Sunday, October 06, 2019

Public Finance Solved Question Papers: Nov' 2018


2018 (November)
COMMERCE (General/Speciality)
Course: 501 (PUBLIC FINANCE)
(NEW COURSE)
The figures in the margin indicate full marks for the questions
Full Marks: 80
Pass Marks: 24
Time: 3 hours
1. (a) Fill in the blanks:                                                  1x4=4

1)         Public finance deals with income, expenditure and borrowings of the government institutions.
2)         The finance ministry possesses the expert knowledge in finance matters.
3)         Every tax is an additional burden on the tax-payer (people).
4)         Public expenditure is more important than private expenditure.
(b) Answer the following questions directly:                     1x4=4
1)      What is public finance?
Ans: Public finance is a study of income and expenditure or receipt and payment of government. It deals the income raised through revenue and expenditure spend on the activities of the community and the terms ‘finance’ is money resource i.e. coins.
2)      Mention one objective of budget.
Ans: Estimation of public expenditure
3)      What do you mean by public revenue?
Ans: 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.
4)      What is private expenditure?
Ans: Expenditure incurred by an individual to satisfy his personal want such as health, food, education etc is called private expenditure.
2. Write short notes on:                                                                4x4=16
a)      Private finance.
Ans: Generally, the word ‘finance’ is loosely used for both the public and private finance. By private finance, we mean the study of the income, debt and expenditure of an individual or a private company or business venture. On the other hand public finance deals with income, expenditure and borrowings of the government. There are both similarities and dissimilarities in governmental financial operations as compared to the monetary operations of private businessman. An individual is interested in the utilisation of labour and capital at his disposal to satisfy social wants. In short, both private finance and public finance have almost the same objective of satisfaction of human wants. Again, private finance stresses individual gains whereas public finance attempts at promoting social welfare of the whole community. These two view points are correct to greater extent only because of their similarities as well as dissimilarities between both.
b)      Performance Budget.
Ans: 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.
c)       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.
Examples of Tax Revenue 
Ø  Income Tax(on income of the individual as well as joint Hindu families) 
Ø  Corporation Tax (on income of the companies both domestic and foreign companies operating in India ) 
Ø  Interest Tax (on the gross interest income of the financial institutions like Bank) 
Ø  Expenditure Tax(expenditure incurred in luxury hotels and restaurants) 
Ø  Wealth Tax(total wealth of individuals and Hindu undivided families) 
Ø  Custom Duty.(import and export duty) 
Ø  Central excusive Duty.(duties on industrial products) 
Ø  Service Tax.(on services provided by hotels,telephones,port services etc.) 
d)      Significance of Public Expenditure.
Ans: 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.
2)      Reduction in Disparities of Income and Wealth.
3)      Economic Stability.
4)      Economic-Social Welfare.
5)      Economic Development of Underdeveloped Countries.
6)      Increase in State Activities.
3. (a) Discuss about the scope of public finance. State about its relations with Economics, Political Science and Statistics 5+3+3+3=14
Ans: Scope of Public Finance (Subject Matter of Public Finance)
The scope of public finance may be summarised as under:
1.       Public Revenue
2.       Public Expenditure
3.       Public Debt
4.       Financial Administration
5.       Economic Stabilisation
1.       Public Revenue: Public revenue concentrates on the methods of raising public revenue, the principles of taxation and its problems. In other words, all kinds of income from taxes and receipts from public deposit are included in public revenue. It also includes the methods of raising funds. It further studies the classification of various resources of public revenue into taxes, fees and assessment etc.
2.       Public Expenditure: In this part of public finance we study the principles and problems relating to the expenditure of public funds. This part studies the fundamental principles that govern the flow of Government funds into various streams.
3.       Public Debt: In this section of public finance, we study the problem of raising loans. Public authority or any Government can raise income through loans to meet the short-fall in its traditional income. The loan raised by the government in a particular year is the part of receipts of the public authority.
