Chapter Two- Public Revenue---General Considerations

2.1 Learning Objectives

After you have completed this chapter you should be able to –
 Discuss the meanings o revenue and capital receipts
 Distinguish between tax revenue and non tax revenue
 Understand the characteristics of a good tax system
 Understand the major objectives of taxation

2.2 Introduction
Like any economic unit, a government needs funds to finance its activities. Such funds are raised from
various sources. It is difficult to give a complete list of all the sources of public receipts. But the
important ones include taxes, income from currency, market borrowings, sale of public assets, income
from public undertakings, fees, fines, gifts and donations, etc. professor Dalton makes a distinction
between public receipts and public revenue. While public receipts include receipts from all sources,
public revenue is a narrower concept and excludes public borrowings, income from the sale of public
assets, or receipts from the use of “printing press”.

It is a normal practice with a government to divide its receipts into “revenue” and “capital” categories.
Broadly speaking, revenue receipts include “routine” and “earned” ones. For this reason, they do not
include borrowings and recovery of loans from other parties, but they do include tax receipts,
donations, grants, fees, and fines etc. capital receipts, on the other hand, cover hose items which are
basically of non-repetitive and non-routine variety and change government’s financial liabilities/assets.
In this chapter we will deal with Revenue receipts, capital receipts, tax and non tax revenues,
characteristics and objectives of taxation.

2.3. Revenue Receipts

These receipts are divided into tax-revenue and non tax -revenue.

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  Tax-revenue itself is divided into three sections: This section covers all those taxes which are
levied on receipts of income and expenditures such as corporation tax, income tax, expenditure
tax, interest tax, and similar other taxes, if any, in force.
 Taxes on property and capital transactions: This section covers taxes on specific forms of
wealth and its transfers such as estate duty, wealth tax, gift tax, house tax, land revenue and
stamps and registration fees, etc.
 Taxes on commodities and services: This section includes taxes on production, sale, purchase,
transport, storage, and consumption of goods and services.
Alternatively, taxes may be divided into direct and indirect ones. This distinction will be discussed
later in this chapter.
Non-tax revenue of the government is divided into three sections
 Currency, coinage and mint: This category covers the receipts of Currency Note Press and of
the Mints. Profit from circulation of small coins is also included here.
 Interest receipts, dividends and profits: This section comprises, apart from interest receipts
on loans by the Government to other parties, dividends and profits from public sector
undertakings run by or as government departments including other income generating
departments. Examples are contributions from railways and posts and telecommunications, and
surplus profits of the Reserve Bank transferred to the Government.
 Other non-tax revenue: This section covers revenue from various government activities and
services such as from administrative services, public service commission, police, jails,
agriculture and allied services, industry and minerals, water and power development services,
transport and communications, supplies and disposal, public works, education, housing,
information and publicity, broadcasting, grants-in-aid and contribution etc. note that income
and profit from the creation of currency by the government, i.e., the excess of face value of
currency over its cost of creation are also included in this group of revenue.

2.4. Capital Receipts

Capital receipts of the government take many forms. The most important one comprises of fresh
borrowings which can be classified in terms of their origin and maturity etc. for example, on the basis
of origin, public borrowings may be external [i.e., from outside the country], or internal [i.e., from
within the country]. In terms of maturity, there may be non-terminable [or perpetuities], “long term”,

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“medium term”, or “short term” loans with specific demarcation of boundaries for each. They may be
marketable or non-marketable, interest-free or interest-bearing, etc.
The next category of receipts covers recovery of loans due from debtors to the government. Some
capital receipts may be in the form of grants and donations, deposits, and appropriation to various
funds and so on. In this and some of the following chapters we shall discuss taxation. This will be
followed by an analysis of public debt and public undertakings.

2.5. Tax Revenue Distinguished From Non-Tax Revenue

What is a Tax?
A tax is a compulsory levy payable by an economic unit to the government without any corresponding
entitlement to receive a definite and direct amount to be given or received from the government. Note
the word direct here. It is not a price paid by the tax-payer for any definite service rendered or a
commodity supplied by the government. The benefits received by taxpayers from the government are
not related to or based upon their being taxpayers. A tax is a generalized exaction, which may be levied
on one or more criteria upon individuals, groups of individuals, or other legal entities. It may be noted
that a public receipt containing an element of compulsion does not automatically become a tax. In
order to be a tax, the absence of a precondition is a must.

