ECONOMICS UNIT – IV NOTES

1. Public Finance

The task of economic stabilization requires keeping the economy from straying too
far above or below the path of steady high employment. One way lies inflation, and
the other lies recession.

Flexible and vigilant fiscal and monetary policy will allow us to hold the narrow
middle course.” (US president John F. Kennedy 1962)

The Concept of Public Finance

• Public finance is a study of income and expenditure of the government at the
central, state, and local levels.

• Government has to perform certain functions in a country such as to supply

certain public or collective goods which individuals cannot or do not singly
perform. And this is the responsibility of the government to provide those goods
for which it needs revenue.

• In the narrow sense, public finance is defined only as the study of income and
expenditure of the government.

• But the broader view is that public finance does not deal only with the income
and expenditure of the government but also the sources of income and the way
of expenditure of various government corporations, public companies, and
quasi-governmental ventures.
Public finance is composed of the following constituents:

1. Public Expenditure: wages and salaries; subsidies and transfers; expenditure

on goods and services such as infrastructures like road, electricity, telecom, and
human capital accumulation like health and education; interest expenditure etc.

2. Public Revenue: Different sources of government revenue with major focus on

tax revenue.

3. Public Debt: Often public revenue falls short of expenditure and government
has to borrow from internal and external sources.

Public Expenditure

Public Expenditure is the end and aim of the collection of State revenues. It
involves the judicious expenditure of public funds on the most important and socially
and economically relevant activities of the State. The term 'Public Expenditure' refers
to the expenses incurred by the Government for its own maintenance and also for the
preservation and welfare of society and economy as a whole. It refers to the expenses
of the public authorities, Central, State and Local Governments, for protecting the
citizens and for promoting their economic and social welfare.
Public Revenue

This 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.

Public Debt

Public debt is the loans raised by and is a source of public finance which carries
with it the obligation of repayment to the individuals, along with interest, from whom
the debt was raised.

The Concept of Public Finance

Public finance is composed of the constituents:

Public financial administration: As Walter Bagehot remarks money cannot

manage itself, an efficient, energetic and scientific management is required to look
after the public expenditure, public revenue and public debt. What are the authorities,
institutions, agencies to look after the management, control, and scrutinizing work
created by government? How do they keep check on the use and misuse of fund?
Answer to all these questions relate public financial administration.

Public Financial Administration

To make sure the government have enough money to support public activities
in term of financial and government expenditure.

• To make sure the public fund is being managed properly by following the law, rules
and procedures.

• To prevent from any misused of fund, corruption in spending the public money.

The Concept of Public Finance

Public finance is composed of the following constituents:

5. Economic stabilization and economic growth: Maintaining stability and promoting

balanced sustainable growth through the functions mentioned above is another
constituent of public policy.
 Economic Stabilization and Economic Growth

Economic Stabilization policies are the tools to ensure a stable economy i.e.
attaining macroeconomic stability, which means stability in general price level,
attaining a stable economic growth rate and high employment level among others

The major policy options that the government uses for macroeconomic
stabilization are monetary and fiscal policies.
Tools for Economic Stabilization
Fiscal Policy
A set of government spending, taxing, and borrowing policies used to achieve
desired levels of e economic performance.

Monetary Policy
Set of procedures designed to regulate the economy by controlling:
• amount of money in circulation
• Level of interest rates

Role of the Government

• Promotion of human capital accumulation
• Provision of essential public goods
• Decentralization
• Facilitating and regulating the private sector for promoting industries, financial
institutions, and building infrastructures.
• Protections of individual liberties
• Private rights to land and capital
• Good courts and legal systems
• Representative political systems
How Does Government Work?

With policy:

• Macroeconomic policy

• Fiscal policy

• Monetary policy

• Infrastructure investment

• Microeconomic policy
 • Social investment and labour policy

• Industrial policy

• Competition policy

2. Government Budgeting

• Derived from Latin word „Bague‟ and French word „Bougette‟.

„Bougette‟ means small leather bag.

• Budget provision initially introduced in the UK. In 1733, the then

Chancellor of Exchequer Walpole came with the leather bag in the
parliament to present the annual statement of income and expenditure,
and when he opened bag people used the term he is opening the budget. Thus,
the term budget became popular.

