The Government Budget And Taxation

Budget is a future estimation of all the revenues and expenditure over a specific period of time. It is used to allocate the scarce resources in the best designed economic use. The budget is used as the tool of decision making by the government. Most of the economic decisions are being dependent on the budget. The economic decision includes the investment spending and allocation of resources.

One of the main components of the budget is the tax. Tax includes the major part of the revenue. In India, the tax is collected in the unified tax system known as Goods Service Tax (GST). This tax is collected by both the state governments and central governments with a single rate. Thus it constitutes a major part of the revenue for the government.

Explanation

i. Excise duty is the tax levied on the goods that are produced within the domestic territory. Excise taxes are those paid on the purchase of goods or services and are often reflected in total purchase prices.

ii. Sales tax is the consumption tax imposed by the government on the sale of goods and services. It is levied when the goods are being sold to the consumer. Therefore the ultimate payer of this tax will be the consumer.

iii. Customs duty is a tax levied on the imports (and sometimes in exports) of the country to raise the state revenue is known as customs duty. It is generally based on the value of the goods being imported.

iv. Income tax is the direct tax which is collected by the government from the individual by fixing a fixed rate is known as income tax. It is collected on a yearly basis, and the tax rate differs as the income of the individual differs.

v. Corporation tax is the tax imposed on the net income of the company. Income of the company will be profit. Therefore it will be levied on the profit with a fixed rate on a yearly basis.

When the tax is imposed on commodities such as steel, matches, clocks, and iron, there will be changes in the price level of the other commodities. There will less effect on the imposition of tax on the finished goods such as matches, clock, and cloth. Since these goods are final consumption goods and being directly used by the consumer, it will result less towards the increase in the price of other commodities. Whereas when there is an increase in the tax rate on intermediate goods such as iron and steel, it will affect the prices of the other commodities. These goods will increase the price of the other commodities because they are intermediate goods, which are used for further consumption. Therefore the increase in the tax rate will increase the price of the commodities and the commodities will become costly. When these commodities are used for the production of the other goods, then the price of those final goods rises.

Example: when there is an increase in the tax rate on the commodities on the products of iron and steel, it will increase the price of iron and steel. These iron and steel is used for further production activities such as car manufacturing, construction works, and other heavy industries. Ultimately when there is an increase in the price of iron and steel, it will result in an increase in the price of the final goods such as cars, houses, bikes, etc.,

Poor are the people who are cannot afford the essential requirements of their life due to lack of income. When there is an imposition of tax on the ordinary food items, it will make the food item very costly. When the price the items are being increased it makes very difficult for the poor people to afford those things with their minimal income. The price rise will be affordable for the middle income and richer people because their income will be higher compared to the poor people income. This increase will adversely affect the lives of poor people.

a. Since they are a group of four friends and the total rent comes to about 2000, they can divide the total rent in such a way that each person equally contributes to the whole amount, i.e. 2000/4 = 500 each. This division will make sure that the burden of the rent is shared equally by everyone.

b. Since two among the four are earning more, they have the capability to contribute more amount for the rent. Thus the whole rent amount can be divided in such a way that the ratio between the marginal cost of paying rent and their income is equal for everyone, i.e. cost of paying rent by A/income = cost of paying rent by B/income = cost of paying rent by C/income = cost of paying rent by D/income.

c. I would prefer the second method of rent bifurcation. The first method though leads to each person paying the same amount of rent is less efficient compared to the second where each person pays according to their ability to pay. Thus this would be the preferred strategy for the division of rent.

Tax on income affects the rich more. Income tax is levied on people who have income above a particular threshold. They will be more affected by income tax as higher income results in the levy and collection of higher taxes from them. The consumption of these sections remains relatively unresponsive to changes in income. Thus they are not affected by the tax on commodities. Rather, a higher rate of income taxes can have an effect on them.

Tax on commodities affected the poorer sections of society. If the commodities they consume are taxed more, they would be compelled to pay a higher price for the commodities and services. This affects their cost of living and standard of living. Thus the poorer sections are affected by commodity taxes more than income taxes.

A VAT is the Value Added Tax in which the tax is levied on every production process of a commodity. Any increase in the value in each stage of production it will be imposed by VAT. When the tax is levied in every stage of production, it becomes very difficult to evade the tax. Tax evasion is the illegal evasion of the tax by the individuals. When the tax is included in all the stages of the production, it will reduce the evasion of the tax by the individuals. But tax avoidance can be done in VAT by transferring the tax burden to another individual by increasing the price of the product which the consumer buys.

Hike in the bus fare is the problem faced nationally in and around India. There is a continuous rise in the bus fares in the economy. Most of the state governments are increasing their bus fare by a huge percent. The main reasons for the hike in the bus fare are:

• A rise in the price of Petrol and diesel

This increase in the price of petrol and diesel will increase the price of tickets in the buses. This is because petrol and diesel are the main components used to run the bus. The petrol prices were 60Rs in 2014 whereas it crossed 80Rs in 2018. This makes the ride very costly and increases in the bus fare.

• Increase in vehicles

Everyone has their own vehicle in most of the cities. This makes them travel in their vehicle rather than in buses and other common vehicles. When there is a lack of passengers in buses, then the bus fare will automatically be increased to maintain the busses and pay the salary to drivers and conductors.

High-income earners have to pay more of direct taxes- income tax and corporation taxes. Direct taxes are those types of taxes which cannot be transferred to others and has to be paid by the individual directly. It can be an income tax or corporation tax. Corporation tax is the tax incurred on profits made by a business organisation excluding its expenses. This increases as the rate of profit increases. Higher income earners would be required to pay more taxes. Same is the case of income tax which is charged against the income of a person. People with higher income would be required to pay more taxes. Since they are incurring more income, they have the ability to pay more taxes. Thus the rich are taxed more and the poor taxed less.

The unaccounted money that circulates in the market is referred to as black money.

The effect of black money are:

a. Black money means a substantial loss in revenue for the government.

b. shortage created by black money is resorting by raising more indirect taxes, that increases the burden on middle and poor class people.

c. Black money results in the transfer of funds from India to foreign countries.

d. Black money has also corrupted our political system.