ROLE OF TAXATION

IN ECONOMY
WHY DO WE NEED TAXATION?
SOURCES OF PUBLIC FINANCE

STATE NEEDS MORE & MORE

RESROUCES
SOURCES OF PUBLIC FINANCE
• TAX – COMPULSORY payment based on
income/profits.
• FEE-payment made to the government by a person
in exchange of a service. License fee, registration
fee.
• PRICE- for supply of goods & services eg supply of
gas, telephone, railways. VOLUNTARY depending
on use.
• SPECIAL ASSESSMENT-COMPULSORY payment
due to a benefit derived by public works (eg:
TPS,BRTS,River front development,Vastrapur lake).
SOURCES OF PUBLIC FINANCE
• PROFITS from Public Enterprise-Nava ratan
companies.
• PUBLIC LOANS-borrowings from internal and
external sources. Required to fund new
economic development or war etc.
• EXTERNAL AID- for specific projects, rural
sanitation and water supply, girls education,
health care.
• ISSUE of NEW PAPER MONEY-Creation of
new money, DEFICIT financing.
 TAXATION
• It is a compulsory contribution
imposed by a public authority.
• It is the main source of income for
public authorities.
• Pre-decided.
• Dose not confer direct and
proportional benefits to tax payer.
 IMPORTANCE
1.Capital formation is important in all
economic model.
2.Means of resource mobilization, highly
dependable, no strings attached.`
3.Instrument for transferring purchasing
power from individual to government .
4. Flexible depending on the requirements.
 DEVELOPING ECONOMIES
1.Problems related to economic growth, removal of poverty and
inequalities, chronic unemployment and regional disparities
for e.g. India
2. Tax policy to yield increased revenues to the government,
also conform to criteria of buoyancy and elasticity
3. Equity and resource mobilizations dictate that the tax burden
should be evenly distributed between sectors and
individuals. e.g.agriculture sector vizaviz industries.
4. Tax system to promote private savings and direct them into
investment in priority industries
(India having high saving rate but low investment rate.)
 CLASSIFICATION OF TAXES

• IMPACT AND INCIDENCE OF A TAX

• RATE OF TAX

• METHOD OF TAX
The Incidence of tax
When a tax is imposed, or its rates etc, are changed, the
effects are felt in different spheres of the economy. The
incidence of tax is “the resulting changes in the distribution
of income available for private uses”,-Musgrave

• Incidence of tax is judged in terms of the money burden of

the tax.
• Incidence lies upon that final source from which the tax
money comes.

Two kinds of tax incidences

Specific tax incidence Differential tax incidence

 CLASSIFICATION
Direct Taxes
J.S.Mill –“direct tax is demanded from the very
persons who, it is intended or desired ,should
pay it”

Indirect Taxes
J.S.Mill –“Indirect tax is demanded from the very
persons in the expectation and intention that he
shall indemnify himself at the expanse of others
 Classification –Rate of Tax
• PROPORTIONAL TAX-rate of tax remains
same irrespective of the size of taxable
income.
• PROGRESSIVE TAX-Rate of tax increases
with increase in taxable income. eg Indian
Income Tax system.
• REGRESSIVE TAX-rate of tax is inversely
proportional to the income.
• DEGRESSIVE TAX-Rate of progression is
relatively less. Increase in the rate of tax is
less then the increase in income.
 CLASSIFICATION
Directly paid by the persons on Indirectly paid by
whom it is legally imposed the other persons

Impact is on the same persons Impact is on many

who pays the tax persons

Tax burden cannot be shifted to Tax burden can shift to

other persons and the consumer the other persons (other
directly pay to the local than the payee).
Government, State government,
Center Government.
Example:Income tax ,house Consumption taxes,
property tax, land and estate tax excise duties, sales tax,
or service tax octroi.
 COMPARATIVE STATUS
1950-51 1990-1991 2003-04
Direct tax 43% 16% 38%
Indirect Tax 57% 84% 62%