• Budget is a financial statement of the government comprising

expenditures and revenues for a year. It is both economic as well as political
document. It is a mirror to look into development activities undertaken by the
government, which sets a framework for policy formulation and implementation.
Budget document is a good source of public information on past activities,
current decisions, and future prospects.
 A good budget document contains:

• (a) overall development policy,

• (b) size and composition of revenue and expenditure, and policy,

• (c) size and composition of external and internal borrowings, and policy,

• (d) whether budget is deficit or surplus and how is deficit covered and surplus
disposed of?

• (e) actual of the previous year, revised estimates of the current year and
estimates for the next fiscal year.

The main components of budget are government expenditures and

government revenues. The expenditures are classified into:

• (a) object classification,

• (b) functional classification

• (c) economic classification.

• The object classification includes expenditure on personal compensation and

benefits; travel and transportation of persons and things; communication,
utilities and rent; printing and reproduction; supplies, and materials; equipment;
grant subsidies and contributions; insurance claims and indemnities, and
reimbursable etc.

• Functional classification expenditures on general is public comprised of

services and economic services. The general public services include:
expenditure on defence, education, health, social security and welfare, housing
and community amenities, and other community and social services. Likewise,
economic services consist of expenditures on agriculture, mining,
manufacturing, electricity roads, water transport, railways, communications,
interest on the public debt and so on.

• Economic classification consists of:

• (a ) current expenditures,

• (b) capital expenditure, and

• (c) principal repayment.

The current expenditures include expenditures on goods and services such as

wages and salaries, other purchases of goods, interest payments, subsidies and other
current transfers. Capital expenditures include acquisition of new and existing fixed
assets, purchase of stocks (inventories), purchase of land and intangible assets, and
capital transfers.

Revenues are classified into: tax andnon-tax revenues.

⚫ Tax revenues constitute both direct and indirect taxes. The premier direct taxes
are on net income, property, and capital gains. Major indirect taxes include taxes
on goods and services (VAT, excise etc), taxes on international trade and
transactions (export and import duties).

⚫ Non tax revenues constitute income from public enterprises, sales of

government property, administrative fees, fines, penalties and royalties etc.

Elements Of Budget

• Elements Of Budget:

• Close to reality: despite being an estimate, it should be based on reality

primarily on the basis of the experience of the previous year.

• Simple and obvious: Since this is a public document, all who are interested
should easily get the required information after looking on it.
• Flexibility: Not only income and expenditure estimates are there but also the
policies and programs of the government. Thus, should have the quality of
flexibility.

• Single fund: A single fund of the government should be established there for
all revenues and expenditures.

• Extensive: Should be in detail about each item of revenue and expenditure.

• Publicity: it is made public and all the stakeholders are free to comment on
this.

• Annularity: Prepared for one fiscal year.

• Principles of budget:

• Balanced budget principle: Classical economists opine that government

budget should be balanced that means expenditure (G) should be equal to
revenue (T). If not followed, either government has to borrow internally or
externally or has to increase the tax. Supporters of balanced budget argue
that unbalanced budget creates disturbances in economy.

• Provide sound financial management

• Focus on objectives and polices

• Most effective use of finance

• Activities planned in advance

• Delegation of authority and responsibility for execution of budget

• Coordinating efforts of various departments

• Setting targets

• Prepare under the supervision and direction

Principle Of Unbalanced Budget: A budget deficit is incurred when

expenditures exceed taxes and other revenues for a year. And a budget surplus
occurs when all taxes and other revenues exceed expenditures for a year.
Though unbalanced means both surplus or deficit budget, a number of
economists refer to deficit budget as unbalanced budget. Keynes has supported
this principle arguing that along with the higher government expenditure, there
will be multiplier effect in the economy.
3. Public vs Private Goods

Public goods, as the name suggests, are for the facility and welfare of the public
in general for free of cost.

Whereas, private products are the ones which are sold by private companies to
earn profits and fulfil the needs of the buyers. This is a significant difference
between these two types of goods.