Public authorities may charge prices for specified services or goods supplied by them and these prices
may contain an element of compulsion. Here the individuals and firms etc. pay voluntarily for the
purchase of goods and services, but the element of compulsion can always be there. If the authorities
have a monopoly of a good or service in question (such as the city bus service) and if they choose to
charge a price in excess of the ‘competitive’ one (that is, the cost of production inclusive of normal
profit), then the ‘excess’ price being paid becomes a tax for the buyers. We must, however, remember
that it is not easy to separate the elements of pure price Public Finance and taxation in such production
on account of inefficiency. Again, there may be some goods or services regarding which the consumers
have no choice. The authorities may thrust the supplies on them compulsorily and collectively even
when members of the society do no want them. A municipal corporation would, in all probability,
provide street lighting and other services and charge for them from every household.
(1) We can also mention the case of ‘special assessment’ (or a betterment levy) which is a kind of a
special charge levied on certain members of the community who are beneficiaries of certain

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 government activities or public projects. For example, due to provision of parks and other
facilities, land values in the neighbourhood often go up. Irrigation facilities often increase the
productivity of irrigated land and, therefore, land prices. Such benefits are unearned increment’
for property owners which the authorities may choose to tax away. Being a compulsory
payment, a betterment levy is like a tax but since there is a quid pro quo (some people get the
benefit out of a project and they pay for it), it is also like a price.
(2) Fines (such as court fines) are also compulsory payments without any quid pro quo but they are
different from taxes because fines are imposed to curb certain offences and not to get revenue
for the Stat. in this sense, fines are not taxes. Similarly, import and export duties may be
imposed with different intentions in mind. If the intention is to get some revenue for the public
treasury, they are exports, then they change their character and strictly speaking, they are no
longer taxes.
(3) The authorities also may charge fees for certain services such as registration of legal documents,
marriages, births and deaths. However, quite often the fees charged are far in excess of their cost
(except, probably, in the case of health services). The extent of excess charges is in the nature of
a tax.
(4) Profits from paper currency and mintage are also like compulsory levies upon the public. The
actual cost of creating this currency is much less than its face value. The Government, therefore,
makes a profit out of this. But this profit is not like the usual profits from other public
undertakings. The public has no choice but to use this currency at its face value.
(5) Another similar source of public income is deficit financing. Ordinarily, deficit financing means
an excess of public expenditure over public revenue. This excess may be met by borrowings
from the market, borrowings from abroad, or the use of the printing press [creation of currency].
In the case of borrowings from abroad, there cannot be any compulsion for the lenders; but in
the case of internal borrowings there can be. The government may force various individuals,
firms, corporations and other institutions to lend to it at rates much lower than would be the case
otherwise. This amounts to a kind of taxation in the sense that the government does not pay as
much to the lenders as they could get otherwise. On the other hand, instead of borrowing, the
government may choose to use the printing press. When the government spends the additional
funds so created, the aggregate demand increases and prices are pushed up. The government
purchases away a part of resources and the market is left with smaller supplies. In other words,
the government, through the use of the printing press, taxes away some resources of the market
just as it could tax them away directly.
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 If voluntary gifts are made to the authorities, such as during a war, then such an income is neither in
the nature of a tax nor a price.

The Base of a Tax - The base of a tax is the legal description of the object with reference to which the
tax is payable. For example, the base of an excise duty is production, packing or processing of a
specific good; the base of an income-tax is the income of the assessee defined and estimated in terms of
certain rules laid down for this purpose; a gift may be defined and made a base for levying a gift-tax.
Note that the base of each tax has to be defined legally and it is to be quantified for the purpose of
determining the tax liability of an individual tax-payer. Each tax-payer is considered a legal entity for
this purpose. Accordingly, an individual legal entity may be subjected to more than one tax. It should
be noted that a tax base may have a time dimension also. For example, income-tax is usually on an
annual basis and the law has to decide whether income would be taxed on the basis of accrual or
receipt.

The authorities, while determining a tax base, are expected to give due consideration to various
questions like those of cost of collection, administration and effects of that tax. The exact coverage of a
tax base is sought to be determined by an optimum combination of these is sought to be determined by
an optimum combination of these considerations. With the passage of time, a tax base under
consideration may grow or may shrink. For example, as production of excisable goods increases, the
base of excise duties also grows. Relevant provisions, definitions and rules of a tax may be changed to
extend its coverage or base. Also, its coverage may be increased by bringing additional items under it.

