Public Finance Solved Question Papers: Nov' 2015 | Dibrugarh University | B.Com 5th Sem

a)      What is the prime source of tax revenue of Assam?              Previously VAT, Now GST

b)      ‘Land Revenue’ is a source of revenue of the Union government. (Write Yes or No)          No

c)       Write the full form of VAT.                  Value Added Tax

d)      Mention one canon of taxation.        Canon of certainty          

e)      Mention one function of the Finance Commission of India. 

f)       Mention one principle of public debt management.

g)      Mention a tax levied by Municipal Corporation.                         Property Tax

h)      Mention one demerit of Indirect tax.                             High tax rate

2. Write short notes on (any four):                           4x4=16

a)      Role of public finance.

Ans: There is great socio-economic significance of public finance, both in developed and developing countries. In developed country countries, price-stability and full employment are the main economic goals of public finance. In developing countries, rapid economic development through capital formulation and creation of infrastructure art the important goals of public finance operations. Socially equitable distributions of income, reduction of inequalities in income are some important functions of public finance operations. The importance of public finance can be clarified from the following functions.

1. TO INCREASE THE RATE OF SAVING AND INVESTMENT: Most of the people spend their income on consumption. Saving is very low so the investment is also low. The government can encourage the saving and investment.

2. TO SECURE EQUAL DISTRIBUTION OF INCOME AND WEALTH: Unequal distribution of income and wealth is the basic problem of the under developed countries. The rich are getting richer and richer while the poor are becoming poorer and poorer. So for the equal distribution of income and wealth there is need of government.

3. OPTIMUM ALLOCATION OF RESOURCES: Fiscal measures like taxation and public expenditure programmers can greatly affect the allocation of resources in various occupation and sectors.

4. CAPITAL FORMULATION AND GROWTH: Fiscal policy will be designed in a manner to perform two functions as of expanding investment in public and private enterprises and by diverting resources from socially less desirable to more desirable investment channels.

5. PROMOTING ECONOMIC DEVELOPMENT: The state can play a prominent role in promoting economic development especially through control and regulation of economic activities. It is fiscal policy which can promote economic development.

b)      Characteristics of ‘zero-base budgeting’.

Ans: Features of Zero Base Budgeting

a) Zero-base: ZBB works on the principle that every year, the projected expenditure for each project/programme must be start from zero. It means all budget requests should be considered freshly for every year with cost-benefit analysis.ZBB never uses the previous year’s amounts so as to eliminate the past mistakes.

b) Focus is on activities/programmes: The focus is on programs or activities instead of functional departments.

c) Best suited to discretionary costs: ZBB is best suited to discretionary costs, for example, advertising, research development and training costs.

d) Decision packages: A unit makes its budget request by preparing ‘decision packages’ for each activity it undertakes. Funding decisions are based on activity.

e) Cost-effective: ZBB helps policy makers to achieve more cost-effective delivery of public services.

f) Bottom-up approach: ZBB starts from the lowest level activity and then moves upwards.

g) Accountability: It makes the functionaries accountable for the amount they are responsible for. ZBB model was formulated to correct certain flaws of traditional budgeting system, which does not allow authorities to discover optional processes.

c)       Classification of public revenue.

Ans: Different classifications of public revenue

Different economists have given various classifications of public revenue. Looking from different angles, they classified public revenue in one manner or another. The following are the main classifications given by different economists or authors:

                    I.            Adam Smith’s Classification: Adam Smith was of the opinion that revenue of the government ultimately depends on the property in possession of the inhabitants of the country and the extent to which the state has control over the wealth of the country. Adam Smith classified public revenue into the following two categories:

1)      Revenue from Public: Revenue from public includes all those sources which are generally known as the sources of revenue of the government from the public.

2)      Revenue from State Property: Revenue from state property includes revenue obtained from public enterprises as well as those revenues which are derived from the property in possession of the state.

This classification as given by Adam Smith does not serve the purpose of modern finance. Hence it is subject to criticism.

                  II.            Bestable’s Classification: Like Adam Smith, Bestable also classified public revenue into the following two categories:

1)      Those incomes which the state receives from its various functions just like a private individual or corporation. It includes all the incomes which the state derives in the form of fees and prices.

2)      Thos incomes which the state derives in its own capacity as ‘state’. It includes taxes and levies.

Like Adam Smith this classification is also limited and narrow.

                III.            Adam’s Classification: Prof. Adam classified public revenue into the following three categories:

1)      Direct Revenue: It includes income which the state derives from public land, public enterprises like rail, roads, highways, posts and telegraph and all other revenues which the state derives on account of the ownership of productive enterprises.

2)      Derivative Revenue: It includes the income derived from the citizens, such as, taxes, fees assessments, fines, penalties etc.

3)      Anticipatory Revenue: It includes income from the sale of bonds or other forms of commercial credit. It also includes income from the treasury notes.

This classification suffers from the defect of overlapping and there is no clear-cut demarcation of different heads. It has a wide range of revenues, as it includes both commercial and administrative revenues in one group in spite of the fact that both are fundamentally different in nature. Hence this classification is also not satisfactory. 

d)      Taxable capacity.

Ans: Taxable capacity refers to the maximum capacity that a country can contribute by way of taxation both in the ordinary and extraordinary circumstances. It represents maximum limit to which the government can tax the people of the country. If the government exceeds this limit, it shall result in over taxation, which, besides being injurious to the long-term interests of the community, may pose a serious threat, to the political stability of the country concerned. The concept of taxable capacity, thus, indicates the limit to which the government can tax the citizens.

e)      Evils of deficit financing.