However, both public goods and private goods are for the consumer’s benefit;
they differ drastically from each other. But, where public goods benefit the mass
population, private products are only for those who have affordability. To know
these differences in detail, read below
Important terms for Understanding the Concept of Goods
What is rivalry and excludability?
Two important concepts when we are thinking about classifying goods as private or
public goods are the concepts of rivalry and excludability.
• A good is rivalrous
• if one person consuming it 'uses it up', meaning someone else cannot
consume it.
• A good is excludable
• if you can prevent somebody from using it.
Types of Goods
• There are four types of Goods:
• Private Goods:
• Common Goods:
• Club Goods
• Public Goods:
 Private Goods:
The products which are rival and excludable at the same time as clothes, cosmetics
and electronics are termed as private goods.
 Common Goods:
These goods are though rival but are non-excludable, including a public library and
playgrounds which can be used by anyone. Also, usage by one person or team
restricts its usage by the other person or group.
  Club Goods:
Such goods are though excludable but are not rival like the telephone and electricity
which are both chargeable, but many people can relish these services
simultaneously.
 Public Goods:
The goods which are non-rival and non-excludable at the same time, for instance,
road, bridge and dams are called public goods.
What are Public Goods?
 Public goods are the commodities or services provided by the nature & the
government of a country, free of cost or by taxing the few people to offer mass
benefit to the public in general.
Characteristics of Public Goods
 These commodities or services develop the infrastructure and living standard of
a country. To know more about public goods, let us go through its following:
Non-Rival:
 The public goods are non-competitive, i.e. it can serve many people at the same
time without hindering the usage of one another.
Non-Excludable:
 These goods are usually free of cost and can be used by anyone without any
restriction.
Non-Rejectable:
 The consumption of such goods cannot be dismissed or unaccepted by the
public since it is available collectively to all the people.
Free-Riding:
 The goods categorized under public goods benefit even those who have not
paid for it. Such people are termed as free-riders.
Advantages of Public Goods
 These goods can be used by many people or the public simultaneously. These
are usually free of cost and can be utilized by the rich and poor equally.
 The primary objective of such goods is to provide essential amenities to the
public in general, along with promoting social welfare and development of the
nation as a whole.
Disadvantages of Public Goods
 Let us see some of the limitations of public goods, elaborated below:
  For providing public goods to be used by all the people, government charges
tax from a few consumers while the others are free to use the services or
commodities even without paying for it. They are called free-riders. Some also
find a way for tax evasion. This increase the cost of production of such products
for the government and leads to market failure.
 Moreover, these facilities or benefits are taken for granted and misused or not
maintained by some people since they have not paid for it and did not realize
its value.
What are Private Goods?
 Private goods are the products or services which are manufactured or
produced by the companies owned by entrepreneurs who aim at meeting
customer’s requirement to earn profits through the trading of such goods in the
free market.
Characteristics of Private Goods
Private goods serve the personal needs of consumers. Following are the
various characteristics of these goods:
 Rival: The private products involve rivalry or competition among the consumers
for its usage since the consumption by one person will restrict its use by another.
 Excludable: These goods involve cost, and therefore the non-payers are
excluded from the consumption.
 Rejectable: Private goods can be unaccepted or rejected by the consumers
since they have multiple alternatives and the right to select the product
according to their preference.
 Traded in Free Market: Such goods can be freely bought and sold in the market
at a given price.
 Opportunity Cost: These goods have an opportunity, i.e. the consumer has to
let go of the benefit from a similar product while selecting a particular private
commodity.
Disadvantages of Private Goods
 Now, to find out the drawbacks of private goods, read below:
 Private goods are manufactured by the private sectors, and therefore they
function on demand and supply concept. These products or services goes on
decreasing with each use since the goods bought by one consumer cannot be
purchased by the other.
  These goods create discrimination among the rich and the poor or the payers
and the non-payers since they limit the access for those who don’t have
purchasing power.
4. MARKET FAILURE AND EXTERNALITIES
What is a “Market Failure”?
Market failure refers to the set of conditions under which a market economy fails
to allocate resources efficiently.
But, due to various reasons when market mechanism is unable to make fair play
or interaction of demand and supply, that is the situation of market failure.
When the market failure occurs?
At times when markets fail to:
▪ Allocate resources efficiently.
▪ Provides goods beneficial to society.
▪ Stop production and consumption of harmful goods.
Market Failure can occur in a number of ways:
o Some products may be under produced or not at all.
o Some good may be over produced.
o The production or consumption of some products affects third parties.
Market Failure Examples:
• Pollution, air, water, soil
• Traffic congestion
• Deforestation and loss of biodiversity
• Health problems associated with consumption of tobacco, alcohol and illicit
drugs
• Depleted fish stocks
• Global Warming
Sources of Market Failure
▪ Market imperfections
▪ Public Goods
▪ Externalities
▪ Inequalities
Market imperfections
 Market Power/Monopoly
➢ Inefficiencies
➢ Higher prices
  Incomplete Information
➢ Imperfect knowledge of the market can also cause market failure
➢ The lack of fully informed decision making might lead to the market
failure.
Externalities
▪ A consequence of an economic activities that are experienced by unrelated third
parties.
▪ Factors whose benefits (external economies) and costs (external
diseconomies) are not reflected in the market price of goods and services.
▪ Externalities are a loss or gain in the welfare of one party resulting from
an activity of another party, without being any compensation for the losing party.
▪ Externalities result from differences between private and social costs or benefits
▪ Externalities can be positive or negative:
➢ Positive – 3rd parties benefit from the production and/or
consumption of goods and services.
➢ Negative – 3rd parties bear spill over cost from the production
and/or consumption of goods and services.
Negative externalities
Negative externalities mean that social costs (have to compensate) are higher so
the new supply curve should be S1 and equilibrium moved to P1.
External Costs / Negative externalities
External costs created by businesses can impact the environment in the following
ways:
Urban blight – excessive development and inappropriate developments mean the
environment is visually less attractive, loss of farmland
Production and disposal of waste – this could include an increase in litter and
rubbish from packaging
Use of energy – absorb the facilities of future generation if people don’t adopt the
sustainable energy plan.
Pollution
▪ Noise – from cars, lorries, factories etc.
▪ Air – emissions from cars and delivery vehicles
▪ Land, Sea, Water
Positive Externalities
If the business was supplying products ignoring social benefits (they get advantage)
so that the initial supply curve S1 shift to S.
External Benefits / Positive externalities
External benefits are advantages a business brings to the local community when it
locates its business in a particular area. These benefits will be positive for the local
community.
Examples:
▪ Employment
▪ Quality of life
▪ Providing a service
▪ Regeneration of land
Externalities and Market failure
Externalities
can lead to market failure if the pricing mechanism fails to account for the social
costs and benefits of production.
Inequalities