Buoyancy and Elasticity of a Tax - These terms highlight the reasons for an increase in the yield of a
tax over time. An increase in tax revenue on account of a growth of its base is termed its buoyancy. A
buoyant tax has an inherent tendency to yield more tax revenue with the growth of its base. Thus, for
example, with given rates of income-tax and the definition of taxable income, if yield from income-tax.
Similarly, excise duties are levied on production of specified goods. If new items are not brought under
these duties and the rates of existing duties remain unchanged, but the revenue from excisable items,
we have a case of buoyancy of excise duties. It is clear that the concept of buoyancy may be applied to
an individual tax or to a whole set of taxes. Numerically, the buoyancy of a tax is measured as a ratio
of the proportionate increase in tax revenue to a proportionate increase in the tax base.

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The yield of a tax may also go up on account of extension of its coverage or a revision of its rates. Such
a characteristic of a tax is referred to as its elasticity. In other words, elasticity of a tax refers to its
responsiveness to steps taken by authorities in increasing its yield through an extension of its coverage
or revision of its rates. Numerically, the elasticity of a tax is measured by the ratio of proportionate
change in its yield to the proportionate change in its coverage or rates.

Principles of Taxation - A tax system (that is, the set of all taxes) for achieving certain objectives
chooses and adheres to certain principles which are termed its characteristics. A good tax system,
therefore, is one which is designed on the basis of an appropriate set of principles, such as equality and
certainty. Mostly, however, objectives of taxation conflict with each other and a compromise is needed.
Therefore, usually economists select some important objectives and work out the corresponding
principles which the tax system should adhere to. The first set of such principles was enunciated by
Adam Smith (which he called Canons of Taxation).

Adam Smith was interested in the ways by which an economy can increase its productive capacity and
thereby achieve a higher rate of growth. Further, he was of the firm view that private sector is more
efficient than the public one and, therefore, the primary responsibility of economic growth should rest
with the private sector. Economic growth necessitates large scale saving and investment. It is also
essential that the investment should be along productive lines. All told, therefore, he was of the view
that the private sector should be entrusted with the maximum possible economic responsibility for an
efficient discharge of which it should be given as much freedom as possible. The only additional
consideration should be the adequacy of revenue for the state (for its own maintenance, for defense, for
law and order, and for social overheads) and an equitable distribution of the tax burden. With this end
in view, he laid down those principles of taxation which were to satisfy these conditions.

The nine canons of taxation as prescribed by Adam Smith are the following:

1. Canon of Equality. “The subjects of every State ought to contribute towards the support of the
government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to
the revenue which they respectively enjoy under the protection of the State.” This canon tries to
observe the objective of economic justice. It dictates that in absolute terms the richer should pay
more taxes because without the protection of the State they could not have earned and enjoyed that
extra income. If we interpret this principle in terms of disutility which the tax-payers suffer by
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 paying taxes, it follows that the tax should impose equal marginal disutility upon every tax-payer.
Two possibilities emerge in this case. If incomes are subject to constant marginal utility, then both
the rich and the poor should be subjected to proportional taxation--each person paying a given
percentage of his income as tax. On the other hand, if we agree with the more realistic proposition
that income is subject to diminishing marginal utility, then the richer should pay a larger proportion
of their incomes as taxes (that is, the taxes should be progressive).

2. Canon of Certainty. This canon is meant to protect the tax-payers from unnecessary harassment
by the ‘tax officials’. “The tax which each individual is bound to pay ought to be certain, and not
arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear
and plain to contributor, and to every other person.” The tax-payers should not be subject to
arbitrariness and discretion of the tax officials, since that breeds a corrupt tax administration. With
a scope for arbitrariness even the honest tax machinery will become unpopular. Smith is so
emphatic about this principle as to claim “that a very considerable degree of inequality… is not
near so great an evil as a very small degree of uncertainty.”

3. Canon of Convenience. The mode and timings of tax payment should be, so far as possible,
convenient to the tax-payer. This canon recommends that unnecessary trouble to the tax-payer
should be avoided; otherwise various ill-effects may result.
4. Canon of Economy. This canon recommends that cost of collection of taxes should be the
minimum possible. It is useless to impose taxes which entail an unnecessary burden upon the
society in the form of additional administrative expense. The productive efforts of the people suffer
due to this wastage. Realizing that the tax collections are being wasted, the tax-payers also tend to
evade them. These canons of taxation have a sound philosophy behind them and exhibit an insight
into the practical aspects of tax administration and its effects. However, in view of developments in
economic philosophy and problems of a modern State, a few additional principles were also
suggested by later writers. A brief description of these is as follows:
5. Canon of Productivity. It is also called the canon of fiscal adequacy. According to this principle,
the tax system should be able to yield enough revenue for the treasury and the government should
have no need to resort to deficit financing.
6. Canon of Buoyancy. The tax revenue should have an inherent tendency to increase along with an
increase in national income, even if the rates and coverage of taxes are not revised.