4.       Financial Administration: Now comes the problem of organisation and administration of the financial mechanism of the Government. In other words, under financial or fiscal administration, we are concerned with the Government machinery which is responsible for performing various functions of the state.
5.       Economic Stabilization: Now –a-day’s economic stabilization and growth are the two aspects of the Government economic policy which got a significant place in the discussion on public finance theory. This part describes the various economic polices and other measures of the government to bring about economic stability in the country.
From the above discussion, we can say that the subject-matter of public finance is not static, but dynamic which is continuously widening with the change in the concept of state and functions of the state. As the economic and social responsibilities of the state are increasing day by day, the methods and techniques of raising public income, public expenditure and public borrowings are also changing. In view of the changed circumstances, it has given more responsibilities in the social and economic field.
Relationship of public finance with economics, politics, history, sociology, ethics, jurisprudence, psychology
Resemblances and differences among the sciences are the true bases for drawing up a clear line of demarcation between them. Public finance has much to take and much to give to the sciences like economics, politics, history, jurisprudence etc. As a matter of fact, public finance is a curious mixture of all these sciences as is evident from the following:
A) Public Finance and Economics: If economics is taken as a science which deals with the administration of scarce resources to satisfy human wants, public finance may be taken as that part of economics which deals with only the satisfaction of wants of the citizens of the state. Many of the problems of public finance are part of the subject-matter of economics. For instance, the problems of taxation are essentially a part of economics. Taxation implies shifting of resources from private hands to the government and, therefore, the shifting of utilization of resources by the individuals and the groups to the hands of the public authorities.
B) Public Finance and Politics: All social sciences are brothers or sisters in the sense that these deal with one or the other aspect of social life. In this manner politics can very well be described as a sister science of public finance. There is an intimate connection between voting and taxation. Much of public finance has political science aspects. According to Dr. Dalton, “Public finance is the borderline between economics and politics.”
C) Public Finance and History: No doubt, public finance is related with history but not so closely as it is related with economics and politics. Public finance has given shape to the nature of public finance as it has given to anything else. History puts up the lessons of the past before us in the sphere of public finance as it is in any other sphere. No finance policy can be formulated without keeping in view the historical development. History provides us with facts, figures and illustrations which is essential for the formulation of any finance policy.
D) Public Finance and Sociology: Social reforms which form the part of sociology, are now supposed to be the responsibility of the state and they need government finance for execution. In fact, these social reforms have enhanced the scope of public expenditure. For example, crimes are the topics which sociologist studies, but are the student of public finance who studies the raising of revenue from criminals of one kind or the other. Taxes on inheritance, gifts etc. may have their due effects on the social set-up of the society. In this way sociology is very much related to public finance.
E) Public Finance versus Law: The fiscal policy of a country, in general, is always based on the principles of equity and justice. All these terms have been borrowed from jurisprudence and in fact are based on the foundation of legal definitions. The law of the country is the basis on which taxes are imposed and funds are allocated. There are laws which prevent improper raising of funds and their improper allocations.
F) Public Finance and Ethics: There is also a close relationship between public finance and ethics. Equity and justice have as much to do with ethics as they have with law and therefore the relationship between public finance and ethics is obvious, if the fiscal policies are to be based on these principles. For instance, it is neither legal nor ethical to snatch Rs. 100 as tax from a person who earns hardly Rs. 200.
G) Public Finance and Psychology: Public finance is also related with psychology. Public finance deals with people and as such most of its problems are human problems and hence depend upon human behaviour which is the subject-matter of psychology. For example, take the case of taxation on company profits. Since profits may be taken as ‘rewards for risk taking’, an undue increase in the tax on company profits may adversely affect the spirit of risk taking and thereby affect investment in the companies.
From the above study, it is clear that public finance is related to many of the social sciences which deal with different aspects of human behaviour.
