Question

Explain various sources of public revenue.

Explain the concept of public revenue and its sources.

Answer 1

Public revenue means the aggregate collection of income with the government through various sources. Public revenue holds a permanent position in the study of public finance which is part of the study of economics. Thus, the necessity of public revenue arises due to public expenditure.

The main sources of public revenue are as follows.

Sources of Public Revenue:

1. Taxes
2. Non-tax Revenue

A) Taxes:

There are two main types of taxes. They are:

• Direct Tax
• Indirect Tax

1) Direct Tax: It is paid by the taxpayer on his income and property. The burden of tax is borne by the person on whom it is levied. As he cannot transfer the burden of the tax to others, the impact and incidence of the direct tax fall on the same person. For example personal income tax, wealth tax, etc.

2) Indirect Tax: It is levied on goods or services. It is paid at the time of production or sale and purchase of a commodity or a service. The burden of an indirect tax can be shifted by the taxpayer (producers) to another person/s. Hence, the impact and incidence of tax are on different heads. For example, the newly implemented Goods and Services Tax (GST) in India has replaced almost all indirect taxes, and customs duties.

B) Non-Tax Revenue Sources:

Public revenue received by the government administration, public enterprises, gifts, grants, etc is called non-tax revenue. These sources are different than the taxes. Brief information about these sources is as follows:

1) Fees: A tax is paid compulsorily without any return service whereas, a fee is paid in return for certain specific services rendered by the government. For example- education fees, registration fees, etc.

2) Prices of public goods and services: Modern governments sell various types of commodities and services to the citizens. A price is a payment made by the citizens to the government for the goods and services sold to them. For example-railway fares, postal charges etc.

3) Special Assessment: The payment made by the citizens of a particular locality in exchange for certain special facilities given to them by the authorities is known as a ‘special assessment.’ For example, local bodies can levy a special tax on the residents of a particular area where extra/ special facilities of roads, energy, water supply, etc. are provided.

4) Fines and Penalties: The government imposes fines and penalties on those who violate the laws of the country. The objective of the imposition of fines and penalties is not to earn income, but to discourage the citizens from violating the laws framed by the Government. For example, fines for violating traffic rules. However, the income from this source is small.

5) Gifts, Grants, and Donations: The government may also earn some income in the form of gifts from the citizens and others. The government may also receive grants from foreign governments and institutions for general and specific purposes. Foreign aid has become an important source of development finance for a developing country like India. However, this source of revenue is uncertain in nature.

6) Special levies: This is levied on those commodities, the consumption of which is harmful to the health and well-being of the citizens. Like fines and penalties, the objective is not to earn income, but to discourage the consumption of harmful commodities by the citizens. For example, duties levied on wine, opium, and other intoxicants.

7) Borrowings: The government can borrow from the people in the form of deposits, bonds, etc. It also gets loans from foreign governments and organizations such as IMF, World Bank, etc. Loans are becoming a more and more popular source of revenue for governments in modern times.