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7. Canon of Flexibility. It should be possible for the authorities, without undue delay, to revise the
tax structure, both with respect to its coverage and rates, to suit the changing requirements of the
economy and of the Treasury.
8. Canon of Simplicity. The tax system should not be too complicated. That makes it difficult to
understand and administer and breeds problems of interpretation and legal disputes.
9. Canon of Diversity. It is risky for the State to depend upon too few a source of public revenue.
Such a system is bound to breed a lot of uncertainty for the treasury. It is also likely to be
inequitable as between different sections of the society. On the other hand, if the tax revenue comes
from diversified sources, then any reduction in tax revenue on account of any one cause is bound to
be very small. However, too much multiplicity of taxes is also to be avoided. That leads to
unnecessary cost of collection and violates the canon of economy.

In general, we must remember that the tax structure is a part of the economic organization of a society
and should, therefore, fit in its overall economic philosophy. No tax system that does not satisfy this
basic condition can be termed a good one. Over time, therefore, ideas regarding what should form a
good tax system have undergone an evolution. In the following section we would briefly discuss the
characteristics of good tax system in the light of modern economic philosophy.

2.6. Characteristics of a Good Tax System

Characteristics or features of a good tax system may be formulated from various objectives, principles
or canons of a tax system. Discussion in the previous sections clearly indicates that these also form an
integral part of its features. Similarly additional features may be searched in the issues associated with
its administration, effects, kinds, forms and timing etc. However, in this connection it is helpful to keep
the following points in mind.

 Firstly, to consider a tax system in isolation from other items of public revenue, or from public
expenditure, is an incomplete and unrealistic attempt. Taxation is only one part (though an
important one) of the total budget of the government. Its effects are always intermixed with
those of non-tax and expenditure parts of the public budget. Thus within the overall framework
of the total revenue, effects of taxation depend upon its structure, tax rates, and so on. Equally
important is the consideration as to what is being done on the expenditure side of the budget,
since that influences the attitude and reactions of the tax-payers. Formulation of characteristics

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 of a good system by considering its effects does not imply that the non-tax items or the public
expenditure can be ignored. This is done only for the sake of clarity of analysis and
understanding. Any choice is bound to harbour to several conflicts and assumed that taxation
forms a major portion of the public revenue, and that the expenditure side of the budget is being
administered in an optimum manner or at least it is not working against the objectives of the tax
system.
 Secondly, a tax system has many dimensions. We should look into its volume, composition,
rates, coverage, timings of collection, mode of collection and so on in order to grasp its effects
in their totality. Alternative sets of these tax-features represent alternative tax systems with
distinctive effects. Each system has its corresponding merits and demerits in terms of social and
economic effects. Normally, therefore, it is rather difficult to evolve a tax system which is the
best or ideal in every respect.
 Thirdly, it is nearly impossible to choose a theoretically best system. For example, we cannot
quantify the theoretical concepts of marginal utility and disutility and use them in practice.
Similarly, in theory many tax proposals may appear very convincing, but it may not be possible
to implement them. Furthermore, it is generally assumed that the administrative machinery is
efficient and honest. In real life, this may not be true. In addition, every government also faces
several administrative, political and other difficulties. For example, in theory it is assumed that
a government has an absolute right over the property of its entire subject; but in practice it is not
a right which can be exercised fully and without limits. Some taxes, though theoretically sound,
may involve a heavy cost of collection. In some countries, there may be long drawn legal
procedures (such as passing of the tax measures by legislative bodies) preventing the
government from changing its tax policy quickly and easily. In actual practice, therefore, the
government has to think of these various problems while working out the best possible tax
system in the county. It will generally settle for a compromise between these conflicting
considerations and will therefore end up with a sub-optimal tax system. Furthermore, if the
government fails to make a correct assessment of the effects of alternative tax-measures, it will
be all the more difficult for it to achieve an ideal tax system.
 Fourthly, the attitude of the tax-payers is an important variable in determining the contents of
a good tax system. Normally each tax-payer desires to be free from a tax burden but does not
mind if the tax burden is borne by others. If this is not so, he feels discriminated against. It is
essential that a good tax system should appear equitable to the tax-payers. Similarly, overall

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 burden of the tax system is of equal importance. In addition, the attitude of tax-payers is also
influenced by a host of other factors like prevalent political situation (such as war or peace),
natural calamities like floods and droughts, economic situations like prosperity or depression
and so on.
 Fifthly, it is a well-known fact changes in a tax system can be brought about only slowly and in
stages. Even if it is decided to have an entirely new tax system the authorities cannot suddenly
disrupt the existing one. They have to gear their tax mentioned to the new system.