Ans: Evils of Deficit Financing

Deficit financing is not free from its defects. It has its adverse effect on economy. Important evil effects of deficit financing are given below:

1. Leads to inflation: Deficit financing may lead to inflation. Due to deficit financing money supply increases & the purchasing power of the people also increase which increases the aggregate demand and the prices also increase.

2. Adverse effect on saving: Deficit financing leads to inflation and inflation affects the habit of voluntary saving adversely. Infect it is not possible for the people to maintain the previous rate of saving in the state of rising prices.

3. Adverse effect on Investment: Deficit financing effects investment adversely when there is inflation in the economy trade unions make demand for higher wages for that they go for strikes and lock outs which decreases the efficiency of Labour and creates uncertainty in the business which a decreases the level of investment of the country. 

4. Inequality: In case of deficit financing income distribution becomes unequal. During deficit financing deflationary pressure can be seen on the economy which make the rich richer and the poor, poorer. The fix wage earners are badly affected and their standard of living reduced thus gap between rich & poor increases. 

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Also Read:

1. Public Finance Notes

2. Public Finance Question Papers (Dibrugarh University)

3. Public Finance Solved Question Papers (Dibrugarh University)

4. Public Finance MCQs

5. Public Finance Important Questions for Upcoming Exam

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3. (a) What is ‘public finance’? Distinguish between public finance and private finance.  3+9=12

Ans: Meaning and Definition of Public Finance

Public finance is a study of income and expenditure or receipt and payment of government. It deals the income raised through revenue and expenditure spend on the activities of the community and the terms ‘finance’ is money resource i.e. coins. But public is collected name for individual within an administrative territory and finance. On the other hand, it refers to income and expenditure. Thus public finance in this manner can be said the science of the income and expenditure of the government.

Different economists have defined public finance differently. Some of the definitions are given below. 

According to prof. Dalton “public finance is one of those subjects that lie on the border lie between economics and politics. It is concerned with income and expenditure of public authorities and with the mutual adjustment of one another. The principal of public finance are the general principles, which may be laid down with regard to these matters.

According to Adam Smith “public finance is an investigation into the nature and principles of the state revenue and expenditure”

To sum up, public finance is the subject, which studies the income and expenditure of the government. In simpler manner, public finance embodies the study of collection of revenue and expenditure in the public interest for the welfare of the country

Public Finance and Private Finance

Generally, the word ‘finance’ is loosely used for both the public and private finance. By private finance, we mean the study of the income, debt and expenditure of an individual or a private company or business venture. On the other hand public finance deals with income, expenditure and borrowings of the government. There are both similarities and dissimilarities in governmental financial operations as compared to the monetary operations of private businessman. An individual is interested in the utilisation of labour and capital at his disposal to satisfy social wants. In short, both private finance and public finance have almost the same objective of satisfaction of human wants. Again, private finance stresses individual gains whereas public finance attempts at promoting social welfare of the whole community. These two view points are correct to greater extent only because of their similarities as well as dissimilarities between both.

Similarities between Public and Private Finance

1.       Both the State as well as individual aim at the satisfaction of human wants through their financial operations. The individuals spend their income to satisfy their personal wants whereas the state spends for the satisfaction of communal or social wants.

2.       Both the States and Individual at times have to depend on borrowing, when their expenditures are greater than incomes.

3.       Both Public Finance and Private Finance have income and expenditure. The ultimate aim of both is to balance their income and expenditure.

4.       For both kinds of finances, the guiding principle is rationality. Rationality is in the sense that maximization of personal benefits and social benefits through corresponding expenditure.

5.       Both are concerned with the problem of economic choice, that is, they try to satisfy unlimited ends with scarce resources having alternative uses.

Dissimilarities between Public and Private Finance

1.       The private individual has to adjust his expenditure to his income. i.e., his expenditure is being determined by his income. But on the other hand the government first determines its expenditure and then the ways and means to raise the necessary revenue to meet the expenditure.

2.       The government has large sources of revenue than private individuals. Thus at the time of financial difficulties the state can raise internal loans from its citizens as well as external loans from foreign countries. In the case of private individual, all borrowings are external in nature.

3.       The state, when hard pressed, can resort to printing of currency, as an additional source of revenue. In fact, during emergencies like war, it meets its increased financial obligations by printing new currency. But an individual cannot raise income by creating money.

4.       The state prepares its budget or estimates its income and expenditure annually. But there is no such limitation for an individual. It may be for weekly, monthly, or annually.

5.       A surplus budget is always good for a private individual. But surplus budgets may not be good for the government. It implies two things. a) The government is levying more taxes on the people than is necessary and b) the government is not spending as much as the welfare of the people as it should.

6.       The individual and state also differ in their motives regarding expenditure. The individuals hanker after profit. Their business operations are guided by private profit motive. But the states expenditure is guided by the welfare motive.

7.       An individual’s spending policy has very little impact on the society as a whole. But the state can change the nature of an economy through its fiscal policies.

8.       The pattern of expenditure in the case of private finance is often influence by customs, habits social status etc. The pattern of government expenditures is guided by the general economic policy followed by the government.

9.       Private Finance is always a secret affair. Individual need not reveal their financial transactions to anyone except for filing tax returns. But Public Finance is an open affair. Government budget is widely discussed in the parliament and out sides. Public accountability is an important feature of public finance.

10.   Individuals can plan to postpone their private expenditure. But the state cannot afford to put off vital expenditure like defence, famine relief etc.

