Public Finance Solved Question Papers: Nov' 2017 | Dibrugarh University | B.Com 5th Sem

Dibrugarh University Solved Question Papers
2017 (November)
COMMERCE (General/Speciality)
Course: 501 (PUBLIC FINANCE)
The figures in the margin indicate full marks for the questions
Full Marks: 80
Pass Marks: 32
Time: 3 hours

1.       (a) Write True or False:                                         1x4=4

(i) Public Finance is a study of income and expenditure of a Government.             True
(ii) Financial administration focuses on the procedure which ensures the lawful use of private funds.      False
(iii) Taxation is the major source of public revenue.          True
(iv) Public expenditure is the expenditure incurred by public authorities.                              True
(b) Fill in the blanks:                                                      1x4=4
(i)Public Expenditure stability is the basic condition for economic stability.
(ii) Zero-base budgeting technique was first used in America in the year 1969 (Texas).
(iii) Taxes are paid by an individual though they may be levied upon individuals, property or commodities.
(iv) A. C. Pigou developed the theory of ‘Ability to Pay’.
2.       Write short notes on:                                            4x4=16
(a)    Keynes’s theory of public finance.
Ans: Keynes’ Theory of Public Finance: Functional Finance Keynes and Hansen have given us the ‘new economics’ which is primarily a new concept of public finance. They assume that a capitalist economy by itself cannot function and thereby the government will have to come to the rescue of the economy at certain times. They emphasize compensatory action through fiscal policy to stabilize and regulate the economic system of a country. The Keynesian concept of public finance has been called functional finance by Abba P. Lerner. Functional finance is the system of judging fiscal measures by the way they function in the economy. Functional finance reduces fiscal operation of taxation, public expenditure and the public debt to operations of policy so as to reduce the volume of money and the aggregate demand in the country. For example, according to functional finance, the main function of taxation is not to secure funds for the state but to be an effective weapon in the hands of the state so as to reduce the purchasing power of the people. In the same way, the main function of public expenditure is to influence the volume of aggregate demand to equal aggregate supply.
Thus, the old precepts vanished, economists began to visualize the instrument of fiscal policy as a means of promoting a healing to their economy. Public finance became Functional Finance signifying a study of the fiscal functions of the government that could eliminate unwanted distortions and fluctuations in the economic activity.
(b)   Functions of the Finance Ministry.
Ans: This Finance Ministry plays significant role in financial administration as it ensure that proper use of public funds. It controls the both before the presentation of budget to parliament to and in it executive after approval by the parliament. The Finance Ministry possesses the expert knowledge in financial matters. It considers all proposals to each ministry in the perspective of the government as whole.
The various scheme and proposals of the different ministries are included in the budget after consultations and discussions with the finance ministry. After the final approval of the budget by the parliament, it seeks to ensure that the amounts are properly spent in accordance with the provision of budget. Therefore, it is the finance ministry which frames rules and regulations about the preparation and executive of the budget. The ministry of finance has been divided into four departments, viz
a)      Department of Economic Affairs.
b)      Department of Revenue and Insurance.
c)       Department of Expenditure.
d)      Department of Co-ordination.

(c)    Tax and non-tax revenue.
Ans: Tax Revenue: A fund raised through the various taxes is referred to as tax revenue. Taxes are compulsory contributions imposed by the government on its citizens to meet its general expenses incurred for the common good, without any corresponding benefits to the tax payer. Seligman defines a tax thus: “A tax is a compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all, without reference to specific benefits conferred.
Non Tax Revenue: The revenue obtained by the government from sources other then tax is called Non-Tax Revenue. The sources of non-tax revenue are:
1. Fees: Fees are another important source of revenue for the government. A fee is charged by public authorities for rendering a service to the citizens. The government provides certain services and charges certain fees for them. For example, fees are charged for issuing of passports, driving licenses, etc.
2. Fines or Penalties: Fines or penalties are imposed as a form of punishment for breach of law or non fulfillment or certain conditions or for failure to observe some regulations. Like taxes, fines are compulsory payments without quid pro quo. But while taxes are generally imposed to collect revenue. Fines are imposed as a form of punishment or to prevent people from breaking the law.
(d)   Scope of public expenditure.
Ans: 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.

