILITY TO PAY PRINCIPLE ( OR SACRIFICE THEORY):
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 IMPLICATION OF THE THEORY
1. Tas is a compulsory contribution.
2. Public expenditure and public revenue are two distinct entities. Public expenditure is provided for the common goods and the public revenue is raised
through taxation from the individuals according to their ability.
3. Taxes should be imposed by the state in an equitable or just manner.
4. Taxes should be imposed to minimize the total sacrifice involved.
5. It emphasizes welfare aspect not only of tax shares but also of expenditure.
 LIMITATIONS OF THE THEORY
1. Income is main determinant of ability.
2. The theory is based on some unrealistic assumptions like utility is quantifiable(calculable/ measurable) and interpersonal comparison of utility is possible.
3. Marginal utility of income is known and declines as income increases.
4. The theory is vague. It does not have a comprehensive definition. The theory has three interpretations of equal sacrifice. One does not know which of the three equity rule is to be
followed.
QUESTIONS FOR ASSIGNMENT;
5. Explain about different sources of public revenue.
6. Public revenue is the means of public expenditure. Explain in the context of Nepal.
7. Explain about different cannon of taxation.
8. Discuss the benefit principle of taxation.
9. Explain the principle of maximum social advantage.
10. Explain about ability to pay principle of taxation.
11. What are the various types of taxes. Discuss.
12. Explain about the objective of taxation in developing countries.
13. Why tax is considered as the important sources of public revenue? Explain the canons of taxation with suitable examples.
14. Discuss about value added tax (VAT). Is it superior than sales tax? Give reason.
15. Define and distinguish between direct and indirect tax with their relative merits and demerits.