<–2/”>a >India has a well developed Taxation structure. The tax system in India is mainly a three tier system which is based between the Central, State Governments and the Local Government organizations. In most cases, these local bodies include the local councils and the municipalities.
According to the Constitution of India, the government has the right to levy taxes on individuals and organizations. However, the constitution states that no one has the right to levy or charge taxes except the authority of law. Whatever tax is being charged has to be backed by the law passed by the legislature or the parliament. ARTICLE 246 (SEVENTH SCHEDULE) of the Indian Constitution, distributes legislative powers including taxation, between the Parliament and the State Legislature. Schedule VII enumerates these subject matters with the use of three lists;
• List – I entailing the areas on which only the parliament is competent to makes laws, Taxes consist of Direct Tax or Indirect Tax, and may be paid in Money or as its labour equivalent (often but not always unpaid labour).
• List – II entailing the areas on which only the state legislature can make laws, and
• List – III listing the areas on which both the Parliament and the State Legislature can make laws upon concurrently.
Direct Taxes: They are imposed on a person’s income, wealth, expenditure, etc. Direct Taxes charge is on person concern and burden is borne by person on whom it is imposed. Example- Income tax.
Indirect Taxes: They are imposed on goods/ Services. The Immediate liability to pay is of the manufacturer/ service provider/ seller but its burden is transferred to the ultimate consumers of such goods/ services. The burden is 
transferred not in form of taxes, but, as a part of the price of goods/ services. Example- Excise Duty, Customs Duty, Service Tax, Value-Added Tax (VAT), Central Sales Tax (CST).
Progressive tax is a tax in which the tax rate increases as the taxable amount increases. The term “progressive” refers to the way the tax 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.
Proportional tax is a tax imposed so that the tax rate is fixed, with no change as the taxable base amount increases or decreases. The amount of the tax is in proportion to the amount subject to taxation.
Public expenditure is spending made by the government of a country on collective needs and wants such as pension, provision, Infrastructure-2/”>INFRASTRUCTURE, etc. Until the 19th century, public expenditure was limited as laissez faire philosophies believed that money left in private hands could bring better returns.
In Democracy, public expenditure is an expression of people’s will, managed through Political Parties and institutions. At the same time, public expenditure is characterised by a high degree of inertia and law-dependency, which tempers the will of the current majority.
Main objective of Public expenditure is to reduce the inequality of income. Expenditure on old age pensions, Unemployment relief, free Education, free mid-day meals etc. benefits the poorer classes of the community at the expense of the rich.Other objectives are:-
1. Provide social goods
2. Remove unemployment
3. Increase Production
4. Exploitation and Development of Mineral Resources
5. Promote Price Stability
6. Promote Balanced Growth
7. Reduce Inequality of Income
Wagnar’s law or “The Law of Increasing State Activity” states that “as the economy develops over time, the activities and functions of the government increase”.
According to Adolph Wagner, “Comprehensive comparisons of different countries and different times show that among progressive peoples (societies), with which alone we are concerned; an increase regularly takes place in the activity of both the central government and local governments constantly undertake new functions, while they perform both old and new functions more efficiently and more completely. In this way economic needs of the people to an increasing extent and in a more satisfactory fashion, are satisfied by the central and local Governments.”
Wagner explained his theory based on following bases:-
- During industrialization process, public sector activity will replace private sector activity. State functions like administrative and protective functions will increase.
- Governments needed to provide cultural and welfare services like education, public Health, old age pension or retirement insurance, food subsidy, natural disaster aid, environmental protection programs and other welfare functions.
- Increased industrialization will bring out technological change and large firms that tend to monopolize. Governments will have to offset these effects by providing social and merit goods through budgetary means.
Colin-Clark forwarded his view through “PUBLIC FINANCE and changes in the value of Money” about the growth of public-expenditure. According to them the share of government sector exceed 25% of the total economic activity in the economy, Inflation occurs even in the balanced budget. In this connection his opinions are;
“When the government’s share of the aggregate economic activities reaches the critical limit of 25% the community behavior pattern changes and people produces less since incentive are harmed by the fact that increasing proportions of additional income must be paid in taxes under progressive tax system.”
