2.1] Meaning, Nature and Scope of Public Finance

Meaning of Public Finance

Public finance is the study of the government’s role in the economy, particularly its revenue and expenditure. It is concerned with how the government raises revenue (taxes, fees, fines, etc.), how it spends that revenue (on public goods and services, such as education, healthcare, infrastructure, etc.), and how these activities affect the economy.

Nature of Public Finance

Public finance is a normative science, meaning that it is concerned with what the government should do, rather than what it does. It is based on the idea that the government has a responsibility to promote the well-being of its citizens. As such, public finance is concerned with issues such as:

• The allocation of resources: How should the government allocate its limited resources among competing needs?
• The distribution of income: How should the government’s fiscal policies affect the distribution of income in the economy?
• The stabilization of the economy: How should the government use its fiscal policies to promote economic stability?

Scope of Public Finance

The scope of public finance is broad and encompasses a wide range of topics, including:

• Taxation: The study of different types of taxes, their effects on the economy, and their impact on different groups of people.
• Public expenditure: The study of how the government spends its money, the different types of public goods and services, and the benefits and costs of different types of spending.
• Public debt: The study of how the government borrows money, the different types of debt, and the management of debt.
• Fiscal policy: The use of government spending and taxation to achieve economic goals.
• Intergovernmental finance: The study of the financial relationships between different levels of government.

In addition to these core topics, public finance also encompasses a number of other areas, such as:

• The economics of education
• The economics of healthcare
• The economics of the environment
• The economics of development

2.2] Difference between public finance and private finance

Public finance is a complex and ever-evolving field. As the role of government in the economy changes, so too does the scope of public finance.

Feature	Public finance	Private finance
Definition	Concerned with the income and expenditure of the government.	Concerned with the income and expenditure of individuals and businesses.
Objective	To provide for collective needs and promote economic welfare.	To maximize profits or personal wealth.
Sources of income	Taxes, fees, fines, borrowing, etc.	Salaries, wages, investments, etc.
Areas of expenditure	Public goods and services, such as infrastructure, education, healthcare, defense, etc.	Private goods and services, such as food, clothing, housing, transportation, etc.
Decision-making	Made by the government through the political process.	Made by individuals and businesses based on their own preferences and goals.
Level of transparency	Generally subject to a high degree of public scrutiny.	May be more opaque.
Examples	Government budgets, public debt, fiscal policy, etc.	Personal budgets, savings accounts, investments, loans, etc.

In summary, public finance is concerned with the allocation of resources to meet the needs of society as a whole, while private finance is concerned with the allocation of resources to meet the needs of individuals and businesses.

2.3] Direct And Indirect Tax

Direct Tax

• Meaning: Direct taxes are those that are levied directly on the income or wealth of an individual or a company. These taxes are not easily shifted from one person to another.
• Merits:
  • Equity: Direct taxes are considered to be more equitable than indirect taxes because they are based on the ability to pay. The more a person earns, the more direct taxes they pay.
  • Elasticity: Direct taxes are more elastic than indirect taxes. This means that they respond more quickly to changes in income. When income increases, direct tax revenue also increases.
  • Certainty: The amount of direct tax that a person or company owes is usually known in advance. This makes it easier for taxpayers to plan their finances.
• Demerits:
  • Evasion: Direct taxes can be more easily evaded than indirect taxes. This is because direct taxes are levied on income or wealth, which can be hidden.
  • Disincentive to effort: Direct taxes can discourage people from working harder. This is because the more a person earns, the more direct taxes they pay.

Examples of direct taxes:

• Income tax
• Corporation tax
• Wealth tax
• Gift tax

Indirect Tax

• Meaning: Indirect taxes are those that are levied on goods and services. These taxes are usually included in the price of goods and services, and are therefore passed on to the consumer.
• Merits:
  • Difficult to evade: Indirect taxes are more difficult to evade than direct taxes. This is because they are levied on goods and services, which are difficult to hide.
  • Revenue neutral: Indirect taxes can be made revenue neutral. This means that they can be designed to raise a specific amount of revenue, regardless of changes in income or wealth.
  • Less disincentive to effort: Indirect taxes are less of a disincentive to effort than direct taxes. This is because they are not levied on income or wealth.
• Demerits:
  • Inequity: Indirect taxes can be regressive, meaning that they take a larger proportion of income from low-income earners than from high-income earners.
  • Inelastic: Indirect taxes are less elastic than direct taxes. This means that they do not respond as quickly to changes in income.
  • Hidden: The amount of indirect tax that a person pays is not always obvious. This is because indirect taxes are included in the price of goods and services.

Examples of indirect taxes:

• Goods and Services Tax (GST)
• Value Added Tax (VAT)
• Excise duty
• Customs duty

In conclusion, both direct and indirect taxes have their own merits and demerits. The best mix of direct and indirect taxes for a country will depend on a number of factors, such as the country’s economic structure, its social goals, and its administrative capacity.

2.4] GST

Concept of GST

Goods and Services Tax (GST) is a comprehensive indirect tax levy on the manufacture, sale, and consumption of goods and services. It is a value-added tax (VAT) that is levied at each stage of the production process, but the amount of GST paid at the previous stage is credited against the GST liability at the current stage. This helps to avoid cascading of taxes.

Types of GST

• Central Goods and Services Tax (CGST): CGST is levied by the central government on the intra-state sale or supply of goods and services.
• State Goods and Services Tax (SGST): SGST is levied by the state government on the intra-state sale or supply of goods and services.
• Integrated Goods and Services Tax (IGST): IGST is levied by the central government on the inter-state sale or supply of goods and services.
• Union Territory Goods and Services Tax (UTGST): UTGST is levied by the central government on the sale or supply of goods and services in Union Territories (UTs) without a legislature.

Merits of GST

• Simplified tax structure: GST has replaced multiple indirect taxes with a single tax, simplifying the tax structure. This has made it easier for businesses to comply with tax laws.
• Elimination of cascading effect: Under the previous tax regime, taxes were levied on taxes, leading to cascading of taxes. GST eliminates this cascading effect by allowing businesses to set off the taxes paid on inputs against the taxes payable on outputs.
• Creation of a common national market: GST has created a common national market by removing fiscal barriers between states. This has led to the seamless flow of goods and services across the country.
• Increased tax compliance: GST has led to increased tax compliance as businesses are now required to file only one return for all indirect taxes. This has made it easier for the government to track down tax evaders.
• Boost to exports: GST has made Indian exports more competitive by eliminating the cascading effect of taxes. This has led to an increase in exports.

Demerits of GST

• Increased compliance burden for small businesses: GST has increased the compliance burden for small businesses as they are now required to file returns on a regular basis.
• Complexity of the tax system: The GST system is complex and can be difficult for businesses to understand. This has led to the need for businesses to hire GST consultants.
• Transitional difficulties: The implementation of GST led to transitional difficulties for businesses as they had to adapt to the new tax system.

Overall, GST is a positive step towards reforming the indirect tax system in India. The merits of GST outweigh the demerits. However, the government needs to take steps to address the concerns of small businesses and to simplify the tax system.