Or

(b) Explain the principle of ‘maximum social advantage’ with the help of a diagram.     12

Ans: THE PRINCIPLE OF MAXIMUM SOCIAL ADVANTAGE

One of the important principles of public finance is the so – called Principle of Maximum Social Advantage explained by Professor Hugh Dalton. Just like an individual seeks to maximize his satisfaction or welfare by the use of his resources, the state ought to maximize social advantage or benefit from the resources at its command.

The principles of maximum social advantage are applied to determine whether the tax or the expenditure has proved to be of the optimum benefit. Hence, the principle is called the principle of public finance. According to Dalton, “This (Principle) lies at the very root of public finance” He again says “The best system of public finance is that which secures the maximum social advantage from the operations which it conducts.” It may be also called the principle of maximum social benefit. A.C. Pigou has called it the principle of maximum aggregate welfare.

Public expenditure creates utility for those people on whom the amount is spent. When the volume of expenditure is small with a slighter increase in it, the additional utility is very high. As the total public expenditure goes on increasing in course of time, the law of diminishing marginal utility operates. People derive less of satisfaction from additional unit of public expenditure as the government spends more and more. That is, after a stage, every increase in public expenditure creates less and less benefit for the people. Taxation, on the other hand, imposes burden on the people.

So, when the volume of taxation becomes high, every further increase in taxation increases the burden of it more and more. People under go greater scarifies for every additional unit of taxation. The best policy of the government is to balance both sides of fiscal operations by comparing “the burden of tax” and “the benefits of public expenditure”. The State should balance the social burden of taxation and social benefits of Public expenditure in order to have maximum social advantage.

Attainment of maximum social advantage requires that;

a) Both public expenditure and taxation should be carried out up to certain limits and no more.

b) Public expenditure should be utilized among the various uses in an optimum manner, and

c) The different sources of taxation should be so tapped that the aggregate scarifies entailed is the minimum.

Assumptions of this theory:

1. All taxes result in sacrifice and all public expenditures lead to benefit.

2. Public revenue consists of only taxes and there is no other source of income to the government.

3. The govt. has no surplus or deficit budget but only a balanced budget. 

Diagrammatical Explanation of the theory of maximum social advantages

In the above diagram, MSS is the marginal social sacrifice curve sloping upward from left to right. This rising curve indicates that the marginal social sacrifice goes on increasing with every additional dose of taxation.   MSB is the marginal social benefit curve sloping downwards from the left to right. This falling curve indicates that the marginal social benefit diminishes with every additional dose of public expenditure. The two curves MSS and MSB intersect each other at the point P. PM represent both marginal social sacrifice as well as marginal social benefit. Both are equal at OM which represents the maximum social advantage.

Criticism of the theory of Maximum Social Advantages

1. Non measurability of social sacrifice and social benefit: The major drawback of this principle is that it is not possible in actual practice to measure the MSS and MSB involved in the fiscal operation of the state.

2. Non applicability of the low of equimarginal utility in public expenditure: The low of equimarginal utility may be applicable to private expenditure but certainly not to public expenditure.

3. Neglect non-tax revenue: The principle says that the entire public expenditure is financed by taxation. But, in practice, a significant portion of public expenditure is also financed by other sources like public borrowing, profits from public sector enterprises, imposition of fees, penalties etc.

4. Lack of divisibility: The marginal benefit from public expenditure and marginal sacrifice from taxation can be equated only when public expenditure and taxation are divided into smaller units. But this is not possible practically.

5. Assumption of static condition: Conditions in an economy are not static and are continuously changing. What might be considered as the point of maximum social advantage under some conditions may not be so under some other.

6. Misuse of government funds: The principle of Maximum social advantage is based on the assumption that the government funds are utilized in the most effective manner to generate marginal social benefit. However, quite often a large share of government funds is misused for unproductive purposes

7. "The govt. has no surplus or deficit budget but only a balanced budget."- is an invalid assumption.

4. (a) What is ‘budget’? Give an account of the budgetary control system in India.          3+8=11

Ans: Meaning and Definitions of Budget

The term ‘Budget’ is said to have its origin from the French word ‘Bougettee’ which means ‘a small leather bag’. The bag itself is not important today. The thing the bag contains is an economic bill which is presented by the Finance Minister in the parliament every year. In this way, budget is the annual financial statement of the estimated receipts and expenditure of the government for a given period.

Different experts have defined budget in different words. Among them, the main definitions are given below:

According to C. L. King, “The budget is a fiscal plan by which expenditure may be balance against income.”

According to Rene Stourn, “The budget is a document containing a preliminary approval plan of public revenue and expenditure.”

According to P. L. Beaulieu, “It is a statement of the estimated receipts and expenses during a fixed period; it is a comparative table giving the amounts of the receipts to be realised and of the expenses to be incurred.”

According to P. F. Taylor, “Budget is the master financial plan of government. It brings together estimates of anticipated revenue and proposed expenditure for the budget years.”

In the Indian Constitution, “A budget has been referred to as the annual financial statement of the estimated receipts and expenditure of the Government of India or of a State Government in respect of a financial year.”

According to Prof. Dimock, “A budget is a balance estimate of expenditures and receipts for a given period of time. In the hands of the administration, the budget is the record of past performance, a method of current control and a projection of future plans.