Dalton’s Principle of Maximum Social Advantage – maximum satisfaction should be yield by striking a balance between public revenue and expenditure by the government. Economic welfare is achieved when marginal utility of expenditure = marginal disutility of taxation. He explains this principle with reference to
- Maximum Social Benefit (MSB)
- Maximum Social Sacrifice (MSS)
Peacock and Wiseman analyze the process of growth of public expenditure in terms of three different but related concepts; displacement, inspection and concentration effects. By the empirical analysis of the data of Britain on public expenditure, they were able to establish the relative growth of public sector expenditure in that country occurred on “step-like” pattern rather than on “continuous growth” pattern.
Musgrave and Rostow’s Development Model suggested that the growth of public expenditure might be related to the pattern of economic growth and development in societies. Three stages in the development process could be distinguished:
(a) The early development stage where considerable expenditure is required on education and on the infrastructure of the economy (also known as social overhead capital) and where private saving is inadequate to finance this necessary expenditure (in this stage, government expenditure must thus be a high proportion of total output);
(b) The phase of rapid growth in which there are large increases in private saving and public Investment falls proportionately; and
(c) High income societies with increased demand for private goods which need complementary public investment (e.g. the motor car and Urbanisation).
In recent years government expenditure is increasing faster than their ability to raise resources, because now their activities are not so restricted as only to maintain law and order and protect the country against external aggression. Therefore, when expenditure exceeds revenue, a deficit arises in the budget of the government. This deficit can be bridged by raising the revenue from taxation (by increasing the existing rates or by imposing new taxes) or by borrowing from the public. Both in developed and developing countries there are certain limits beyond which the taxation rates cannot be raised without adverse effects on the investment level or production and consequently on the rate of economic growth. Further, it taxes the rich and the poor alike which is not desirable for the welfare of any community.
Public Debt
Public debt is the total financial obligations incurred by the entire public sector of a nation, including guarantees and implicit debt. Public debt would include obligations evidenced by a legal instrument issued by the Central, State, Municipal, or Local Government or Enterprises owned or controlled by the Government; and other entities considered public or quasi public.
Internal debt refers to rupee-denominated debt, consisting of marketable securities (dated securities, Treasury Bills) and non-marketable securities (14 days Intermediate Treasury Bills, compensation and other Bonds, securities issued to international financial institutions etc.).
External Debt refers to the debt raised by the Union Government from non-domestic sources, namely, multilateral institutions like the International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), Asian Development Bank (ADB) etc. or bilateral sources, i.e., directly from the foreign countries.
Liabilities in the Public Account (referred to as ‘other liabilities’) include National Small Savings Fund (NSSF), Provident Funds, Reserve Funds and deposits and special bonds issued to oil Marketing companies, fertilizer companies and Food Corporation of India. ‘Other liabilities’ are not included in the public debt.Total liabilities reported in the budget documents of the Central Government have been adjusted so that the outstanding debt truly reflects the outcome of fiscal operations of the Central Government.,
Taxation is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental authority, typically to fund government spending and various public expenditures.
Taxation can be classified into two main types: direct and indirect taxes. Direct taxes are levied directly on the income or wealth of the taxpayer, while indirect taxes are levied on goods and services that are purchased by consumers.
Direct taxes have a number of advantages over indirect taxes. First, they are more equitable, as they are based on the ability to pay. Second, they are more efficient, as they are less likely to be evaded. Third, they are more transparent, as taxpayers are more aware of the amount of tax they are paying.
However, direct taxes also have a number of disadvantages. First, they can be difficult to collect, as taxpayers may not be able to afford to pay them. Second, they can be regressive, as they may place a greater burden on low-income taxpayers than on high-income taxpayers. Third, they can be distortionary, as they may discourage economic activity.
Indirect taxes have a number of advantages over direct taxes. First, they are easier to collect, as they are paid at the point of purchase. Second, they are less likely to be evaded, as taxpayers are less likely to avoid paying taxes on goods and services that they purchase. Third, they are more progressive, as they place a greater burden on high-income taxpayers than on low-income taxpayers.