❖ In market economies, an individual’s ability to consume goods and services is

dependent on their income/wealth.

❖ An uneven distribution of income/wealth within an economy can result in an

unsatisfactory allocation of resources and therefore market failure prevail.

❖ In many developing countries, income inequality is great therefore resulting in

misallocation of resources.

❖ Market imperfections can be caused by monopolies, imperfect market

knowledge and factor immobility which can result in misallocation of resources.

❖ Public goods are goods that are provided by the government e.g. street lighting.

❖ Externalities are caused because of social benefits/costs .

❖ Positive externalities occur where social benefits are greater than private
benefits

❖ Negative externalities occur where social costs are greater than private
costs
 ❖ Inequalities in wealth and income distribution may result in a misallocation of
resources as the rich consume more.
Types of market failure
Failure by the market structure
▪ Due to number of buyers and sellers
▪ Entry barriers (syndicate, licensing, etc)
▪ Natural monopoly or market power
(There is also equal chances of providing the goods and services at the competitive
rates so that government intervention is necessary)
Failure by incentives
▪ Due to externalities – difference in social and private costs & benefits
Government’s Response to Market Failure
 Regulatory role
 Allocative role
 Distributive role
 Stabilisation role
Regulatory response to structure failure
i. Control over industry structure – by antitrust policies, for instance, telecom
industry, diary industry, etc
ii. Direct control – by fixing the quantity and price of the products and services.
Regulatory response to incentive failure