Or
(b) Explain the theory of ‘principle of maximum social advantage’ with the help of diagram. State its practical problems. 10+4=14
Ans: 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 is Financial Administration? Briefly analyze the various instruments of financial administration.         4+10=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.”
INSTRUMENTS/AGENCIES OF FINANCIAL ADMINISTRATION
For the success of financial administration of the Government, different constitution play imperative role. These agencies can be grouped as:
a)      Executive
b)      Legislature
c)       Financial Department of Financial Ministry
d)      Auditing Department
a)      Executive. According to Prof. H. M. Grover, “The executive is the best position to the view the financial problem as a whole ant to assume the responsibilities for the success and failure of a financial programme.” Executive is responsible for running the administration, thus it is in the best position to say what funds are required for it. No tax or expenditure can be made without the permission of the executive. It is therefore, the responsibility of the executive to prepare the budget which is stupendous task.
In Parliamentary Government, there is a principle that no demands for grants can be made except on recommendation of the executive. It is therefore In India; executive refers to the Central Government. Since, Finance Ministry is responsible for the administration of the finance of the Central Government, even then it performs the policy making function and tries its best to get the final approval of the legislature.
b)      Legislature. In democratic parliamentary system, it is the legislature or parliament which is the time representation of the people. In India, under the constitution there is special provision to control the finances:
1.       Controller over Taxation. Indian constitution under Article 265 provides that no tax shall be levied or collected except the permission of law. Thus, The Government has to present all tax proposals before parliament in the form of a Bill to be passed into law and unless no art is passed, no tax can be levied. Similarly U.S.A constitution under article one mentions, “The congress shall have to levy and collect tax.”Therefore under, we can conclude that the power of taxation always vests with literature.
2.       Control over Public Expenditure. In Indian constitution states. “All revenues received of all loans by the union or state shall be paid into in the consolidated funds of the union or state, as case may be ad that no money can be written out of  the fund except in accordance with the law and for the purpose and in the manner provided for in the constitution.”
3.       Enforcement of Financial Accountability. 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. This function is performed by the Comptroller and Audit-General of India. In this way, one can say that Parliament is the supreme in Finance matters.
c)       Financial Ministry: 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
1.       Department of Economic Affairs.
2.       Department of Revenue and Insurance.
3.       Department of Expenditure.
4.       Department of Co-ordination.
d)      Auditing. Auditing is the most important ingredients of parliamentary control over the finances of country as a hole. In a democratic form of government, the supreme authority with the regard to financial policy is vested in legislature. This is ensured by the provision of audit of public expenditure by an independent statutory authority i.e. Comptroller and Audit-General. Therefore, audit supplies an essential link between the executive and parliament and helps in interpreting the action in so as the have a finance bearing of the former on the latter.
Or
(b) What do you mean by zero-base budgeting? What are its features? Discuss the main benefits of zero-base budgeting. 3+4+7=14
Ans: 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.
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:
1.       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.
2.       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.
3.       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.
4.       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.
5.       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.
6.       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.
7.       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. 
8.       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. 

5. (a) Discuss about the various sources of public revenue. How is public revenue important in economic development? 8+6=14
MEANING OF PUBLIC REVENUE AND ITS SOURCES
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.
However, Prof. Dalton has defined the term in two senses – broader and narrow sense. In broad sense, it includes all the income and receipts, irrespective of their sources and nature, which the government happens to obtain during any period of time. In the narrow sense, it includes only those sources of income of the government which are described as revenue resources. In broader view of the concept is that is includes all loans which the government raises under the term ‘public revenue’ or public income. The distinction in both can also be explained as the term ‘public revenue’ used in public finance. It includes only those sources of government income which are not subject to repayment. In a broad sense, it means all receipts of the government irrespective of the fact whether they are subject to repayment or not.
In a modern welfare state, public revenue is of two types:
(a)    Tax revenue and
(b)   Non-tax revenue.
(a) 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.