From the above, we conclude that as per the Indian reference, “the budget is the annual financial statement of the estimated receipts and expenditure of the Government of India or of a State Government in respect of a financial year. It contains three sets of figures, the ‘accounts or the actual for the preceding year, the ‘revised estimates’ of the current year and the ‘budget estimate for the following year. The budget in India is divided into two parts, the revenue budget and capital budget. The revenue budget deals with the receipts from taxation, public enterprises etc. and the expenditure incurred from them. The capital budget is the statement of all capital expenditure and the borrowings to meet it.” In short, the budget reveals the basic character of the fiscal policy of the government.

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Also Read:

1. Public Finance Notes

2. Public Finance Question Papers (Dibrugarh University)

3. Public Finance Solved Question Papers (Dibrugarh University)

4. Public Finance MCQs

5. Public Finance Important Questions for Upcoming Exam

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BUDEGETARY CONTROL

Budgeting control is the process of determining various budgeting figures for the enterprises for the further period and then comparing the budgeted figures with the actual performance for calculating variances. First of all budgets are prepared and then actual results are recorded. The comparison of budgeted and actual figures will enable the management to find out discrepancies and take remedial measures at a proper time. The budgetary control is the continuous process which helps in planning and co-ordination. It provides a method of control too. A budget is a means and budgetary control is the end result.

According to Brown and Howard, “Budgetary control is a system of controlling costs which includes the preparation of budgets, coordinating and department and establishing responsibilities, comparing actual performance with the budgeted and acting upon results to achieve maximum profitability.

Wheldon characteristics budgetary control as “planning in advance of the various functions of a business so that the business as a whole is controlled”

J. Batty defines it as “A system which uses budgets as a mean of planning and controlling all aspects of producing and/or selling commodities and services”.

Objectives of Budgetary Control: The main objectives of budgetary control are as under:

1.       To ensure planning future by setting up various budgets. The requirements and expected performance of the enterprise are anticipated.

2.       To co-ordinate the activities of different departments.

3.       To operate various cost centres and departments with efficiency and economy.

4.       Elimination of wastes and increase in profitability.

5.       To anticipate capital expenditures for future.

6.       To centralize the control system.

7.       Correction of deviations from the established standards.

8.       Fixation of responsibility of various individuals in the organization.

Implementation of Budgetary Control

There are certain steps which are necessary for the successful implementation of a budgetary control system. They are as follows:

1.       Organization for Budgetary Control: The proper organization is essential for the successful preparation, maintenance and administration of budgets. A budgetary committee is formed which comprises the departmental heads of various departments. All the functional heads of various departments are entrusted with the responsibility of ensuring proper implementation of their respective departmental budgets. This has been shown in the following chart. 

2.       Budget Centres: A budget centre is that part of the organization for which the budget is prepared. A budget centre may be a department, section of a department or any other part of the department. The establishment of budget centres is essential for covering all parts of the organization. The budget centres are also necessary for cost control purposes. The appraisal of performance of different parts of the organization becomes easy when different centres are established.

3.       Budget Manual: A budget manual is a document which tells out the duties and also responsibilities of various executives concerns with the budgets. It specifies the relation among various functionaries. A budget manual covers the following:

1)      A budget manual clearly defines the objectives of budgetary control system. It also gives the benefits and principles of this system.

2)      The duties and responsibilities of various persons dealing with preparation and execution of budgets are also given in a budget manual. It enables the management to know of persons dealing with various aspects of budgets and clarify their duties and responsibilities.

3)      It gives information about the sanctioning authorities of various budgets. The financial powers of different managers are given in the manual for enabling the spending of amount on various expenses.

4)      A proper table for budgets including the sending of performance reports is drawn so that every work starts in time and a systematic control is exercised.

5)      The specimen forms and number of copies to be used for preparing budget reports will also be stated. Budget centres involved should be clearly stated.

6)      The length of various budget periods and control points is clearly given.

7)      The procedure to be followed in the entire system should be clearly stated.

8)      A method of accounting to be used for various expenditures should also be stated in the manual.

4.       Budget Officers: The chief executive who is at the top of the organization appoints some person as budget officer. The budget officer is empowered to scrutinize the budgets prepared by different functional heads and to make changes in them, if the situation so demands. The actual performance of department is communicated to the budget officer. He determines the deviation in the budgets and takes necessary steps to rectify the deficiencies.

5.       Budget Committee: In small scale concerns, the accountant is made responsible for preparation and implementation of budgets. In large scale concerns a committee known as budget committee is formed. The heads of all departments are made members of this committee. The committee is responsible for preparation and execution of budgets. The members of this committee put up the case of their respective departments and help the committee to take collective discussions. The budget office acts as coordinator of this committee.

6.       Budget Period: A budget period is the length of time for which a budget is prepared. The budget period depends upon a number of factors. It may be different for different industries or even it may be different in the same industry or business.

7.       Determination of Key Factors: The budgets are prepared for all functional areas. These budgets are inter-departmental and inter-related. A proper coordination amount different budget is necessary for making the budgetary control a success. The constraints on some budgets may have an effect on other budgets too. A factor which influences all other budgets is known as Key Factor or Principal Factor. There may be a limitation on the quality of goods a concern may sell. In this case, sales will be a key factor and all other budgets will be prepared by keeping in view the amount of goods the concern will be able to sell. The raw material supply may be limited; so production, sales and cash budgets will be decided according to raw materials budget. Similarly, plant capacity may be key factor if the supply of other factor is easily available.