Incentive
failure

Due to Due to
positive negative
externalities externalities

Granting
Subsidies Patent system operating Operating
Tax policies
grants control
Patent
It is the special right grant to the producers to use or sale any invention to any firm
for the specific period. The main objective is to promote the invention and innovation.
Arguments on patent system
For
Important incentives
Necessary incentives
Invention disclosed
Against
Less use
Ineffective
Perversion
Subsidy
The government also respond to the market failure by providing subsidies to the
private business firm.
It may be two types:
Indirect Subsidy like :
Construction of road,
Providing of Maintenance cost etc
Direct subsidy like:
Special tax treatment (ITC),
Direct payment etc
Granting the operating rights
Incentives given to the regulated firms to provide services in the public interest. It
is the grant provided by the government to the firm to operate.
For instance, license of media, banks, educational institutions, etc
Operating control
The control impose by the government in order to limit the activities of the business
firm.
a. Control on environment pollution
b. Control on food products
c. Price control
d. Industrial work condition/Quality of Work Life
Protection of minority groups
Tax policy
The tax policies are like as negative subsidies to limit the unwanted activities in the
market.
For instance, environmental taxes for emission whereas ITC for pollution control
devices, etc.
Allocative Role
The government must determine how some resources are allocated.
Collective goods such as roads, education and health.
Distributive Role
The free market outcome results in an unfair distribution of income, so the will
intervene to assure everyone has a sufficient income.
They do this through benefits, state housing and educational courses.
Stabilisation Role
The government intervenes in the market to ensure there is steady growth.
They do this through monetary and fiscal policy.
Government Intervention
✓ Taxes – a compulsory payment to the government.
✓ Subsidy – a payment by government to firms to keep costs low.
✓ Transfer payments – a payment made by the government with nothing in
return.
5. Taxation
Taxation refers to the practice of a government collecting money from its citizens
or a legal entities to pay for public services. This money is collected by imposing taxes
on individual or a corporate entities. Tax is the basis for taxation.
 Tax is a financial charges imposed on individual or company by a CG or SG .
 Collected Tax amount is used for building nation (infrastructure & other
development ) to increase arms and ammunition for defense of country and for
other welfare related work.
 That’s why it is said that “Taxes are paid nation are made”
Significance of taxation
 Primary purpose:- generates funds and revenues use to defray expenses
incurred by the government in promoting the general welfare of its citizen.
 Other purpose:-
❑ To equitably contribute to the wealth of nation
❑ To promote new industries
❑ To protect local bodies
Types of Tax :
❑ On the Basis of Volume
➢ Single Tax System
➢ Multiple Tax System
❑ On the Basis of Form
➢ Direct Tax
➢ Indirect Tax
❑ On the Basis of Income/Consumption Method
Proportional Tax
➢ Progressive Tax
➢ Regressive Tax
➢ Degressive Tax
On the Basis of Volume
➢ Single Tax System
Single tax mean that only one kind of tax. It does not mean tax on only one person.
In other words, a tax on one thing, i.e., on one class of things or one class of people.
➢ Multiple Tax System
A multiple tax refers to the tax system in which taxes are levied on various items. A
modern economy is not one objective economy. It tries to forge ahead simultaneously
along the paths of growth, equitable distribution of income & wealth, economic
stabilization and soon.
On the Basis of Income/Consumption Method
➢ Proportional Tax
Proportional tax is the mechanism in which the taxing authority charges the same
rate of tax from each taxpayer, irrespective of income. This means that lower, middle
or upper class people pay same amount of tax.
➢ Progressive Tax
A progressive tax is one in which the tax authority charges more taxes as the
income of the taxpayer increases. A higher tax is collected from the taxpayers who
earn more & lower taxes from taxpayers earnings less.
➢ Regressive Tax
Regressive tax is a tax that takes a larger percentage from low-income people than
from high-income people. A regressive tax is generally a tax that is applied
uniformaly.
➢ Degressive Tax
 A degressive tax is one on which tax is progressive up to a certain limit, after that it
is proportional, i.e., charged at flat rate.