Examples of Tax Revenue 
Ø  Income Tax(on income of the individual as well as joint Hindu families) 
Ø  Corporation Tax (on income of the companies both domestic and foreign companies operating in India ) 
Ø  Interest Tax (on the gross interest income of the financial institutions like Bank) 
Ø  Expenditure Tax(expenditure incurred in luxury hotels and restaurants) 
Ø  Wealth Tax(total wealth of individuals and Hindu undivided families) 
Ø  Custom Duty.(import and export duty) 
Ø  Central excusive Duty.(duties on industrial products) 
Ø  Service Tax.(on services provided by hotels,telephones,port services etc.) 
(b) 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.
3. Surplus from Public Enterprises: The Government also gets revenue by way of surplus from public enterprises. In India, the Government has set up several public sector enterprises to provide public goods and services. Some of the public sector enterprises do make a good amount of profits. The profits or dividends which the government gets can be utilized for public expenditure.
4. Special assessment of betterment levy: It is a kind of special charge levied on certain members of the community who are beneficiaries of certain government activities or public projects. For example, due to a public park in a locality or due to the construction of a road, people in that locality may experience an appreciation in the value of their property or land. Thus, due to public expenditure, some people may experience 'unearned increments' in their asset holding.
5. Grants and Gifts: Gifts are Voluntary contributions by individuals or institutions to the government. Gifts are significant source of revenue during war and emergency. A grant from one government to another is an important sources of revenue in the modern days. The government at the Centre provides grants to State governments and the State governments provide grants to the local government to carry out their functions.
6. 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.
SIGNIFICANCE OF PUBLIC REVENUE
The public revenue of one country differs in amount from that of another country. The difference is due partly to the size of country and partly to other causes. India is not a small country. It is sub-continental in itself. Its stages are as big as some counties of the west. But its public revenue is not very big in size. What does the size of public revenue then indicate. It depends on the following aspects.
1. Sign of Prosperity: A man who has a big income is in general respected more than the other who has a smaller income. It is only rarely that people with small income are held in high esteem by society. And in the same way a country that has a small volume of public revenue is not regarded as a big power and consequently not respected by other counties. A State that has a big volume of public revenue considered as a power to be reckoned with. America and United Kingdom have public revenue that is several times higher than that of our country. And we knows they do, that they can afford to do things that require much money.
2. Welfare of Country: Other things being equal, however, the welfare of a country can be judged from the size of its public revenue. A country whose resources, both natural and human, are not fully developed is a poor and backward country. And the government of such a country must necessarily be poor also. And with poverty of wealth goes also the poverty of welfare unless other things are not the same.
3. Composition of Public Revenue: Yet, it is not merely the size of public revenue the one should look to in order to form some idea of the prosperity or otherwise of a country. The composition of public revenue is as much important as its size. If a large part of the wealth of the government comes from the poor it is not a sign of a healthy state of affairs.
4. Mere Availability of Means: Public revenue is only, a means and the mere availability of means indicates nothing. All depends on how the means are utilized. It is not safe, therefore, to reckon with merely the size of revenue. Some countries of the world have public revenue in thousands of millions. The tendency today is on the one hand to spend an increasing percentage of public revenue on social services and social security. On the other hand, everywhere more and more money is being diverted to the building up of strong defensive and offensive force.
5. Manner of Public Revenue: A word may again be said about the manner in which revenue is obtained from the people. Every government tries to get more money from the rich that from the poor. But not all succeed in so doing. Some fail because they are ignorant and some fail because they are careless. And we have to say also that some fail because they are mischievous.
Or
(b) Distinguish between Progressive and Proportional Taxation. Discuss the merits and demerits of each of them. 6+4+4=14
Ans: Difference between Progressive, Regressive and Proportional tax system
Basis
Progressive
Proportional
Meaning
A tax, the rate of which increases with every increase in income is called progressive tax.
If a tax on all incomes is levied at the same rate, it is called proportional tax.