However, indirect taxes also have a number of disadvantages. First, they are less equitable, as they are not based on the ability to pay. Second, they are less efficient, as they are more likely to be passed on to consumers in the form of higher prices. Third, they are less transparent, as taxpayers are less aware of the amount of tax they are paying.
Public expenditure is the spending of money by the government on goods and services. It can be classified into three main categories: consumption expenditure, investment expenditure, and Transfer Payments.
Consumption expenditure is the spending of money on goods and services that are used up in the current period. This includes spending on goods such as food, clothing, and housing, as well as spending on services such as education, healthcare, and transportation.
Investment expenditure is the spending of money on goods and services that will be used in the future to produce more goods and services. This includes spending on Capital Goods such as machinery and equipment, as well as spending on research and development.
Transfer payments are payments made by the government to individuals or businesses that do not result in the production of goods or services. This includes payments such as social security benefits, unemployment benefits, and welfare payments.
Public debt is the total amount of money that a government owes to its creditors. It can be classified into two main categories: internal debt and external debt.
Internal debt is the debt that a government owes to its own citizens and residents. This includes debt that is held by individuals, businesses, and financial institutions.
External debt is the debt that a government owes to foreign creditors. This includes debt that is held by governments, businesses, and financial institutions in other countries.
Public debt can be a problem if it becomes too large. A large public debt can lead to higher interest rates, which can make it more difficult for businesses to borrow money and invest. It can also lead to inflation, which can erode the value of savings and make it more difficult for people to afford goods and services.
There are a number of ways to reduce public debt. One way is to increase taxes. This can raise revenue that can be used to pay down the debt. Another way is to cut spending. This can be done by reducing the size of government or by eliminating programs that are not essential.
Public debt can also be reduced by growing the economy. When the economy grows, tax revenue increases and government spending decreases. This can help to reduce the debt burden over time.
Effects of Taxation
Taxation is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a government. Most taxes are levied on income (income tax), profits (Corporate tax), or added value (sales tax). Taxes are also levied on goods and services, property, and wealth.
The effects of taxation can be divided into two categories: economic effects and distributional effects.
Economic effects of taxation include:
- Efficiency effects: Taxes can distort economic activity by discouraging certain types of behavior. For example, a tax on income from capital gains may discourage investment.
- Redistribution effects: Taxes can be used to redistribute income from one group to another. For example, a progressive income tax system takes money from high-income earners and gives it to low-income earners.
- Stabilization effects: Taxes can be used to stabilize the economy by raising or lowering government spending. For example, a government may raise taxes during a Recession to reduce the deficit and stimulate the economy.
Distributional effects of taxation refer to the way in which taxes affect the distribution of income in an economy. Taxes can be progressive, regressive, or proportional.
- Progressive taxes take a larger share of income from high-income earners than from low-income earners. For example, a progressive income tax system takes a higher Percentage of income from high-income earners than from low-income earners.
- Regressive taxes take a larger share of income from low-income earners than from high-income earners. For example, a sales tax is a regressive tax because it takes a larger percentage of income from low-income earners than from high-income earners.
- Proportional taxes take the same share of income from all income earners. For example, a flat tax is a proportional tax because it takes the same percentage of income from all income earners.
Direct and Indirect Taxes
Direct taxes are taxes that are levied on the income or wealth of individuals or businesses. Indirect taxes are taxes that are levied on goods and services.
Examples of direct taxes include income tax, property tax, and corporate tax. Examples of indirect taxes include sales tax, value-added tax (VAT), and excise tax.
Direct taxes are generally considered to be more equitable than indirect taxes because they are based on the ability to pay. Indirect taxes, on the other hand, are often regressive because they place a greater burden on low-income earners.
Public Expenditure
Public expenditure is the total amount of money that a government spends in a given year. Public expenditure can be divided into two categories: current expenditure and Capital Expenditure.
Current expenditure is the money that a government spends on things like salaries, pensions, and social welfare payments. Capital expenditure is the money that a government spends on things like infrastructure, education, and healthcare.
Public expenditure is important because it helps to provide essential services to the Population and to stimulate the economy. However, public expenditure can also be a burden on the economy if it is too high.