On the Basis of Form

▪ Direct Taxes
Direct tax are those which are paid by the person on whom these are imposed and
real burden is also borne by them, such as taxes on income, wealth, consumption,
gift, expenditure etc.
➢ Income Tax
➢ Capital Gain Tax
➢ Securities Transaction Tax(STT)
➢ Perquisite Tax
➢ Corporation Tax
➢ Gift Tax
➢ Expenditure Tax
➢ Wealth Tax
Income Tax
 Income tax act came into force w.e.f 1st april, 1961.
 Income tax is charged on the total income of every person for the privous year.
  Every individual whose total income exceeds taxable limit has to pay income
tax based on prevalling rates applicable time to time.
 It is levied and collected by the central government.
 Income tax is a very important source of income of the central government.
For FY 2024-2025 income tax rates are : Income Tax Slabs For 2024-25
For male and female
Income Tax Rate
Up to Rs 3,00,000/- Nil
Rs 3,00,001/- to Rs 7,00,000/- 5%
Rs 7,00,001/- to Rs 10,00,000/- 10%
Rs 10,00,001/- to Rs 12,00,000/- 15%
Rs 12,00,001/- to Rs 15,00,000/- 20%
Rs 15,00,000 above 30%+surcharge
For resident individual of 60 Years and above
Up to Rs 2,50,000/- Nil
Rs 2,50,001/- to Rs 5,00,000/- 5%
Rs 5,00,001/- to Rs 10,00,000/- 20%
Rs 10,00,001/- to Rs 100,00,000/- 30%
Rs 100,00,000 above 30%+surcharge
➢ Capital Gain Tax
Capital Gain tax as name suggests it is tax on gain in capital.
If you sale property, shares, bonds & precious material etc. &
earn profit on it within predefined time frame you are supposed
to pay capital gain tax. The capital gain is the difference between
the money received from selling the asset & the price paid for it.
➢ Securities Transaction Tax (STT)
STT which is applicable on every transaction done at stock exchange. That means
if you buy or sell equity shares or derivative instruments this tax is applicable.
➢ Perquisite Tax
Earlier to perquisite Tax we had tax called FBT ( Fringe Benefit Tax) which was
abolished in 2009 this tax is on benefit gives by employer to employee.
eg: if your company provides you non –monetary benefit like car with driver , club
membership , ESOP (employee stock ownership plan) etc.
➢ Corporation Tax
 Corporate taxes are annual taxes payable on the income of the corporate operating
in India. For the purpose of taxation, companies in India are broadly classified into
domestic companies and foreign companies.
➢ Gift Tax
Gift tax in India is regulated by the Gift Tax Act which was constituted on 1 st April,
1958. If you receive gift form someone it is clubbed with your income and you need
to pay tax on it .
➢ Expenditure Tax(consumption tax)
It is a tax which is assessed on expenditure or amount spend. It is defined as a fee
which is charged & collected by govt. on a commodity, activity or income.
➢ Wealth Tax
It is imposed on property of individual depending upon the value of property.
Indirect Tax
Indirect tax is a tax collected by an intermediary (such as a retail store) from the
person who bears the ultimate economic burden of the tax (such as the customers).
This tax is shifted by the taxpayer to someone else. An indirect tax may increase the
price of a good so that consumers are actually paying the tax by paying more for the
products.
➢ Central Sales Tax
➢ Entertainment Tax
➢ Customs Duty
➢ Central Excise Duty
➢ Service Tax
➢ Value Added Tax (VAT)
Central Sales Tax
 Central Sales Tax came into force on 1.7.1957.
 Central Sales Tax is applied to whole of the India including Jammu and Kashmir.
 Central Sales Tax in India is a form of tax that is imposed by the Government
on the sale or purchase of a particular commodity within the country.
 Central Sales Tax is imposed under both, CG and SG.
 Rate of CST is 2% or less.
 Eg: prices of comoditity
Entertainment Tax
 It is charged form cinema owners, who recover it form cinema viewers.
 In other words tax imposed by SG on every financial transaction that is related
to entertainment.
 Tax rates vary from state to state from 0%-110%.
 Eg: Movies ticket, Show exhibition, Cable Services, DTH service.
The Customs Duty (1962)
 It applicable on goods imported into India and exported from India.
 It is levied by the central government.
 It is applicable to whole of the India.
 One has to pay duty on goods import form a foreign country into India.