Total Tax 100% 100% 100%

Revenue

Note: Figures in percentages of total Tax Revenue

Source: Indian Economy, Sundhararam & Datt, 2004
 DIRECT TAX:ADVANTAGES
1. Economy
The tax payer makes the payment to the state directly and
deducting the cost of collection, which directly adds up to
the State’s income.
2. Certainty
Proper provision for the payment of taxes on times, easy for
the State to make financial plans .
3. Elasticity
The yield from direct tax increases with an increase in wealth
and population
4. Social effects & Distributive justice
Redistributes the fruits of developments, develop civic
consciousness among tax-payers.
Reduce the glaring inequalities in the distribution of wealth
and income.
Income tax and inheritance taxes are useful in this direction.
 INDIRECT TAXES :ADVANTAGES
1 Convenience
Indirect taxes are convenient to the tax payers and the State
both .The tax –payer makes the payment when he purchases
commodities in small amount and he does not feel them. The
State can collect them in bulk from importers, exporters and
producers.
2. Elasticity
With proper adjustments indirect taxes are elastic sources of
revenue. If they are imposed on commodities of wide
consumption, the revenue from them can increase to a great
extent.
3. Diffculty of evasion
Ordinarily, indirect taxes cannot be easily evaded. They are
included in the prices of commodities and every time a
commodity is purchased, the purchaser pays the tax
 OTHER CLASSIFICATIONS
Temporary and Permanent Taxes
Temporary taxes Permanent taxes
A tax on war profits to pay off Taxes on income
a large amount of debt in a
short period of time.

Example:Kargil war tax Example: property tax

 OTHER CLASSIFICATIONS
On basis of method of assessment.
SPECIFIC AND AD VALOREM TAXES

Specific taxes Ad valorem taxes

A physical measurement like Tax on value of a commodity.

the weight or volume of a Definite percentage of value of
commodity. goods.

Example : water tax Example :Finished goods

 SINGLE TAX AND MULTIPLE TAXES

Single taxes Multiple taxes

The single tax is the tax on some A multiple tax system is preferably
one-class of commodities only once preferable to a single tax system, but
in the revenue system of a country. too great a multiplicity of taxes would
be undesirable.

The Physiocrats proposed a single A large number of taxes, however

tax on the economic rent of land.
small, would involve a large cost
and difficult to collect.
Example: Example: Yarn, Textile
GRADUATED AND PROGRESSIVE TAXATION
Graduated taxation
A variation in the rate of tax with
variation in the amount on
income,property,etc
Example: property tax
Progressive taxation
When tax rate rises with an increases
in income,etc graduate is upwards
and is known as progressive taxation
It has forms :Step system and Sad
system
Step system: Specific rates were laid
down for the whole of the income.
Hence under this income, the tax
amount did not rise gradually, but it
moved by leap or jumps
Slab system: The tax is calculated or
different slabs of income
Example: income tax
NATIONAL TAXES
Collected by the central government like
(income, wealth, corporate tax ,custom
duties).
STATES TAXES
On goods and services manufactured and
produces in the state, on land and real estate
transactions (stamp duties).
LOCAL TAXES
By ULB/ Municipalities / Municipal
Corporate/Development Authorities (vacant
land taxes, Sanitation ,Water and Property
Tax.)
 DOUBLE TAXATION

• Double taxation is the case where two or more

countries concurrently tax the same tax payers
on account of the same subject matters of tax
(such as income, property, etc).

• Double taxation generally arises on account of

conflicting criteria adopted by different countries
to levy the taxes.
• Two or more governments may enter into an agreement
where by it is ensured that the same subject matter is
not taxed by two governments. This solution would be
called avoidance of double taxation.
• Governments may enter into an agreement whereby the
economic units liable to double taxation are provided
partial relief.
• A country may decide to give unilateral tax relief to its
own subjects even when no tax agreement exists with
other countries.

India has entered into comprehensive agreement

for the advantage of double taxation of income with
several countries including Austria, Belgium, and The
federal republic of Germany, France, Japan and the
Scandinavian countries.
FOR AN EFFICIENT SYSTEM
• EQUALITY
• CERTAINTY
• CONVINENCE
• ECONOMY
• PRODUCTIVITY
• ELASTIC
• DIVERSITY
• SIMPLICITY
THANK YOU