Assessment
Tax is charged on income.
Tax is charged on income.
Type of tax
It includes direct taxes.
It includes direct taxes.
Benefits
Low income group people are benefited.
High income group people are benefited.
Ability to pay
Payer’s ability to pay is considered.
Payer’s ability to pay does not matters.
Revenue
It generates more revenue to the government.
It generates less revenue as compared to others.
Equality
It leads to equality to sacrifice.
It does lead to equality to sacrifice.
Merits of Progressive Taxation
1.          Based on the Principle of Equity: Progressive tax rates increase with the increase in income group as the higher income group people have high ability to pay because of rapid fall in the marginal utility of money with the increase in income.
2.          Powerful Tool for Reducing Inequality: Progressive taxation is a powerful tool for reducing the inequalities of income because the rich people are bound to pay more taxes.
3.          More Elastic: The progressive tax system is more elastic because the state can change the rate of taxation during any time (like war, famines or drought etc.) for collection of more funds and a minor change in the rate of taxation in the higher income group can bring substantial increase in the income.
4.          Economical: Progressive taxes can be justified on the ground that they are more economical as the cost of collection does not rise with the rates of taxes.
5.          Based on Social Justice: This type of tax is also advocated from the socialistic pattern of society. It is powerful instrument in narrowing down the gap between the rich and the poor sections of the society.
6.          More Productive: It is more suitable because the government revenue automatically increases with the increase in economic activities.
7.          Based on Modern Social Ethics: Progressive tax is also justified on the ground of modern social ethics as rich should contribute more than the poor. It has proved its worth through revenue productivity, social usefulness and fair justice.
8.          Automatic increase in Revenue: Progressive taxes lead to an automatic increase in public income.
Demerits of Progressive Taxation System
1.          Difficult to Understand: The progressive tax system is very difficult to understand as it can have infinite number of progression and one has to take the help of an expert in evaluation and calculation of the tax money to be paid.
2.          Difficult to Measure Utility: The marginal utility of an individual cannot be measured easily because the mental and psychological satisfaction varies from individual to individual. All human beings have different mentality and law of marginal utility cannot be applied universally.
3.          Retards Capital Formation: The degree of progressive taxation has an important bearing in the process of saving and capital formation in an economy.
4.          Scope of Tax Evasion: In the progressive tax, there is a large scope of evasion of tax. There may be false declaration of the income just to save from the heavy taxation. Here the motives for evasion is stronger and the means of prevention less effective than in the case of proportional tax.
5.          Breeds Corruption: Generally, it is argued that progressive taxation breeds corruption in public life. This depends upon a number of factors such as administrative efficiency, social consciousness and purpose of financial operations etc.
6.          Wrong Assumption: It is based on wrong assumption of marginal utility of money which is less to a rich person as compared to a poor person. But satisfaction is a mental or psychological phenomena.
c) Regressive Tax: In regressive taxation, the larger the income of tax-payer, the smaller is the proportion that he contributes. A schedule of regressive tax rate is one in which the rate of taxation decreases as the base increases.
d) Degressive Tax: A Degressive tax is one on which tax is progressive up to a certain limit, after that it is proportional, i.e., charged at flat rate.
Merits of Proportional Taxation
1.          Simple and Uniform: Proportional tax system is simple and uniformly applicable. The tax can be administered relatively easily. Since the simple and uniformly applicable. The tax can be administered relatively easily. Since the tax rate is uniform, there is no problem of computing the tax liability for different individuals. Since everyone pays the same proportion of his income the system has a popular appeal and the revenues can be raised with minimum opposition from the tax payers.
2.          Free from Harmful Effects: Proportional tax is free from the harmful effects like disincentive to saving and productivity that are associated with progressive taxation when imposed steeply. If the government follows stringent communistic ideas, the richer sections may be very steeply taxed under progressive system. This needs not usually occur to a proportional system.