On account of the above mentioned limitations, the authorities cannot hope to satisfy all the objectives
or considerations, and have to be satisfied with a compromise between them. Still, in general, a good
tax system should assist the society in achieving them. It should try to accommodate the attitudes and
problems of the tax-payers and should not lose sight of the administrative practicability or the goals of
social and economic justice. It should also yield adequate revenue for the treasury and should be
flexible enough to move with changing requirements of State and the economy. Such dynamism of the
tax system is all the more relevant for a developing economy where the structure and rates of taxes
have to be constantly reviewed. We may also say that the interests of the administrative machinery, the
economy, the State and the individual tax-payers can be in conflict with each other and a good tax
system tries to accommodate them all in the best possible manner.

A good tax system recognizes that the tax-payer has some basic rights. He is expected to pay his taxes
but not undergo harassment. With this end in view, tax laws should be simple in language and the tax
liability should be determinable with certainty. The mode and timings of payment should suit the
convenience of the tax-payer to the extent possible. At the same time, a tax system should be equitable
as between different tax-payers. It should be progressive so as to levy an equitable burden on all.
Developed free market economies are subject to cyclical fluctuations. A good tax system should be
flexible enough to counteract them. In underdeveloped countries, on the other hand, the main problem
is not that of cyclical fluctuations, but that of unleashing the forces of economic growth and
productivity. For this all possible sources of savings and capital accumulation should be exploited.

Private savings and investment necessitates a greater reliance upon the budgetary savings as the main
source of capital accumulation. In the private sector, the tax system should encourage the consumers to
go in for durable consumption goods. This will reduce their expenditure on consumption items over
time and release larger amounts for savings. Heavy import duties should be used to curb import of
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luxuries and cut the demonstration effect. Within the economy, the demand for luxuries should be
reduced while the consumption and production of health-giving and efficiency-producing goods should
be encouraged. Another problem that a developing economy faces is that of regional disparities. Tax
measures should be so devised as to counteract this tendency and bring about a more equitable
economic growth. In the process of economic growth, a developing country is likely to face the
problem of inflation. A good tax system should help in counteracting the inflationary forces. It should
be designed to discourage unnecessary consumption and boost up production along desired lines.

It can be argued that all direct taxes related to income and wealth should be replaced by a single tax
on expenditure. The case for expenditure tax is supposed to be stronger in developing countries since it
rewards savings and taxes consumption. However, this tax has some practical limitations. It poses
difficult problems of data collection, and is administratively very cumbersome. Moreover, if applied
universally, it is not equitable between different income levels.

2.7. Objectives of Taxation

There is a good deal of overlapping and interaction between subject matter covered by principle/canon
of taxation, features of a good tax system and objectives of taxation. None of these can be discussed
without bringing in the others. However, it may be emphasized that the focus of “objectives of
taxation” is upon what is sought to be achieved through it; principles of taxation are the rules to be
observed in formulating tax structure; while features of a good tax system amount to a broad
description of a tax system devised in conformity with foregoing principles.

General
(a) Objectives of tax system in any economy are intimately connected with the overall economic and
non-economic policies of the government, the non-tax components of its fiscal policy and
institutional and other circumstances faced by the economy. Usually, therefore, objectives of a tax
system differ significantly between developed and underdeveloped countries. Further, some of
these objectives can be contradictory and the tax system must resolve this problem in the best
possible manner. Also a tax system, by itself, cannot be expected to achieve all the goals fully. It
has to fit in the overall framework of policies and measures of the government. For example, in
theory, VAT is considered an ideal form of indirect taxation. But its actual adoption is often
modified to accommodate prevailing circumstances.

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(b) Similarly, suggestions are advanced for reforming direct taxation also. Such suggestions cover
many areas and include the following:

(i) Replacing all direct taxes (or at least income tax) with a tax on expenditure. Alternatively,
replacing direct personal taxes (or only personal income tax) with a tax on personal
consumption expenditure.
(ii) Consolidating all direct taxes into one tax.
(iii) Coordinating all direct taxes in such a manner that they can be assessed simultaneously on the
basis of a single comprehensive return.