Or

(b) What do you mean by ‘financial administration’? What are its main ingredients? Discuss clearly the principles of financial administration.                                 3+4+4=11

Ans: Meaning of Financial Administration

In simple words, financial refers to such a system or method by which one can analyse the financial working of the public authority. Thus the focuses on the procedure which ensure the lawful use of public funds. However the concept has been differently defined as under:

Prof .M.S Kenderic, “The financial administration refers to the financial measurement of govt. including the preparation of budget method of administering the various revenue resources the custody of the public fund, procedures in expending money, keeping the financial records and the like. These functions are important to the effective conduct of operation of public finance”

Prof. Dimock, “Financial administration consists of a series of steps whereby funds and made available certain official under procedures which will ensure their lawful and efficient use. The main ingredients are budgeting, accounting, auditing and purchase and supply.”

From these definitions one can easily find four ingredients (Methods/Process) of financial administration:

1)      Budget. The term budget has been derived from the French word “Bougette” which means a leather bag or a wallet. The chancellor of Exchequer in England used to carry his papers in the bag to House of Commons. Prof. Willoughby defined, “Budget-it should be at once a document through which the Chief Executive comes before the fund-raising and fund grading authority and makes full report regarding the manner and which he or his subordination have administered affairs during the last completed year ; in which he or exhibits the present conditions of public treasury and one the basis of such information sets forth his programme of for the year to come and the manner in which the purposes that such work should be financed.” In the word of Prof. Dimock, “Budget is a balanced estimate of expenditure and receipts for a given period of time. In the hands of the administration, the budget is a record of part performance a method of current control and a projection of future planes.”

2)      Accounting. Accounting is the record ingredient of financial administration. It is an art by which the financial effects of executive action are recorded, assembled and finally summarized in the form of the financial reports. A good according system is indispensable for adequate budgeting control. Therefore, there must be harmonious relationship between the goals in budget and financial statements prepared from accounts.

3)      Auditing. Auditing is a considered the final stage. In fact, it is investigation of report and legally, efficiency and accuracy of the financial transactions. Audition is of two types i.e. internal and external. The Chief Motto of audit is only to supervise the manner in which expenditure has been made in order to ascertain whether the executive has spent in accordance with rules and regulations. Auditing is an independent department who points out reregulation and submits its report to the higher authority.

4)      Purchase and Supply. As the name implies, it is the acquisition of the property. In other words, purchasing is a report of large category of supply which covers specialization traffic management, inspection, storage and proper utilization of different resources.

PRINCIPLE OF FINANCIAL ADMINISTRATION

Generally, in democratic set up, there are guiding principles for the operation of financial administration. They are:

a)      Principle of Unity in the organisation: We all know that unity provides strength to all of us. According to this principle, there must be control of central authority on financial administration. However, it does not mean that every work is done by superior authority. It simply means that there must be close coordination between different executives and higher executives should have full control over on the activities of their subordinate executives.

b)      Principle of simplicity and regularity: According to this principle, financial administration should have the quality of simplicity, regularity and promptness. Red tapism should be totally eliminated and the work procedure should be quite simple, clear and easily understandable by the average person.

c)       Principle of Compliance with the will of the legislature: According to this principle, no expenditure out of public revenue is incurred unless it is sanctioned by Parliament. In the constitution of India, it has been mentioned as, “No money out of the consolidated fund of India or the consolidated fund of a state shall be appropriated except in accordance with the law and the purpose and the manner as passed by legislature.

d)      Principle of effective control: According to this principle, it is essential to have effective control at every stage of financial administration. Generally the following agencies are involved in the control of financial administration of the government:

1)      Executive

2)      Legislature

3)      Financial Department of Financial Ministry

4)      Auditing Department

5)      Parliamentary Committees

e)      Principle of Uniformity: According to this principle, there must be uniformity in all departments or sections of the government as to policies of expenditure, revenue and loan etc.

f)       Principle of Authority: According, to this principle, no tax shall be levied or collected unless it is approved by the representatives of the people. In the constitution of India has been mentioned as “No tax shall be levied or collected except by authority of laws.”

g)      Principle of Accountability: According to this principle, Every Government is bound to spend the money granted by the parliament for no purpose other than it was sanctioned by the legislature or parliament. In order to check the abuses of owners on the part of executive, the Auditor-General audits the a/c of the Govt. to place before the legislature a report to show that the executive has spent the money for purposes for which Parliament has sanctioned. Thus the provision for the appointment of comptroller and Auditor-General is laid down in the Indian Constipation to achieve the above objective.

5. (a) What do you mean by ‘public revenue’? Explain the principles of public revenue. Also write a short note on the effects of public revenue.                            3+5+3=11

Ans: Public Revenue: A government needs income for the performance of a variety of functions and meeting its expenditure. Thus, the income of the government through all sources like taxes, borrowings, fees, and donations etc. is called public revenue or public income.

However, Prof. Dalton has defined the term in two senses – broader and narrow sense. In broad sense, it includes all the income and receipts, irrespective of their sources and nature, which the government happens to obtain during any period of time. In the narrow sense, it includes only those sources of income of the government which are described as revenue resources. In broader view of the concept is that is includes all loans which the government raises under the term ‘public revenue’ or public income. The distinction in both can also be explained as the term ‘public revenue’ used in public finance. It includes only those sources of government income which are not subject to repayment. In a broad sense, it means all receipts of the government irrespective of the fact whether they are subject to repayment or not.