3.          Easy to Calculate: Proportional taxes are levied at certain proportion of the income and the rate of tax does not vary. Therefore, they are easy to calculate.
4.          Equality of Sacrifice: Proportional taxes are sometimes justified on the ground that the real burden of taxes must be equal to the money burden. If this principle is accepted, then the proportional taxes can be justified.
5.          Certain: Such taxes enjoy the benefit of certainty. Both the tax payer and the state can know the amount of the tax.
Demerits of Proportional Taxation
1.          Not Equitable: Proportional taxes are unjust as the burden is heavier on poor sections. They have been justified on the wrong notion that the real burden of a tax is equal to its money burden. The fact, however, is that real burden is heavier on small income groups.
2.          Less Elastic: Proportional taxes are less elastic as compared to progressive taxes. The taxes cannot increase beyond a certain limit because of low taxation capacity of the poor people. Thus it is not easy for the state to increase its revenue through such taxes.
3.          Adverse Effect on Distribution of Wealth: Revenue is not the only motive of Tax. The idea that taxes are only for revenue only has long been discarded. The weapon of taxation is increasingly used to promote social justice. It is in this field that proportional taxes miserably fail. They fail to narrow down the inequalities in the distribution of wealth.
4.          Lack of Elasticity: Proportional tax fails to follow the rule of elasticity. As a result, Government is unable to increase its revenue.
5.          Not According to Ability to Pay: it is not according to ability to pay of the individual. Low income groups feel heavy burden of taxation. The marginal utility of money decreases rapidly with the increase in income. So, the rich income group people have negligible burden.
b) Progressive Tax: A tax, the rate of which increases with every increase in income is called progressive tax. A schedule of progressive tax rate is one in which the rate of taxation increases as the tax base increases. In India, we have progressive tax rate system.

6. (a) Discuss about the various aims and objectives of public expenditure as classified by Prof. Dalton. Mention about the effects of public expenditure on production and distribution.                   6+4+4=14
Ans: Objectives of Public Expenditure: The major objectives of public expenditure are
a)      Administration of law and order and justice.
b)      Maintenance of police force.
c)       Maintenance of army and provision for defence goods.
d)      Maintenance of diplomats in foreign countries.      
e)      Public Administration.
f)       Servicing of public debt.
g)      Development of industries.
h)      Development of transport and communication.
i)        Provision for public health.
j)        Creation of social goods.
Effects of Public Expenditure on Production: While analyzing the effects of public expenditure, Dalton very correctly said that just as taxation, other things being equal should reduce production as little as possible, so the public expenditure should increase it as much as possible. He further added that the level of production and employment in any country depends upon the following three factors:
1)      Effects Upon the Ability to Work, Save and Invest: If public expenditure increases the efficiency of a person to work, It will promote production and national income. Public expenditure on education, medical services, cheap housing facilities, means of transport and communications, recreation facilities etc. will increase the efficiency of persons to work. At the same time, public expenditure can promote saving on the part of the lower income groups by providing additional income to them, for a person who has larger income can be normally expected to save a larger amount. Finally, public expenditure, particularly repayment of public debt will place additional funds at the disposal of those who can save. Thus, it is evident that public expenditure can promote ability to work, save and invest and thus promote production and employment.
2)      Effects on Willingness to Work, Save and Invest: Public expenditure also affects the people’s willingness to work, save and invest. Pension, provident fund, interest-free loan, free medical aid, unemployment allowances and other government payments provide security to a person and, therefore, reduce the willingness of persons to work and save – after all, why should a person work hard and save when he knows fully he will be looked after by the government when he is not in a position to earn any income, i.e. he finds his future fully secured. In the absence of any savings, the question of investment does not arise at all.