Objective of Taxation in a Developed Countries- The problems of a developed country are

materially different from those of an underdeveloped one. A developed country does not have to worry
about accelerating its rate of economic growth. It has adequate capacity to save and invest. Similarly,
in spite of the fact that it may have very wide inequalities of income and wealth, the problem of
distributive justice is not an urgent one. Generally, the incidence of absolute poverty is very low in a
developed instability of income and employment and the tax system is directed to attack it. In this
connection, the general prescription as provided by Keynesian and Lerner’s theories is that taxation
should be used to generate anticyclic changes in total expenditure and demand in the economy; they
should be pushed up to counteract depression and reduced during boom periods. Keynes had
concentrated his attention upon the state of a chronic depression which was to be cured by increasing
effective demand. Hence, his remedy was to reduce taxation coupled with a deficit budgeting and to
encourage expenditure in private sector.

More specifically, his approach implied reducing tax liability of those tax payers who have high
marginal propensity to consume. Similarly, Lerner’s remedy of compensatory fiscal finance advocates
a reduction in taxation during depression and an increase in it during boom. Also taxation in the field
of customs duties should be adjusted to bring about desired changes in the balance of trade of the
county. Care should, however, be taken to use these duties only if the demand and supply of the export
and import items are appropriately elastic. The above prescription gets modified in the context of a
balanced budget multiplier, which says that an expansion (contraction) of the budgetary expenditure,
even though fully balanced by increased (reduced) taxation would be expansionary (contractionary) in
effect. This implies that a depression can be remedied even by increasing taxation provided public
expenditure is also increased correspondingly. Similarly, a boom can be cured by a reduction in
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taxation provided public expenditure is also reduced by the same or larger amount. These remedial
measures assume that a developed economy is competitive enough with adequate factor mobility. To
the extent these conditions are not satisfied and the economy is not able to adjust itself quickly,
taxation loses its ability to act as a weapon of stability. In recent years, developed market economies
have started acquiring numerous rigidities originating from monopoly elements so on. The result is a
stickiness of wage rates on the one hand and monopoly profits on the other. Such economies are now
witnessing the phenomenon of co-existence of stagnation of demand, unemployment and inflationary
pressures. Taxation by itself is not able to eradicate these rigidities and to that extent and tax policy
would fail to cure either inflationary price rise or stagnant demand and unemployment. For effective
remedies, measures other than taxation would have to be resorted to.

2.8 Check Your Progress

Q.1. Shortly Discuss the different kinds (categories) of tax and non tax revenues
Q.2. Discuss five cannons of taxation as prescribed by Adam smith
Q3. Discuss the main chrematistics of a good tax system

2.9. Possible Answers to Check Your Progress

Q1. These receipts are divided into tax-revenue and non tax –revenue. Tax revenue is divided into three
sections Including Income tax which covers all those taxes which are levied on receipts of income and
expenditures such as corporation tax, income tax, expenditure tax, interest tax, and similar other taxes,
if any, in force. Taxes on property and capital transactions which covers taxes on specific forms of
wealth and its transfers such as estate duty, wealth tax, gift tax, house tax, land revenue and stamps and
registration fees, etc. and Taxes on commodities and services which includes taxes on production,
sale, purchase, transport, storage, and consumption of goods and services.
Alternatively, taxes may be divided into direct and indirect ones. This distinction will be discussed
later in this chapter.
Non-tax revenue of the government is divided into three sections -Currency, coinage and mint: This
category covers the receipts of Currency Note Press and of the Mints. Profit from circulation of small
coins is also included here. Interest receipts, dividends and profits: This section comprises, apart
from interest receipts on loans by the Government to other parties, dividends and profits from public
sector undertakings run by or as government departments including other income generating
departments. Examples are contributions from railways and posts and telecommunications, and surplus

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profits of the Reserve Bank transferred to the Government. Other non-tax revenue: This section
covers revenue from various government activities and services such as from administrative services,
public service commission, police, jails, agriculture and allied services, industry and minerals, water
and power development services, transport and communications, supplies and disposal, public works,
education, housing, information and publicity, broadcasting, grants-in-aid and contribution etc. note
that income and profit from the creation of currency by the government, i.e., the excess of face value of
currency over its cost of creation are also included in this group of revenue.