PRINCIPLES OF PUBLIC REVENUE

There are various principles of public revenue as under:

1.       Principle of Least Aggregate Sacrifice.

2.       Principle of Equity.

3.       Principle of Economy.

4.       Principle of Productivity.

5.       Principle of Certainty.

6.       Principle of Uniformity.

1. Principle of Least Aggregate Sacrifice: Prof. Pigou and Prof. Dalton developed the principle of least aggregate sacrifice. According to them, “State should raise money in such a manner that the sacrifice imposed on the people is the least. As pointed out earlier, taxation is irksome and the act of raising money a necessary evil. Taxation therefore imposes sacrifice and pain. The State exists for the welfare of the masses and therefore should see to it that the sacrifice or pain is least.”

2. Principle of Equity: Economists like A. Smith and Chapman, Robert Jones considers equity or equality as the right principle of taxation. Seligman and Cohn accept this principle but understand it to imply progressive taxation while walker and some other classical economists think that equality or equity leads to proportional taxation. All these economists, however, believe in equity. It is worth while therefore considering in some detail the meaning and implications of equity, as the basis of taxation.

3. Principle of Economy: Hobson, Wicksteed and Jones believed in the principle of economy. According to them, Taxation is an act of production and therefore one must affect as much economy in production as possible. Whatever the demand side may be, if a certain amount has to be produced that producer’s has concern is always to produce it at the lowest cost. Economy is then the correct principle of taxation. But since the cost of taxation consists in the sacrifices made by the tax-payers, the cost is least when the sacrifice is the lowest. Thus, the principle of economy is precisely the same as the principle of least aggregate sacrifice.

4. Principle of Productivity: Principle of productivity was propounded by Bastable. According to Bastable, the idea of productivity comes close to that of economy. Taxation is an act of production. And therefore it should be as productive as possible. Taxation should be as productive of revenue as the State can make it to be.

5. Principle of Certainty: This principle was dates back to the name of President Hadley. According to him, tax should be certain in its manner of imposition and its rate, is not to be doubted. Uncertainty is never desirable. The statesmen as also the tax payers should know how and when and what taxes are imposed. It gives greater confidence to the govt. about its estimates and the tax payers feel certain about his budget. Certainty reduces the cost of paying taxes for the tax payers and the cost of them for the govt. certainty helps to reduce cost and thereby increases welfare.

6. Principle of Uniformity: Principle of uniformity was analyzed by Nitty and Conrad. According to them, “If uniformity implies that the taxes should burden the people uniformly, then it is the same principle as that of equal sacrifice. But if the word uniformity refers to the manner of levying taxes or the rates of taxes no such similarity between this principle and that of equal sacrifice can be deduced. It is desirable of course that tax should possess the feature of uniformity even in the rates and the manner of their imposition. That reduces the complexity of the system and thereby conduces to smooth working of the entire machinery.

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Also Read:

1. Public Finance Notes

2. Public Finance Question Papers (Dibrugarh University)

3. Public Finance Solved Question Papers (Dibrugarh University)

4. Public Finance MCQs

5. Public Finance Important Questions for Upcoming Exam

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EFFECTS OF PUBLIC REVENUE

The effects of public revenue can be discussed under the following heads as:

1. Effects of Revenue-Direct and Indirect: For the consideration of effects of public revenue on social welfare it is best to suppose that revenue is raised and then destroyed. That would enable us to ignore effects that the knowledge and expectation of public expenditure has the minds of the tax payers. When a tax is levied on an individual his income decreases. If pays out of his income, then it is directly and immediately reduced. He decides to pay it out of his savings and current income is not used but future income derived from his saving decreases. In any case the effect of taxation is thus to reduce the income of people. This accounts for the sacrifice of taxation. We may study effects of direct reduction of income and indirect reduction of it.

The immediate decrease of income takes place, as we have when the tax payer pays tax out of his current consumable income when that happens he is force to cut down his present consumption of goods and services. If he consumes less of luxuries, the adverse effect of taxation occurs. But if he cuts down his consumption of necessaries more than luxuries the effects are more pronounced.

2. Effects of Present and Future Generation: This brings us to the consideration of the effects of taxation on the present and future generation. When taxes are paid out of current consumable the present generation directly and immediately suffers. However, they are affected in two ways. First, the reduction of consumer goods may decrease the efficiency of the people and thereby the amount of wealth they can produce and save for succeeding generation. But they also such effects will be partly or wholly offset by expenditure policy of the govt. But the payment of taxes will themselves have the effect of shifting the incidence of sacrifice on future generation to some extent. In the second place, they may suffer due to adverse effects on production caused by increased demand for consumption goods.

3. Effects on Tax Distribution: The effects of taxes do not only differ according to the aggregate volume of revenue raised or according to its impact on current consumable income and savings; they also depend on the distribution of the tax burden between the tax payers. Taxes not levied equally on all. They are so levied as to minimize the sacrifice. Thus some have to pay more than others. If the Govt. is successful in so fixing the rates of taxes as to minimize sacrifice jointly made by the tax payers, we have to consider only effects of taxation on the people in the manner that we have done. But the government is not likely to succeed in minimizing the aggregate sacrifice.

4. Other Effects on Public Revenue: It is worthwhile considering if taxation can produce some favourable effect on social welfare. We had seen while considering the favourable effects of public expenditure on social welfare; how such expenditures can also have an adverse effect on the well-being of the people.

Or

(b) Discuss Adam Smith’s canons of taxation.                      11

Ans: CANONS OF TAXATION

In the modern age, tax is the main source of Income. Every tax is an additional burden on the tax-payer. Thus, it is essential that the burden of a tax should be divided in equitable manner. Every govt. bears the responsibility to provide certain facilities to its subject. For this purpose, the govt. has to adopt a definite principle. Further, it needs a definite machinery for imposing, collecting and utilizing the money. Therefore, a better taxation system speaks of the better taxing capacity and efficient economic administration of the governments.