3.       (a) Discuss the importance of public finance in modern times. Also distinguish between public finance and private finance.               8+6=14
Ans: Importance (Significance) of Public Finance
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.
6. IMPLEMENTATION OF PLANNING: Under democratic planning fiscal policy plays crucial role as financial plan is as much important as physical plan and the implementation of the financial will obviously depend upon the uses of fiscal measures.
7. INFRASTRUCTURE BUILDING: Public finance helps to build up well-development physical and institutional infrastructure.
8. TO CONTROL INFLATION: The imbalance between demand for and supply of real resources may lead to inflations to under-development countries inflation ruins the entire economic structure of the national and the process of economic development in these countries comes to stand still. So to check inflation, budgetary policies can be used by the government.
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.
(b) Critically explain 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 do you understand by ‘financial administration’? Briefly analyze the principles of financial administration.  3+11=14
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.”
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 no 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.
(b) What is ‘budgetary control’? Discuss the techniques of budgetary control.                  2+12=14
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.
Techniques of Budgetary Control
a)      Zero Based Budgeting
b)      Performance Budgeting
Zero Based Budgeting
Zero Base Budgeting is a new technique for the preparation of budgets. It involves fresh evaluation of every item of expenditure as if it were a new item. It is reconsideration of each item of expenditure from the very beginning. It is like assuming that a zero expenditure has been incurred on a project at the time of its review, although the project may be in existence from a long time and may have involved some expenditure also. The review is meant to provide a justification or otherwise of the project as a whole in the light of objectives set for it and priorities of the society. The procedure is altogether different from the usual procedure followed in India.
Peter A. Phyrr describes, the concept of zero base budgeting as an operating, planning and budgeting process that requires each manager to justify a budget request in detail from scratch…….” It means, the budget as a whole is considered rather than to examine incremental change only.
According to Prof. R. A. Musgrave, “the idea of zero base budgeting is to consider the budget as a whole, rather than to examine incremental changes only.”
Essentially, the concept of zero base budgeting is that all the financial requirements of a budget unit are analyzed, evaluated and justifies annually and not just the increased or additional requirements. In more practical way, zero base budgeting means the evaluation and prioritization of all programmes at different levels of effects. To be simpler, under zero base budgeting, each department ministry is required to justify its budget requests from the bottom up, evaluating alternative programme packages and ranking programmes so as to select the best alternative and allocate resources accordingly. The budget is considered as a whole and a fresh one, i.e. from zero base.
Benefits and Limitations of Zero Base Budgeting
Zero-base budgeting is revolutionary concept and is relatively a new management tool for planning and control of activities. It involves people at all levels in the organization and promotes team sprit. The plans and budgets based upon ZBB are much improved than shoes based upon traditional budgeting. There are a number of benefits that arise from zero-base budgeting. Some of the important advantages of ZBB are enumerated below:
a)      Proper Allocation of Funds: It enables management to allocate funds according to the jurisdictions of the programme. The priority can be fixed for various activities and their implementation will be in the same order.
b)      It improves Efficiency: Zero-base budgeting improves efficiency of the management. Every manager will have to justify the demand for resources. Only those activities will be undertaken which will have justification and will be essential for the business.
c)       Identification of Economical Areas: Zero-base budgeting will help in identifying economical and wasteful areas. Emphasis will be given to economical activities and alternative courses of action will also be studies.
d)      Optimum use of Resources: The management will be able to make optimum use of resources. The expenditures will be undertaken only when it will have justification. A list of priorities is prepared and cost-benefit analysis will be the guiding principle in fixing the priority.
e)      Determining of Utility: Zero-base budgeting will be appropriate for those areas whose output is not related to production. It becomes difficult to evaluate the performance of those sides which are not directly related to production but undertaken other activities. This technique will be helpful in determining the utility of each and every activity of the business.
f)       Useful of Attain organizational Goals: Budgeting will be related to organizational goals. Something will not be allowed the plea that it was done in the past. Only those things will be allowed which will help in realizing organizational goals.
g)      Job Satisfaction: ZBB ensures greater participation of personnel in formulation and ranking processes. This helps in promoting level of job satisfaction and thus resulting in better control and operational efficiency in the organisation. 
h)      Applied to priority areas: Zero base budgeting is a flexible tool that can be applied on a selective basis. It does not have to be applied throughout the entire organisation or even in all the service departments. Keeping in view the limitations of time, money and persons available to install, operate and monitor it the management thus can select priority areas to which zero base budgeting may be applied. 
In spite of many advantages, there are a number of limitations arising mainly from difficulties in operation of ZBB. Some of the important limitations are as below:
1)      Bureaucratic and Time Consuming: Though zero-based budgeting proved to be a useful budgeting process to review discretionary overheads but the process was so bureaucratic and time consuming that the organisations got discouraged to use it again. Moreover, like traditional budgeting, it was based on the organisational hierarchy. It thus reinforced functional barriers and failed to focus on the opportunities for improving business processes.
2)      Incorrect Assumptions: Although budgeting depends on many assumptions as a basis, organisations use the previous year’s assumption as a basis only. Each assumption has to be determined without looking at the previous year’s budget. If the assumptions are incorrect, then the budget will not be accurate and will be of little help to the organisation.
3)      Threat felt by bureaucrats: The major problem is the threat that many bureaucrats feel towards a process which evaluates the effectiveness of their programs.
4)      Lacking in Programs: For many programs, workload and performance measures may be lacking or the cause/effect and program impact may not be well defined so that the analysis will be less than perfect.
5)      Based on organisation hierarchy: Like traditional budgeting, it was based on the organisational hierarchy. It thus reinforces functional barriers and fails to focus on the opportunities for improving business processes.
6)      Too much paper work: A major reason for failure of ZBB has been too much of paper work involved in the process which was found unmanageable by the organisation concerned. Also, the reviews and analysis required to be carried out could not be handled within the normal cycle of the budget process spreads over a few months.
7)      Difficulties in ranking of decisions: Difficulties in formulation and ranking of decisions packages as every manager may not have been necessary expertise.
8)      No flexible budgeting: The system of zero base budgeting has no scope to adjust for the changes and thus, flexible budgeting is not possible. 
Performance Budgeting
Performance budgeting is generally understood as a system or technique of presentation of public expenditure in terms of functions, programmes, performance units, i.e. activities, projects etc, reflecting primarily the government output and its cost. The focus in a performance budgeting is basically different from that in the conventional budgets. The two approaches differ in their scope and context. Under the performance budgeting, emphasis is shifted from the budget as a means of accomplishment to the accomplishment itself. If concerns itself primarily with the objectives aimed at by the government rather than with the outlays incurred on several projects. According to U. S. Bureau of Budget, “A performance is one which presents the purpose the objectives for which funds are required, the cost of the programmes proposed for achieving those objectives and quantitative data measuring the accomplishment and work performed under each programme.”
Under performance budgeting system, the overall budget is divided into functions based on the major purpose of government and then subdivided into programme and activities, funds being granted for doing a specific quantity of work. Performance budgeting implies that the budget statement should indicate the actual achievements expected by a Ministry over a period of time from certain amount of expenditure. It forces attention on the size and cost of programme to be implemented.
Procedure for Performance Budgeting
Objectives of each program are ascertained clearly and then the resources are applied after specifying them clearly. The results expected from such activities are also laid down. Annual, quarterly and monthly targets are determined for the entire organization. These targets are broken down for each activity center. The next step is to set up various productivity or performance ratios and finally target for each program activity is fixed. The targets are compared with the actual results achieved. Thus the procedure for the performance budgets include allocation of resources, execution of the budget and periodic reporting at regular intervals.
The budgets are initially compiled by the various agencies such as Government Department, public undertakings etc. Thereafter these budgets move on to the authorities responsible for reviewing the performance budgets. Once the higher authorities decide about the funds, the amount sanctioned are communicated and the work is started. It is the duty of these agencies to start the work in time, to ensure the regular flow of expenditure, against the physical targets, prevent over runs under spending and furnish report to the higher authorities regarding the physical progress achieved.
In the final phase of performance budgetary process, progress reports are to be submitted periodically to higher authorities to indicate broadly, the physical performance to be achieved, the expenditure incurred and the variances together with explanations for the variances.
The main features of performance budgeting are as follows
1. It helps the management to regulate its each and every activity according to predetermined standards of performance, targets and objectives.
2. It is not only an estimate of future needs but goes beyond that and- includes functions, programmes, activity schemes and time schedules to help effective and economic allocation for the programmes.
3. It lays great stress on the management of organisational structural and overall policy, personnel, financial, etc. from traditional to dynamic one.
4. It is not merely a projection of trends and targets but planning the business from grass root level to top level on rational thinking and forecasting.
5.       (a) What is ‘public revenue’? Discuss the effects of public revenue on the following: 2+(4+4+4)=14
(i) Revenue (Direct and Indirect)
(ii) Tax Distribution
(iii) Present and future generation
Ans: MEANING OF 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.
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.
(b) What do you mean by ‘cannons of taxation’? State and explain Adam Smiths’s cannons of taxation.   2+12=14