Q2. Some of the cannon of taxation as prescribed by Adam Smith include the following
Canon of Equality- “The subjects of every State ought to contribute towards the support of the
government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the
revenue which they respectively enjoy under the protection of the State.” This canon tries to observe
the objective of economic justice. It dictates that in absolute terms the richer should pay more taxes
because without the protection of the State they could not have earned and enjoyed that extra income.
Canon of Certainty- This canon is meant to protect the tax-payers from unnecessary harassment by
the ‘tax officials’. “The tax which each individual is bound to pay ought to be certain, and not arbitrary.
The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to
contributor, and to every other person.” The tax-payers should not be subject to arbitrariness and
discretion of the tax officials, since that breeds a corrupt tax administration.
Canon of Convenience- The mode and timings of tax payment should be, so far as possible,
convenient to the tax-payer. This canon recommends that unnecessary trouble to the tax-payer should
be avoided; otherwise various ill-effects may result.
Canon of Economy. This canon recommends that cost of collection of taxes should be the minimum
possible. It is useless to impose taxes which entail an unnecessary burden upon the society in the form
of additional administrative expense. The productive efforts of the people suffer due to this wastage.
Realizing that the tax collections are being wasted, the tax-payers also tend to evade them. These
canons of taxation have a sound philosophy behind them and exhibit an insight into the practical
aspects of tax administration and its effects. However, in view of developments in economic
philosophy and problems of a modern State, a few additional principles were also suggested by later
writers. A brief description of these is as follows:
Canon of Productivity- It is also called the canon of fiscal adequacy. According to this principle, the
tax system should be able to yield enough revenue for the treasury and the government should have no
need to resort to deficit financing.
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Other cannon include Canon of Buoyancy, Canon of Flexibility, Canon of Simplicity, canon of
Diversity.
Q3 The main Characteristics or features of a good tax system include the following
 Tax system should not be considered in isolation from other items of public revenue, or
from public expenditure, is an incomplete and unrealistic attempt. Taxation is only one part
(though an important one) of the total budget of the government. Its effects are always
intermixed with those of non-tax and expenditure parts of the public budget. Thus within the
overall framework of the total revenue, effects of taxation depend upon its structure, tax rates,
and so on. Equally important is the consideration as to what is being done on the expenditure
side of the budget, since that influences the attitude and reactions of the tax-payers. Formulation
of characteristics of a good system by considering its effects does not imply that the non-tax
items or the public expenditure can be ignored. This is done only for the sake of clarity of
analysis and understanding. Any choice is bound to harbour to several conflicts and assumed
that taxation forms a major portion of the public revenue, and that the expenditure side of the
budget is being administered in an optimum manner or at least it is not working against the
objectives of the tax system.
 A tax system has many dimensions. We should look into its volume, composition, rates,
coverage, timings of collection, mode of collection and so on in order to grasp its effects in
their totality. Alternative sets of these tax-features represent alternative tax systems with
distinctive effects. Each system has its corresponding merits and demerits in terms of social and
economic effects. Normally, therefore, it is rather difficult to evolve a tax system which is the
best or ideal in every respect.
 It is nearly impossible to choose a theoretically best system. For example, we cannot quantify
the theoretical concepts of marginal utility and disutility and use them in practice. Similarly, in
theory many tax proposals may appear very convincing, but it may not be possible to
implement them. Furthermore, it is generally assumed that the administrative machinery is
efficient and honest. In real life, this may not be true. In addition, every government also faces
several administrative, political and other difficulties.
 The attitude of the tax-payers is an important variable in determining the contents of a good
tax system. Normally each tax-payer desires to be free from a tax burden but does not mind if
the tax burden is borne by others. If this is not so, he feels discriminated against. It is essential
that a good tax system should appear equitable to the tax-payers. Similarly, overall burden of

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 the tax system is of equal importance. In addition, the attitude of tax-payers is also influenced
by a host of other factors like prevalent political situation (such as war or peace), natural
calamities like floods and droughts, economic situations like prosperity or depression and so on.
 It is a well-known fact changes in a tax system can be brought about only slowly and in
stages. Even if it is decided to have an entirely new tax system the authorities cannot suddenly
disrupt the existing one. They have to gear their tax mentioned to the new system.