It is an important question as to how the taxes can be levied and what should be pattern of distribution of the taxes. Moreover, taxation does not have only economic but also social and political implications. For every new tax, it is correct to note the ‘motive’ behind such proposals. In short, it carries the motives of capacity to pay, no discrimination and positive effect on the balance of payment.

However, these motives cannot be achieved unless a clear cut policy regarding the imposition of taxation is followed. Economists have suggested various principles regarding taxation. But none of had given the exact canons of taxation. The canons or principles given from time to time bear the testimony of a good taxation policy.

ADAM SMITH’S CANNONS TAXATION

Adam Smith was the first writer to give a detailed and comprehensive statement of the principles of taxation. Basically, he laid stress on the ways in which an economy could increase its productive capacity and ultimately achieve a higher rate of economic growth. According to him, if the principles enunciated by him, were adopted in a full spirit, the govt. would have a very sound taxation policy. Findlay Shirras has strongly commented on the contribution made by Adam Smith, “No genius, however, has succeeded in condensing the principles into such clear and simple canons as has Adam Smith.” Adam Smith has enumerated the following four canons of taxation which are accepted universally:

1)      Canon of Equality.

2)      Canon of Certainty.

3)      Canon of Convenience.

4)      Canon of Economy.

1)      Canon of Equality: According to this canon, a good tax is that which is based on the principle of equality. In a broader sense, equality may be considered to be same as justice. In this principle, it is maintained that the tax must be levied according to the taxpaying capacity of the individuals. Adam Smith had defined this principle as follows: “The subject 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 states.”

In other words, the principle of benefit states that the burden of taxation should be fair and just. Thus, rich people must be subjected to higher taxation in comparison to poor. The higher the income and higher the tax, the lower the income of lower the tax.

2)      Canon of Certainty: Another canon of taxation is the certainty which implies that the tax-payer should determine the following manners carefully: (a) The time of payment, (b) Amount to be paid, (c) Method of payment, (d) The place of payment, (e) The authority to whom the tax is to be paid.

With this, a tax-payer will be able to keep equilibrium between his income and expenditure. There should not be any embarrassment and confusion about the payment of tax. Every tax-payer must know the time of payment, manner and mode of payment, so that he may adjust his expenditures accordingly. In the words of Adam Smith, “The tax which each individual is bound to pay ought to be certain the not arbitrary. The time of payment, the manner of payment, the quantity to be paid, all ought to be clear and plain to the contributor and to every other person.” This certainty creates confidence in the contributor of the tax.

3)      Canon of Convenience: The taxes should be levied and collect in such a manner that it provides the maximum of convenience to the tax-payers. The public authorities should always keep this point in view that the tax-payers suffer the least inconvenience in payment of the tax. For example, land revenue should best be collected at the harvest time. The income-tax from the salaried class is collected only when they get their salaries from their employers. To quote Adam Smith, “Every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay it.” This canon is important both for the tax-payers and the govt. The tax-payer feels convenient in payment of tax. The authorities also come to know the incidence of taxation and get increased income by way of taxes.

4)      Canon of Economy: It implies that minimum possible money should be spent in the collection of taxes. The maximum part of the collected amount should be deposited in the govt. treasury. Thus, all unnecessary expenditure in the collection should be avoided at all costs. In the words of Adam Smith, “Every tax ought o be so contrived as little to take out and to keep out of the pockets of the people as possible over and above what is brings into public treasury of the state.” So more addition should be secured to the public revenue at the minimum maintenance cost. It also implies that a tax should interfere as little as possible with the productive activity and general efficiency of the community so that it may not create any adverse effect on production and employment.

6. (a) what is ‘public expenditure’? What are its principal objectives? Discuss its scope.   2+5+4=11

Ans: Meaning of Public Expenditure

Public Expenditure refers to Government Expenditure. It is incurred by Central and State Governments. The Public Expenditure is incurred on various activities for the welfare of the people and also for the economic development, especially in developing countries. In other words The Expenditure incurred by Public authorities like Central, State and local governments to satisfy the collective social wants of the people is known as public expenditure.

Objectives of Public Expenditure:

The major objectives of public expenditure are

a)      Administration of law and order and justice.

b)      Maintenance of police force.

c)       Maintenance of army and provision for defence goods.

d)      Maintenance of diplomats in foreign countries.      

e)      Public Administration.

f)       Servicing of public debt.

g)      Development of industries.

h)      Development of transport and communication.

i)        Provision for public health.

j)        Creation of social goods.

Scope of Public Expenditure

1) Welfare state: Modern states are no more police states. They have to look in to the welfare of the masses for which the state has to perform a number of functions. They have to create and undertake employment opportunities, social security measures and other welfare activities. All these require enormous expenditure.

2) Defence expenditure: Modern warfare is very expensive. Wars and possibilities of wars have forced the nation to be always equipped with arms. This causes great amount of public expenditure.

3) Growth of democracy: The form of democratic government is highly expensive. The conduct of elections, maintenance of democratic institutions like legislatures etc. cause great expenditure.

4) Growth of population: tremendous growth of population necessitates enormous spending on the part of the modern governments. For meeting the needs of the growing population more educational institutions, food materials, hospitals, roads and other amenities of life are to be provided.