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 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 be 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 feel 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) “The concept of public expenditure plays a very important role in public finance.” Discuss this statement. Also distinguish between  public expenditure and private expenditure.        10+4=14
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.
Role/Significance/Importance of Public Expenditure
Gone are the days when any kind of state intervention in the socio-economic affairs of a country was considered as a positive hindrance in the smooth working of the economy. The state was to act as passive spectator and the countries were left to the free working of the economic forces. It was Prof. J. M. Keynes in the twentieth century, who realised that state interference is necessary to keep the economy of a country in a stable equilibrium and the road leading to the destination of full employment. At a time when there was world-wide depression (1929-30), the economies of the world were facing the acute problems of overproduction and mass unemployment, private investment was showing a chronic deficiency, the emphasis was shifted from private spending to public spending. The doses of public spending served to uplift the economic system of the world through the interaction of multiplier principle, from the cruel hands of worldwide depression. The importance/significance/role of public expenditure may be studied under the following heads:
1)      Economic Development and Planning: Public expenditure plays a crucial role in the economic development and planning. The success of economic planning depends on the public expenditure because: (i) Economic planning itself requires heavy public expenditure; (ii) For the success of economic planning proper allocation of public expenditure is to be done on different items, such as, roads, transport, irrigation, electricity and power, industries, agriculture etc; (iii) the government is required to establish and manage the working of several government undertakings including public utility undertakings; (iv) Speedy capital formation is to be undertaken, and (v) balanced economic development. All these require heavy public expenditure. Planned development programmes cannot be undertaken without increasing public expenditure.
2)      Reduction in Disparities of Income and Wealth: Today, great emphasis is being given in almost all countries of the world to the reduction of disparities of income and wealth. Public expenditure has a vital importance in the attainment of this vital objective. Programmes for the uplift of the poor and backward classes may be undertaken by adopting a suitable policy of public expenditure.
3)      Economic Stability: Economic stability of a country depends on the public expenditure. In case of depression, heavy public expenditure is to be incurred for increasing investment, capital formation and employment and also for saving the economy from adverse effects of depression. On the contrary, in case of boom period public expenditure is incurred in such a way as to increase production and control the rising price-level.
4)      Economic-Social Welfare: Economic-social welfare in a country depends on the amount of public expenditure incurred on them. Economic and social welfare programmes like labour welfare, child welfare, women welfare, welfare of physically and mentally handicapped persons, welfare of scheduled castes, scheduled tribes, backward classes and backward areas, welfare of economically and socially weaker sections of the society etc. all these require huge public expenditure.
5)      Economic Development of Underdeveloped Countries: It is now unanimously agreed that public expenditure plays a positive role especially in the economic development of an underdeveloped country. The problems of underdeveloped countries are in such a magnitude that they cannot be left at the mercy of the old laissez-faire policy. Private sector cannot undertake the development projects, where the large amount of risk and capital investment is involved. The only available solution lies in the rapid increase of public expenditure.
6)      Increase in State Activities: Formerly, the activities of the state were limited, i.e. internal administration, maintenance of peace and order, judiciary and defence of the countries. Now-a-days the state is required to perform several functions over and above the basic functions, such as education, providing basic necessities like water and electricity, transport, establishment of basic industries in particular, labour welfare, banking including issue of currency, agricultural development, socio-economic welfare, medical assistance to industries and trade, entertainment etc. All these require huge public expenditure.
Difference between Public and Private Expenditure
a)      Difference as to motive: The motive of public expenditure is the welfare of the public whereas the motive of private expenditure is purely personal welfare. Further, (i) the scope of public welfare is wide whereas the scope of private welfare is limited; (ii) the object of public expenditure is of long-term nature whereas the object of private expenditure is of short-term nature.
b)      Difference as to Economy: Greater emphasis is placed on economy in case of public expenditure as against private expenditure. An individual tries to gain maximum utility out of his expenditure whereas the public expenditure does not have such an objective.
c)       Difference as to Adjustment of Income and Expenditure: Private expenditure is always adjusted according to income, whereas in case of public expenditure, the government collects revenue according to expenditure to be incurred. In other words, in case of private expenditure we follow the principle of income first and expenditure next; on the contrary, in case of public expenditure we follow the principle of expenditure first and income (revenue) next.
d)      Difference as to Elasticity: Elasticity exists in case of private expenditure, whereas electricity does not exist in case of public expenditure.