Public Debt
Public debt is the total amount of money that a government owes to its creditors. Public debt can be divided into two categories: internal debt and external debt.
Internal debt is the money that a government owes to its own citizens. External debt is the money that a government owes to foreign creditors.
Public debt is important because it can affect a government’s ability to borrow money in the future. If a government has too much public debt, it may find it difficult to borrow money at a reasonable interest rate. This can make it difficult for the government to finance its activities, such as providing essential services and stimulating the economy.
Internal and External Debt
Internal debt is the money that a government owes to its own citizens. External debt is the money that a government owes to foreign creditors.
Internal debt is typically considered to be less risky than external debt because it is owed to people who live in the same country as the government. This means that the government is more likely to be able to repay its internal debt if it runs into financial difficulties.
External debt, on the other hand, is typically considered to be more risky because it is owed to people who live in other countries. This means that the government may have difficulty repaying its external debt if it runs into financial difficulties.
In addition, external debt can also be affected by changes in the exchange rate between the government’s currency and other currencies. If the exchange rate falls, the value of the government’s external debt will increase. This can make it more difficult for the government to repay its external debt.
Which of the following is not a direct tax?
(A) Income tax
(B) Property tax
(C) Sales tax
(D) Excise taxWhich of the following is not a public expenditure?
(A) Defense spending
(B) Education spending
(C) Healthcare spending
(D) Corporate tax breaksWhich of the following is not a type of public debt?
(A) Internal debt
(B) External debt
(C) National debt
(D) State debtWhich of the following is not an effect of taxation?
(A) It can be used to redistribute income.
(B) It can be used to finance government spending.
(C) It can be used to regulate the economy.
(D) It can be used to protect the Environment.Which of the following is not a direct effect of taxation?
(A) It can reduce disposable income.
(B) It can increase the price of goods and services.
(C) It can lead to Tax Evasion.
(D) It can lead to tax avoidance.Which of the following is not an indirect effect of taxation?
(A) It can affect the level of economic activity.
(B) It can affect the distribution of income.
(C) It can affect the level of government spending.
(D) It can affect the level of public debt.Which of the following is not a type of direct tax?
(A) Income tax
(B) Property tax
(C) Sales tax
(D) Excise taxWhich of the following is not a type of indirect tax?
(A) Value-added tax (VAT)
(B) Goods and services tax (GST)
(C) Excise tax
(D) Import dutyWhich of the following is not a function of government expenditure?
(A) To provide public goods and services.
(B) To redistribute income.
(C) To stabilize the economy.
(D) To regulate the economy.Which of the following is not a type of public good?
(A) National defense
(B) Law enforcement
(C) Education
(D) HealthcareWhich of the following is not a type of Public Service?
(A) Social security
(B) Unemployment insurance
(C) Medicare
(D) MedicaidWhich of the following is not a type of government regulation?
(A) Environmental regulation
(B) Consumer protection regulation
(C) Occupational safety and health regulation
(D) Financial regulationWhich of the following is not a type of internal debt?
(A) Treasury bills
(B) Treasury notes
(C) Treasury bonds
(D) Federal Reserve notesWhich of the following is not a type of external debt?
(A) Sovereign bonds
(B) Corporate bonds
(C) Bank loans
(D) Foreign Direct InvestmentWhich of the following is not a cause of public debt?
(A) Government spending
(B) Tax cuts
(C) Economic recessions
(D) Natural disastersWhich of the following is not a consequence of public debt?
(A) Higher interest rates
(B) Inflation
(C) Currency depreciation
(D) Economic growthWhich of the following is not a way to reduce public debt?
(A) Increase taxes
(B) Cut spending
(C) Sell assets
(D) Print moneyWhich of the following is not a way to manage public debt?
(A) Issue new debt
(B) Refinance debt
(C) Buy back debt
(D) Default on debtWhich of the following is not a goal of Fiscal Policy?
(A) To promote economic growth
(B) To stabilize the economy
(C) To redistribute income
(D) To regulate the economyWhich of the following is not a tool of fiscal policy?
(A) Taxes
(B) Spending
(C) Monetary Policy
(D) Government borrowing