5) Rise in price level: Rises in prices have considerably enhanced public expenditure in recent years. Higher prices mean higher spending on the part of the govt. on items like payment of salaries, purchase of goods and services and so on.

6) Expansion public sector: Counties aiming at socialistic pattern of society have to give more importance to public sector. Consequent development of public sector enhances public expenditure.

7) Development expenditure: for implementing developmental programs like Five Year Plans, Modern governments are incurring huge expenditure.

8) Public debt: Along with debt rises the problem like payment of interest and repayment of the principal amount. This results in an increase in public expenditure.

9) Grants and loans to state governments and UTs: It is an important feature of public expenditure of the central government of India. The government provides assistance in the forms of grants-in-aid and loans to the states and to the UTs.

10) Poverty alleviation programs: As poverty ratio is high, huge amount of expenditure is required for implementing alleviation programmes.

Or

(b) Discuss the effects of public expenditure on production and distribution.               6+5=11

Ans: Effects of Public Expenditure

Public expenditure incurred according to the sound principles of public finance, exerts healthy effects on the entire economy of a nation. The ultimate effects of public expenditure, in the form of greater production, more equitable distribution of wealth and all-round economic development of a country, are always expected to be present, if the expenditure is incurred after considerable thought and utmost rationality.

Gone are the days when it was advocated that the state should interfere the least in economic activities and the government is merely an agent for the people – responsible for the maintenance of justice, police and army. In those days public expenditure on economic activities was normally considered a waste. Contrary to this, a new concept of public expenditure has been developed by the modern economists. Today, public expenditure is regarded as a means of securing social ends rather than just being a mere financial mechanism. In present times, Wagner’s Law of Increasing Public Expenditure – both extensively and intensively, is considered universally true. The trend of rising public expenditure is not confined to any particular country, but it is found in almost all countries of the world, irrespective of its socio-economic and political set-up. Every public expenditure is considered desirable, when it is not wasteful, but has a positive effect on production, distribution, consumption and thus maximizes economic and social welfare of the country as a whole.

Effects of public expenditure can be studied under the following heads:

a)      Effects of Public Expenditure on Production.

b)      Effects of Public Expenditure on Distribution.

c)       Miscellaneous Effects of Public Expenditure including Consumption.

Effects of Public Expenditure on Production: While analyzing the effects of public expenditure, Dalton very correctly said that just as taxation, other things being equal should reduce production as little as possible, so the public expenditure should increase it as much as possible. He further added that the level of production and employment in any country depends upon the following three factors:

a)      Effects Upon the Ability to Work, Save and Invest: If public expenditure increases the efficiency of a person to work, It will promote production and national income. Public expenditure on education, medical services, cheap housing facilities, means of transport and communications, recreation facilities etc. will increase the efficiency of persons to work. At the same time, public expenditure can promote saving on the part of the lower income groups by providing additional income to them, for a person who has larger income can be normally expected to save a larger amount. Finally, public expenditure, particularly repayment of public debt will place additional funds at the disposal of those who can save. Thus, it is evident that public expenditure can promote ability to work, save and invest and thus promote production and employment.

b)      Effects on Willingness to Work, Save and Invest: Public expenditure also affects the people’s willingness to work, save and invest. Pension, provident fund, interest-free loan, free medical aid, unemployment allowances and other government payments provide security to a person and, therefore, reduce the willingness of persons to work and save – after all, why should a person work hard and save when he knows fully he will be looked after by the government when he is not in a position to earn any income, i.e. he finds his future fully secured. In the absence of any savings, the question of investment does not arise at all.

c)       Effects on Diversion of Resources: Public expenditure also affects the diversion of resources. For example, if the government wishes to attract productive resources to a particular industry, it will start giving financial assistance from its own funds to such an industry. In the same way, if the government wishes to attract productive resources to a particular area or region, it will start giving a variety of incentives in the form of bounties, subsidies etc. (such as land at concessional rates, cheap electric supply and water, loans on nominal rates of interest, freedom from sales tax, income-tax etc. for a certain period, production subsidy etc.) to the industrialists to achieve this objective.

Effects of Public Expenditure on distribution: Public expenditure has its effects not only on production but is also a most powerful weapon in the hands of the government for bringing about an equitable distribution of wealth. For bringing about an equitable and just distribution of wealth the government can use not only its taxation policy but public expenditure policy can also help to a great extent in achieving this very objective. In fact, the role of taxation and public expenditure in removing inequalities of income is complementary and supplementary. If the government intends to minimize the economic inequalities that existed in the society, it should levy maximum about of taxation on richer sections of the community, because their taxable capacity is undoubtedly high. The income so earned through taxation should be spent on providing various types of facilities, subsidies and amenities to the poorer section of the community. For example, the state can extend to the poor benefits of old age pensions, social insurance, free medical aid, cheap housing, interest-free loans, subsidized food etc. This will automatically bring redistribution of wealth (national income) in favour of the poorer section of the community. On the contrary, public expenditure which confers larger benefits to the richer sections of the community, e.g., subsidies on luxury goods, provision of subsidized milk, other foodstuff etc. tends to widen the gap of inequalities. As Dalton puts, “That system of public expenditure is best which has the strongest tendency to reduce inequalities of income”. Public expenditure has, thus, an important role in reducing economic inequalities in the community.

7. (a) What is meant by ‘public debt’? Discuss about the growth of internal and external public debt in India.  3+4+4=11

Or

(b) What is ‘deficit financing’? Discuss the role of deficit financing in Indian economy.   3+8=11