e)      Difference as to control: In case of private expenditure control exists in the hands of individual only who actually incurs the expenditure. On the contrary, the control is varied in case of public expenditure, such as, departmental control, assembly/parliament control and audit control.
f)       Difference as to Working: The scope of working of private expenditure is limited, i.e. himself including his own family, whereas the scope of working of public expenditure is quite wide.
g)      Difference as to Effects: The effect of private expenditure is limited, whereas the effect of public expenditure is wide and far reaching.
(b) Briefly explain the following:                             7+7=14
(a) Public Expenditure and Economic Stability.
(b) Public Expenditure and Economic Growth.
Ans: Effect of Public Expenditure on Economic Stability: It is an admitted fact that public expenditure has proved to be a powerful tool for bringing about economic stability in the country. It is an excellent instrument for regulating and controlling volume of employment in a country. The government should make a substantial increase in public expenditure at a time of depression, because this will help bring about an automatic increase in the volume of employment. On the contrary, the government brings about a substantial reduction in its expenditure at a time of boom (inflation), because this will help save the economy from the adverse effects of inflation. Inflation is a condition when investment exceeds savings. In this situation the aim of the government should be to have a surplus budget, i.e. the governments spend less than its revenue. The funds acquired by means of a surplus budget may be used to provide additional capital to those sectors of economy which experience shortage of capital so that the total productive capacity of the economy may increase. The rising price-level may also be checked by increasing the production of goods and services leading to control of inflation.
Effect of Public Expenditure on Economic Growth: There is a close relationship between public expenditure and economic growth. According to John Adler, a rising proportion of additional output should be developed to capital formation, so that the economic growth of an undeveloped country may be speeded up. For this purpose, twofold change in the government budget is required. Firstly, the government budget should be raised so that a rising proportion of the additional output may be available for development purposes. Secondly, a rising proportion of government revenues should be used to finance expenditure on development. The basic infrastructural facilities required for economic development can be provided with the help of public expenditure. In this way, public expenditure has a significant role to play in the process of economic growth.
(Old Course)
Full Marks: 80
Pass Marks: 32
1.       Answer the following questions:                     1x8=8
(a)    What do you mean by ‘finance’?
Ans: Finance is defined as the management of money and includes activities like investing, borrowing, lending, budgeting, saving, and forecasting by the government.
(b)   Who developed the theory ‘principal of maximum social advantage’?
Ans: Hugh Dalton
(c)    What is the full form of CAG?
Ans: Comptroller and Auditor General of India
(d)   What is ZBB?
Ans: Zero Base Budgeting is a new technique for the preparation of budgets. It involves fresh evaluation of every item of expenditure as if it were a new item. It is reconsideration of each item of expenditure from the very beginning.
(e)   Mention any one distinction between ‘tax’ and ‘fees’.
Ans: Tax is a compulsory payment to the government, whereas fees are a voluntary payment to the government.
(f)     What is ‘indirect tax’?
Ans: Indirect taxes are those which are imposed on all the goods and services, and not on incomes and profits. Such taxes are collected by the sellers or service provider from their customers. Since consumers are not paying taxes directly to the government, that is why it is called indirect taxes. Example of indirect taxes: Goods and services tax.
(g)    Mention any one similarity between Public Expenditure and Private Expenditure.
Ans: Both the individual and government try to obtain maximum satisfaction out of the expenditure.
(h)   What is ‘deficit financing’?
Ans: Deficit Financing: Deficit means an excess of public expenditure over public revenue. This excess may be met by borrowings from the market, borrowings from abroad, by the central bank creating currency. In case of borrowing from abroad, there cannot be compulsion for the lenders, but in case of internal borrowings there may be compulsion.
2.       Write short notes on (any four):                       4x4=16
(a)    Public Finance – as a positive science.
(b)   Performance Budget.
(c)    Taxable Capacity.
(d)   Scope of Public Expenditure.
(e)   Finance Commission (Recent).
 3.       (a) What is ‘public finance’? Discuss the role of public finance as a tool of economic and social welfare.   2+10=12
(b) Explain the theory of ‘principle of maximum social advantage’ with the help of diagram. State its practical problems.

4.       (a) What is ‘financial administration’? What are the guiding principles for the operation of financial administration? Discuss about four ingredients of financial administration.     2+3+6=11
(b) Discuss about the main features of ‘zero-based budgeting’. Also mention about the various steps involved in zero-based budgeting.                                             6+5=11

5.       (a) Describe various sources of Public Revenue. What in your opinion can be the best classification of the sources of Public Revenue?                              8+3=11
(b) “Tax is an important tool in the development of a country like India.” Discuss.                    11 
6.       (a) Discuss about the various aims and objectives of Public Expenditure as classified by Prof. Dalton. Also distinguish between Public Expenditure and Private Expenditure.         6+5=11
(b) Discuss the effects of public expenditure on production and distribution.        6+5=11

7.       (a) Write a note on growth of internal and external public debt in India.       5 ½ +5 ½ =11
(b) Explain the following:                              5 ½ +5 ½ =11
(i) Municipal Corporation.
(ii) Gram Panchayat.

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