 That tax payable at the port of entry (like the airport).
 Its main purpose is to prevent illegal import and export of goods.
 This duty rate various based on nature of item.
Central Excise Duty
 It falls under the Excise Duty Act, 1944.
 It is charged on such excisable goods that are manufactured in India for
domestic consumption.
 It is paid by the producer of goods, who recovers it form wholesalers & retailers.
 It also knows CENVAT (Central Value Added Tax).
 Excise is a duty not tax.
 Tax rate varies from product to product.
Service Tax (sec. 67)
 Service tax is levied on aggregate amount charged by the service provider on
the receiver.
 The tax is permitted to be paid on value received.
 It is applicable to whole India except J&K.
 It has no separate act. It falls under the Finance act, 1994.
 It was imposed by Dr. Manmohan Singh.
 The service tax rate was 15%.
Value Added Tax (VAT)
 It was introduced under Indian taxation system on 1 april,2005.
 The Value Added Tax or VAT, is a tax on the added value of a good as it moves
through the supply chain to the end consumer.
 In effect, the tax is levied on the gross margin at each point in the manufacturing
– distribution – sales process.
 It is charged by registered VAT business.
  The tax rate varies from nil – 12.5%.
Other Tax
➢ Toll Tax
➢ Stamp Duty, Registration fees, Transfer Tax
➢ Education Cess, Surcharge
➢ Dividend Distribution Tax
6. PUBLIC EXPENDITURE
Causes Wagner’ Law: extensive and intensive activities
1. Growth of population
2. Defence expenditure
3. Administrative machinery
4. Planning & economic development
5. Urbanization
6. Rural development
7. Welfare state
8. Interest payment
9. Subsidies
10. Inflation
11. Natural calamities
1. Growth of population
With increasing population the govt. has to spend more on various public services
like schools, offices, housing, sanitation, police, education, health etc.
2. Defence expenditure
One of the important functions of a govt. is to defend the country from foreign
aggression. Increasing defence expenditure is a serious problem for developing
countries like India because of the hostile neighbours. It has to spend large
proportion of GDP on maintaining Air force, Navy and Army. The risk of terrorist
attacks has increased this expenditures.
3. Administrative machinery
The number of ministries and govt. departments has increased over the years in
India. India is the largest democracy in the world. A democratic country has to
spend large amount of money on elections and democratic institutions at central,
state and local levels. It has to spend on legislatures, parliament, embassies etc.
every year.
4. Planning & economic development
The number of ministries and govt. departments has increased over the years in
India. India is the largest democracy in the world. A democratic country has to
spend large amount of money on elections and democratic institutions at central,
state and local levels. It has to spend on legislatures, parliament, embassies etc.
every year.
5. Planning & Economic development
In developing countries like India, the govt. has been making lot of expenditures
for the planned economic development of the country. The govt. has given lot of
importance to the development of infrastructure under different plans. Setup of
large and basic industries like iron &steel industry, heavy engineering, machinery,
chemical industries and number of small-scale industries required lots of
expenditures.
6. Urbanization
Development leads to urbanization and growth of cities and towns. Due to this the
expenditures on civil administration like water supply, sanitation, electricity,
transport, maintenance of roads, railways, public park, courts have all increased.
7. Rural development
In developing countries, the govt. has to spend a lot of money on rural
development. It has to undertake programs like community development, credit to
farmers, marketing and warehousing facilities, irrigation facilities, power supply etc
for agricultural development.
8. Welfare state
Modern states are welfare states. The main objective of the welfare state is to
promote economic, political and social well-being of its citizens. For this purpose,
govt. has to conduct number of activities.

