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Public Revenue: Meaning, Tax

Revenue, Non-Tax Revenue with


Classification of Public Revenue
Meaning of Public Revenue:
The income of the government through all sources 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 termed
public receipts and the latter public revenue.
As such, receipts from public borrowings (or public debt) and from the
sale of public assets are mainly excluded from public revenue. For
instance, the budget of the Government of India is classified into
revenue and capital. Heads of Revenue include the heads of
income under the capital budget are termed as receipts. Thus, the
term receipts includes sources of public income which are excluded
from revenue.
In a modern welfare state, public revenue is of two types, tax revenue
and non-tax revenue.

Tax Revenue:
A fund raised through the various taxes is referred to as tax revenue.
Taxes are compulsory contributions imposed by the government on its
citizens to meet its general expenses incurred for the common good,
without any corresponding benefits to the tax payer. As Taussig puts
it, the essence of a tax, as distinguished from other charges by
government, is the absence of a direct quid pro quo between the tax
payer and the public authority.

Seligman defines a tax thus: A tax is a compulsory contribution from


a person to the government to defray the expenses incurred in the
common interest of all, without reference to specific benefits
conferred.

The main characteristic features of a tax are as follows:


1. A tax is a compulsory payment to be paid by the citizens who are
liable to pay it. Hence, refusal to pay a tax is a punishable offence.
2. There is no direct, quid pro quo between the tax-payers and the
public authority. In other words, the tax payer cannot claim reciprocal
benefits against the taxes paid. However, as Seligman points out, the
state has to do something for the community as a whole for what the
tax payers have contributed in the form of taxes.
But this reciprocal obligation on the part of the government is not
towards the individual as such, but towards the individual as part of a
greater whole.
3. 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 be made by the government to the community as a whole.

4. A tax is payable regularly and periodically as determined by the


taxing authority.
Taxes constitute a significant part of public revenue in modern public
finance. Taxes have macro-economic effects. Taxation can affect the
size and mode of consumption, pattern of production and distribution
of income and wealth.
Progressive taxes can help in reducing inequalities of income and
wealth by lowering the high income groups disposable income. By
disposable income is meant the income left in the hands of the tax
payer for disbursement after tax payment. Taxes imply a forced saving
in a developing economy. Thus, taxes constitute an important source
of development finance.

Non-Tax Revenue:
Public income received through the administration, commercial
enterprises, gifts and grants are the source of non-tax revenues of the
government.
Thus, nontax revenue includes:
(i) Administrative revenue
(ii) Profit from state enterprises
(iii) Gifts and grants
Administrative Revenues:
Under public administration, public authorities can raise some funds
in the form of fees, fines and penalties, and special assessments.
Fees:
Fees are charged by the government or public authorities for
rendering a service to the beneficiaries. To quote Seligman, A fee is a
payment to defray the cost of each recurring service undertaken by the
government, primarily in the public interest, but conferring a
measurable advantage to the payer.

Court fees, passport fees, etc., fall under this category. Similarly,
licence fees are charged to confer a permission for something by the
controlling authority, e.g., driving licence fee, import licence fee,
liquor permit fee, etc. Fees are to be paid by those who receive some
special advantages. Generally the amount of the fee depends upon the
cost of services rendered.
Fees are a bye- product of the administrative activities of the
government and not a payment for a business. Thus, fees are distinct
from prices. Prices are always voluntary payments, but fees are
compulsory contributions, though both are made for special services.
Sometimes a fee contains an element of tax when it is charged high in
order to bring revenue to the exchequer e.g., a licence fee.
Fines and Penalties:
Fines and penalties are levied and collected from offenders of laws as
punishment. Here the main object of these levies is not so much to
earn an income as to prevent the commission of offences and
infringement of laws of the country. Fines and penalties are arbitrarily
determined and have no relation to the cost of administration or
activities of the government. Hence, collections from such levies are
insignificant as a source of public revenue.
Special Assessments:
A special assessment, as Seligman points out, is a compulsory
contribution levied in proportion to the social benefits derived to
defray the cost of a specific improvement to property undertaken in
the public interest. That is to say, sometimes when the government
undertakes certain types of public improvements such as construction
of roads, provision of drainage, street lighting etc., it may confer a
special benefit to those possessing properties nearby.
As a result, values of rents of these properties may rise. The
government, therefore, may impose some special levy to recover a part
of the expenses so incurred. Such special assessment is levied