2.10 Let Us Sum Up

 Like any economic unit, a government needs funds to finance its activities. Such funds are
raised from various sources. It is difficult to give a complete list of all the sources of public
receipts. But the important ones include taxes, income from currency, market borrowings, sale
of public assets, income from public undertakings, fees, fines, gifts and donations, etc.
professor Dalton makes a distinction between public receipts and public revenue. While public
receipts include receipts from all sources, public revenue is a narrower concept and excludes
public borrowings, income from the sale of public assets, or receipts from the use of “printing
press”.
 It is a normal practice with a government to divide its receipts into “revenue” and “capital”
categories. Broadly speaking, revenue receipts include “routine” and “earned” ones. For this
reason, they do not include borrowings and recovery of loans from other parties, but they do
include tax receipts, donations, grants, fees, and fines etc. capital receipts, on the other hand,
cover hose items which are basically of non-repetitive and non-routine variety and change
government’s financial liabilities/assets. In this chapter we will deal with Revenue receipts,
capital receipts, tax and non tax revenues, characteristics and objectives of taxation.
 Revenue Receipts are divided into tax-revenue and non tax -revenue.
 Capital receipts of the government take many forms. The most important one comprises of
fresh borrowings which can be classified in terms of their origin and maturity etc. for example,
on the basis of origin, public borrowings may be external [i.e., from outside the country], or
internal [i.e., from within the country]. In terms of maturity, there may be non-terminable [or
perpetuities], “long term”, “medium term”, or “short term” loans with specific demarcation of
boundaries for each. They may be marketable or non-marketable, interest-free or interest-
bearing, etc.

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 A tax is a compulsory levy payable by an economic unit to the government without any
corresponding entitlement to receive a definite and direct amount to be given or received from
the government. Note the word direct here. It is not a price paid by the tax-payer for any
definite service rendered or a commodity supplied by the government. The benefits received by
taxpayers from the government are not related to or based upon their being taxpayers. A tax is a
generalized exaction, which may be levied on one or more criteria upon individuals, groups of
individuals, or other legal entities. It may be noted that a public receipt containing an element of
compulsion does not automatically become a tax. In order to be a tax, the absence of a
precondition is a must.
 The base of a tax is the legal description of the object with reference to which the tax is
payable. For example, the base of an excise duty is production, packing or processing of a
specific good; the base of an income-tax is the income of the assessee defined and estimated in
terms of certain rules laid down for this purpose; a gift may be defined and made a base for
levying a gift-tax. Note that the base of each tax has to be defined legally and it is to be
quantified for the purpose of determining the tax liability of an individual tax-payer. Each tax-
payer is considered a legal entity for this purpose. Accordingly, an individual legal entity may
be subjected to more than one tax. It should be noted that a tax base may have a time dimension
also. For example, income-tax is usually on an annual basis and the law has to decide whether
income would be taxed on the basis of accrual or receipt.
 Characteristics or features of a good tax system may be formulated from various objectives,
principles or canons of a tax system. Discussion in the previous sections clearly indicates that
these also form an integral part of its features. Similarly additional features may be searched in
the issues associated with its administration, effects, kinds, forms and timing etc. However, in
this connection it is helpful to keep the following points in mind. Firstly, to consider a tax
system in isolation from other items of public revenue, or from public expenditure, is an
incomplete and unrealistic attempt. Secondly, a tax system has many dimensions. We should
look into its volume, composition, rates, coverage, timings of collection, mode of collection and
so on in order to grasp its effects in their totality. Thirdly, it is nearly impossible to choose a
theoretically best system. Fourthly, the attitude of the tax-payers is an important variable in
determining the contents of a good tax system. Normally each tax-payer desires to be free from
a tax burden but does not mind if the tax burden is borne by others. If this is not so, he feels
discriminated against. It is essential that a good tax system should appear equitable to the tax-

17
 payers. Similarly, overall burden of the tax system is of equal importance. In addition, the
attitude of tax-payers is also influenced by a host of other factors like prevalent political
situation (such as war or peace), natural calamities like floods and droughts, economic
situations like prosperity or depression and so on. Fifthly, it is a well-known fact changes in a
tax system can be brought about only slowly and in stages. Even if it is decided to have an
entirely new tax system the authorities cannot suddenly disrupt the existing one. They have to
gear their tax mentioned to the new system.
 There is a good deal of overlapping and interaction between subject matter covered by
principle/canon of taxation, features of a good tax system and objectives of taxation. None of
these can be discussed without bringing in the others. However, it may be emphasized that the
focus of “objectives of taxation” is upon what is sought to be achieved through it; principles of
taxation are the rules to be observed in formulating tax structure; while features of a good tax
system amount to a broad description of a tax system devised in conformity with foregoing
principles.

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