7. (Goods and Service Tax) GST

What is GST?
It is a single indirect tax for the whole nation, one which made India a unified
common market. It is a single tax on the supply of goods and services, right from
the manufacturer to the consumer.
 Countries Standard rates of GST

India’s GST slab rates

The government has categorized items in five major slabs –
0%
5%
12%
18%
28%
What are the proposed taxes to be subsumed under GST?
The central taxes proposed to be subsumed under CGST include:
 Central Excise duty
 Additional Excise duties
 Excise Duty levied under the Medicinal and Toiletries Preparation Act
 Service Tax levied under Chapter V of the Finance Act, 1994
 Countervailing Duty (CVD)
 Tax Surcharges
 Special Additional Duty of Customs (SAD)
 Central Sales and Central Cesses.
 Additional Customs Duty, commonly known as
The state taxes proposed to be subsumed under GST are:
VAT/Sales tax
Entertainment tax (unless it is levied by the local bodies)
Luxury tax
Taxes on lotteries, betting and State cess and surcharges in so far as they relate to
supply of goods and services
Entry tax
Octroi/Local body tax
Structure of CGST
CGST
CGST is a tax levied on Intra State supplies of both goods and services by the
Central Government and will be governed by the CGST Act.
Governed by the Central Government.
It will include following taxes-
1. Central Excise Duty
2. Service tax
3. Countervailing duties
4. Surcharge, education &Secondary/Higher Education Cess.
5. Additional excise Duty
Structure of SGST
SGST
SGST is a tax levied on Intra State supplies of both goods and services by the State
Government and will be governed by the SGST Act.
Governed by the Central Government.
It will include following taxes-
1. VAT/Sales Tax
2. Purchase tax
3. Entertainment tax
4. Luxury Tax
5. Lottery Tax
Structure of IGST
IGST
IGST will be applicable on any supply of goods and/or services in both cases of
import into India and export from India.
 IGST is designed to ensure seamless flow of input tax credit from one state to
another.
 It is designed so that a state doesn’t have to deal with every other state to settle
the tax amounts.
 Therefore if inter-state sales (i.e., sale from one state to another state) is made
then the seller will charge IGST in place of CGST + SGST.
For example: A dealer in Maharashtra sells goods to its dealer in Rajasthan
worth Rs.1,00,000. The GST rate is 18% comprising of CGST rate of 9% and
SGST rate of 9%. In such a case the dealer has to charge Rs.18,000 as IGST.
Structure of UTGST
UTGST
The UTGST bill is presented in respective states government to implement as
UTGST Act.
The Main purpose of UTGST bill is to apply a collection of tax on every Intra UT
supply of goods and service in the union territories in absence of legislature and
has similar properties as that of SGST.
Goods and Services Tax Network

Goods and Services Tax Network (GSTN) It was incorporated on March 28, 2013.
It is a Section 8 (under new companies Act, not for profit companies are governed
under section 8), non-Government, private limited company.
Objective:
GSTN has been entrusted with the responsibility of building Indirect Taxation
platform for GST to help tax payers prepare, file, rectify returns and make payments
of your indirect tax liabilities.
It also provides IT infrastructure and services to the Central and State Governments
GST Council
Nature of GST Council
The GST Council will be quasi-legislative–cum– administrative body because it
functions both legislative as well as administrative duties as assigned by the
Parliament to it.
 Members of GST Council
• Union Finance Minister- Chairperson
• The Union Minister of State, in-charge of Revenue of finance-Member
• The Minister In-charge of finance or taxation or any other Minister nominated by
each State Government Members
GST rates for a composition dealer

✓ The rates specified above are only for taxable supplies made by the taxpayer.
✓ Exempted goods are to be excluded while calculating tax.
Advantages & Disadvantages of GST
Advantages of GST
1. GST eliminates the cascading effect of tax
2. Higher threshold for registration
3. Composition scheme for small businesses
4. Simple and easy online procedure
5. The number of compliances is lesser
6. Defined treatment for E-commerce operators
7. Improved efficiency of logistics
8. Unorganized sector is regulated under GST
Disadvantages of GST
1. Increased costs due to software purchase
2. Being GST-compliant
3. GST will mean an increase in operational costs
4. GST came into effect in the middle of the financial year
5. GST is an online taxation system
6. SMEs will have a higher tax burden