generally in proportion to the increase in the value of the properties


involved. In this respect, it differs from a tax.
In India, these special assessments are referred to as betterment
levy. Betterment levy is imposed on land when its value is enhanced
by the construction of social overhead capital such as roads, drainage,
street- lighting, etc. by the public authority in an area.
Profits of State Enterprise:
Profits of state undertakings also are an important source of revenue
these days, owing to the expansion of the public sector. For instance,
the central government runs railways. Surplus from railway earnings
can be normally contributed to the revenue budget of the central
budget.
Likewise, profits from the state transport corporation and other public
undertakings can be important sources of revenue for the budgets of
state governments. Similarly, other commercial undertakings in the
public sector such as Hindustan Machine Tools, Bokaro Steel Plant,
State Trading Corporation etc. can make profits to support the central
budget.
Earnings from state enterprises depend upon the prices charged by
them for their goods and services and the surplus derived therefrom.
Thus, the pricing policy of state undertakings should be selfsupporting and reasonably profit-oriented. Again, prices are charged
with an element of quid pro quo i.e., directly in proportion to the
benefits conferred by the services rendered.
A price is a form of revenue derived by the government by selling
goods and services of public enterprises. Thus, price is the revenue
obtained from business activity undertaken by the public authorities.
Many public enterprises like postal services run on cost-to-cost basis.
The prices are charged just to cover the cost of rendering such
services.

However, in certain cases, when the state has an absolute monopoly,


prices having a high profit element are charged. Such monopoly
profits of a state enterprise are in the nature of a tax. The difference
between price and fee is this: the former usually can never be less than
the cost of production or service, while the latter may not necessarily
cover the cost of service.
Gifts and Grants:
These form generally a very small part of public revenue. Quite often,
patriotic people or institutions may make gifts to the state. These are
purely voluntary contributions. Gifts have some significance,
especially during war time or an emergency.
In modern times, however, grants from one government to another
have a greater importance. Local governments receive grants from
state governments and state governments from the centre. The central
government gives grants- in-aid to state governments in order to
enable them to carry out their functions. When grants are made by one
countrys government to another countrys government it is called
foreign aid. Usually poor countries receive such aid from developed
countries, which may be in the form of military aid, economic aid, food
aid, technological aid, and so on.

Classification of Public Revenue:


Different economists have classified the sources of public revenue
differently. A scientific classification enables us to know in what
respects these various sources resemble one another and in what ways
they differ. Of the various classifications of public revenue available in
economic literature, we shall review a few important ones.
Seligmans Classification:
Seligman classifies public revenue into three groups:
(i) Gratitious revenue
(ii) Contractual revenue
(iii) Compulsory revenue

Gratitious revenue comprises all revenues such as gifts, donations and


grants received by the public authorities free of cost. They are entirely
of a voluntary nature. Further, these are very insignificant in the total
revenue.
Contractual revenue includes all those types of revenue which arise
from the contractual relations between the public authority and the
people. Fees and prices fall into this category. A direct quid pro quo is
usually present in these types of revenue.
Compulsory revenue includes income derived by the state from
administration, justice, and taxation. Taxes, fines and special
assessments are regarded as compulsory revenue. These revenues
express an element of state sovereignty. It is the most significant type
of public revenue in modern times.
Daltons Classifications:
Dalton provides a very systematic, comprehensive and instructive
classification of public revenue. In this opinion, there are two main
sources of public revenue taxes and prices. Taxes are paid
compulsorily whereas prices are paid voluntarily by individuals, who
enter into contracts with the public authority. Thus, prices are
contractual payments.
Taxes are sub-divided into: (i) Taxes in the ordinary sense; (ii)
Tributes and indemnities; (iii) Compulsory loans, and (iv) Pecuniary
penalties for offences.
Prices are sub-divided into: (i) Receipts from public property passively
held such as rents received from the tenants of public lands; (ii)
Receipts from public enterprises charging competition rates; (iii) Fees
or payments charged for rendering administration services, such as
birth and death registration fees, and (iv) Voluntary public debt.
To these two groups must be added another group to make the
classification exhaustive. Under this group, the following items are
included: (i) receipts from public monopolies, charging higher prices;

(ii) special assessments; (iii) issue of new paper money or deficit


financing; and (iv) voluntary gifts.
Taylors Classification:
The most logical and scientifically based classification of public
revenue is however provided by Taylor. He divides public revenue into
four categories:
(i) Grants and gifts
(ii) Administrative revenues
(iii) Commercial revenues
(iv) Taxes
Grants and gifts:
Grants-in-aid are the means by which one government provides
financial assistance to another to enable it to perform certain specified
functions, for example, education and health grants made to the states
by the central government.
Grants- in-aid are the cost payments made by the grantor government
and revenue receipts to the grantee, and no obligation of repayment is
involved. Gifts are voluntary contributions from individuals or
institutions for specific purposes. Grants and gifts are voluntary in
nature and there is absence of quid pro quo to the donor.
Administrative Revenues:
Under this group, fees, licenses, fines and special assessments are
included. Most of these are voluntary in nature and based upon the
direct benefits accruing to the payer. They generally arise as a byproduct of the administrative or control function of the government.
Commercial Revenues:
These are the receipts by way of prices paid for government produced
goods and services. Under this group, postal charges, tolls, interest on

loans of state financial institutions or nationalised banks, tuition fees


of public educational institutions are included.
Taxes:
These are compulsory payments made to government without
expecting a direct return of benefits. The taxes involve varying degrees
of coercive powers.