Public Revenue — Tax Revenue

Public Revenue: Tax Revenue

Public Revenue refers to all the income the government receives from all sources during a given period, used to finance public expenditure. Public revenue is conventionally divided into two broad categories: tax revenue and non-tax revenue. This section covers tax revenue; non-tax revenue is covered in the next section.

Tax Revenue. A tax is a compulsory payment made by individuals and businesses to the government, without the taxpayer receiving any direct, proportional benefit in return (this is what distinguishes a tax from a fee, which is charged for a specific service rendered). Taxes are the largest single source of government revenue in India, and are broadly classified into direct taxes and indirect taxes, based on whether the burden of the tax can be shifted to someone else.

Direct Taxes. A direct tax is one where the person who pays the tax (the impact) also bears its final burden (the incidence) — it cannot be shifted to another person. Direct taxes are generally levied on income and wealth, and their burden is often progressive (a higher rate applies as income rises), making them a tool for reducing inequality.

• Examples: Income Tax (on individuals' income), Corporate Tax (on companies' profits).
• Key features: progressive in nature (broadly); cannot be shifted; based on the ability to pay; the taxpayer is directly aware of the amount paid, which promotes civic awareness of taxation but can also invite evasion.

Indirect Taxes. An indirect tax is one where the person who initially pays the tax to the government (say, a manufacturer or seller) shifts its burden, wholly or partly, to another person (typically the final consumer) through the price of a good or service. The impact and incidence of an indirect tax fall on different persons.

• Examples: Goods and Services Tax (GST), customs duty.
• Key features: generally regressive in effect (a poor and a rich consumer pay the same tax on the same product, so it takes a larger share of a poor person's income); easier to collect and harder to evade (built into the price of the transaction); can influence what is produced and consumed.