3)      Effects on Diversion of Resources: Public expenditure also affects the diversion of resources. For example, if the government wishes to attract productive resources to a particular industry, it will start giving financial assistance from its own funds to such an industry. In the same way, if the government wishes to attract productive resources to a particular area or region, it will start giving a variety of incentives in the form of bounties, subsidies etc. (such as land at concessional rates, cheap electric supply and water, loans on nominal rates of interest, freedom from sales tax, income-tax etc. for a certain period, production subsidy etc.) to the industrialists to achieve this objective.
Effects of Public Expenditure on distribution: Public expenditure has its effects not only on production but is also a most powerful weapon in the hands of the government for bringing about an equitable distribution of wealth. For bringing about an equitable and just distribution of wealth the government can use not only its taxation policy but public expenditure policy can also help to a great extent in achieving this very objective. In fact, the role of taxation and public expenditure in removing inequalities of income is complementary and supplementary. If the government intends to minimize the economic inequalities that existed in the society, it should levy maximum about of taxation on richer sections of the community, because their taxable capacity is undoubtedly high. The income so earned through taxation should be spent on providing various types of facilities, subsidies and amenities to the poorer section of the community. For example, the state can extend to the poor benefits of old age pensions, social insurance, free medical aid, cheap housing, interest-free loans, subsidized food etc. This will automatically bring redistribution of wealth (national income) in favour of the poorer section of the community. On the contrary, public expenditure which confers larger benefits to the richer sections of the community, e.g., subsidies on luxury goods, provision of subsidized milk, other foodstuff etc. tends to widen the gap of inequalities. As Dalton puts, “That system of public expenditure is best which has the strongest tendency to reduce inequalities of income”. Public expenditure has, thus, an important rule in reducing economic inequalities in the community.
Or
(b) Discuss about the various ways in which public expenditure can achieve economic development in the developing countries.                                                           14
Ans: 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:
7)      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.
8)      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.
9)      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.
10)   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.
11)   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.
12)   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.
(OLD COURSE)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
1. Answer the following as directed:                                                                                                      1x8=8
a)      What is private finance?
Ans: By private finance, we mean the study of the income, debt and expenditure of an individual or a private company or business venture.
b)      Which is the best system of public finance?
Ans: The best system of public finance is that which secures the maximum social advantage.
c)       What is budget?
Ans: budget is an annual financial statement showing item wise estimates of expected revenue and anticipated expenditure during a fiscal year.
d)      In zero-base budgeting, every year is taken as a new year. (Write True or False)
Ans:  True
e)      What is public revenue?
Ans: 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.
f)       Mention one distinction between tax and fees.
Ans: Tax is a compulsory payment to the government, whereas fees are a voluntary payment to the government.
g)      Public expenditure is more important than private expenditure. (Fill in the blank)
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)         Scope of public finance.
b)         Elements of budget.
c)          Tax and non-tax revenue.
d)         Internal public debt.
e)         Functions of Gram Panchayat.
3. (a) Define public finance. Discuss the role of public finance as a tool of economic and social welfare.   3+9=12
Or
(b) “The best system of public finance is that which secures the maximum social advantage.” Discuss the statement.     12
4. (a) What are the main instruments of financial administration? Discuss each of them in brief.    11
Or
(b) What are the pre-conditions of zero-base budgeting? Discuss the merits and demerits of zero-base budgeting. 3+4+4=11
5. (a) Explain the following:                                        + =11
1)         Adam Smith’s classification of public revenue.
2)         Prof. Dalton’s classification of public revenue.
Or
(b) Discuss about the features of tax system of our country. Also write a brief note on Adam Smith’s canon of equality. 7+4=11
6. (a) Mention the similarities between Public Expenditure and Private Expenditure. Also explain the ability to pay theory of Prof. Pigou.                            4+7=11
Or
(b) What are the principles of public expenditure? Which of these do you prefer?             8+3=11
7. (a) Write a note on Union and State Financial Relations.                                   11
Or
(b) What are the main sources of revenue of Municipal Corporation? What are the welfare activities where these revenues are spent? Discuss.              5+6=11

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