Ch:9 Public Finance

Question 1

Q.1: What is meant by public finance?

Answer 1

Public finance is that branch of economics, which deals with the revenue and expenditures of the government. It studies the resources of government’s revenue and its expenditures.

Question 2

Define public finance in the words of Bastable?
.

Answer 2

Public finance is that branch of economics which studies the revenue and expenditures of government’s institutions, their interrelationship and financial administration

Question 3

Define public finance in the words of Prof Armitage Smith?

Answer 3

The study of nature and principles of government’s expenditure and revenue is called public finance.

Question 4

Define public finance in the words of Prof Dalton?

Answer 4

Public finance deals with government revenue and expenditure and studies
how government maintains the balance between its revenue and expenditure.

Question 5

Define canon of taxation “canon of convenience” according to Prof Adam
Smith.

Answer 5

According to Prof Adam Smith tax should be levied on the time when the
taxpayers can easily pay it. Therefore it is necessary that tax should be collected in installments and at the time when tax payers get their incomes or salaries.

Question 6

Write the four basic canons of taxation stated by Prof Adam Smith?

Answer 6

Prof Adam Smith has stated the following four basic canons of taxation.
(1) Canon of equality.
(2) Canon of certainity.
(3) Canon of convenience.
(4) Canon of economy.

Question 7

What is meant by direct tax?

Answer 7

Direct tax means the tax which is paid from the pocket of the person on when it is levied. It means the incidence (final burden) and impact (initial money burden) of the tax is on the same person. Income tax, property tax and wealth tax are the examples of this kind of tax.

Question 8

What is meant by indirect tax?

Answer 8

Indirect tax means the tax which is not paid from the pocket on when it is levied. Rather the burden of the tax is shifted to another person.
For example sales tax, custom duty and excise duty etc. The entrepreneurs and traders pay these taxes for the time being but they include the amount of this tax in the prices of goods and receive from the buyers.

Question 9

What is meant by progressive tax?

Answer 9

A tax in which rate of tax increases with the increase of level of income is called progressive tax. In Pakistan income tax is progressive tax

Question 10

What is meant by proportional tax?

Answer 10

A tax in which the rate of tax remains the same on every level of income is called proportional tax

Question 11

What is meant by regressive tax?

Answer 11

Regressive tax is opposite to progressive tax. The lower the income level is, more the rate of tax will be and the higher the income level is, the less the rate of tax will be. It means the rate of tax decreases with the increase in income and vice versa.

Question 12

What is meant by value added tax (VAT)?

Answer 12

This is a kind of tax which is imposed on every stage of production of good. For example VAT for a bread, will be received first from farmer on wheat, then after grinding when it becomes flour but on the difference of value between wheat and flour, then after baking the bread, on the difference of value between flour and bread and finally the retail seller on selling the bread.

Question 13

What is meant by Zakat?

Answer 13

The meaning of zakat is purification and growth. Zakat purifies the wealth from which the fixed amount of zakat is paid. The person who pays zakat, his wealth grows by the blessing and favour of Allah.

Question 14

Define Zakat in religious term?

Answer 14

Zakat is a compulsory payment on a sahib-e-nisab Muslim. He pays it as a religious duty at a given rate on open and secret wealth himself or through Islamic state to the deserving people.

Question 15

Who are the beneficiaries of Zakat?

Answer 15

Ans: According to Quran-e-Hakeem there are eight beneficiaries of Zakat.

(1)The Poor.
(2)The Needy.
(3)The newly converts to Islam.
(4)For the freedom of slaves.
(5)Debtors.
(6)The collectors of Zakat.
(7)The needy travellers.
(8) For the cause of Allah.

Question 16

What are the parts of public finance?

Answer 16

There are three parts of public finance.
(1)Public revenue.
(2)Public expenditures.
(3)Public debt.

Question 17

What canons a government takes into account while levying tax? OR
What are canons of taxation?

Answer 17

Following are canons of Taxation:

(1)Canon of equality.
(2)Canon of certainity.
(3)Canon of convenience.
(4)Canon of economy.
(5)Canon of productivity.
(6)Canon of simplicity.
(7)Canon of Elasticity.
(8)Canon of economic development.
(9)Canon of diversity.

Question 18

What is meant by Private finance?

Answer 18

The study of the nature of an individual’s income , expenditure and their related principles is called private finance.

Question 19

Define canon of taxation “canon of equality” according to Prof Adam Smith?

Answer 19

Ans: Canon of equality means that all the individuals should pay tax in accordance with their incomes. This canon of equality does not mean that every individual should pay equal tax or every individual should pay tax with the same rate. In fact,it means everybody should equally sacrifice for public finance. It is only possiblewhen the rich pay tax at the higher rate than the poor.

Question 20

Differentiate between the incidence of tax and the impact of tax?

Answer 20

Impact of the tax means the government receives the tax from the person on whom the tax is imposed while incidence means the burden of the tax. Because it is not necessary
that the burden of the tax is on the same person when tax is imposed.

Question 21

What are different kinds of taxes?

Answer 21

The following are kinds of taxes.

Direct tax.
Proportional tax.
Regressive tax.
Indirect tax.
Progressive tax.
Value added tax (VAT).

Question 22

Define Budget

Answer 22

Account of income and expenditure is called budget.

Question 23

What is meant by surplus budget?

Answer 23

When the revenue of the government is more then its expenditures, then it is called surplus budget

Question 24

What is meant by Deficit budget?

Answer 24

When the revenues of the government are less than its expenditures then it is called a deficit budget.

Question 25

What is meant by Balanced Budget?

Answer 25

When the revenues of the government are equal to its expenditures then it is called a balanced budget.

Question 26

What is meant by Fee?

Answer 26

The government provides some direct services to the people and charges money in return for these services, it is called fee.

Question 27

Differentiate between Fee and Tax?

Answer 27

Fee is the reward of the government’s services from which the people are benefited, while the tax payer cannot demand for direct personal benefit from the government in return for payment of tax.

Question 28

What is meant by Tax?

Answer 28

Tax is a compulsory payment made by the people to government treasury to meet the expenditure of the government, for the common
benefit of the people.
There are two characteristics of tax:

Firstly:-
Tax is a compulsory payment made by the people. It is illegal and punishable to refuse payment of tax.

Secondly:-
The amount of money collected from taxes is spent on social welfare. A tax payer cannot demand for a direct personal benefit from the government in return for payment of tax.

Question 29

Differentiate between public finance and private finance?

Answer 29

The study of government’s revenue, expenditure and their principles is called public finance. whereas, the study of the nature of an individual’s income, expenditure and their related principles is called private finance

Question 30

Write four points of similarities between public finance and private finance?

Answer 30

similarities are as following:

1)Balance between income and expenditure.
2)Maximum utilization of scarce means.
3)Need of loans.
(4) Increase in income through investment.

Question 31

Write four differences between public finance and private finance?

Answer 31

Differences are as following:

1-Difference in Adjustment of income and expenditures
2-Difference in budget period.
3-Private budget is kept secret while public budget is announced.
4-Individuals can lend only from the internal resources while the
government can lend both from internal, external resources and
international financial agencies.

Question 32

Write four main sources of public revenue?

Answer 32

Following are four main sources of public revenue:
(1) Taxes.
(2) Fee.
(3) Price.
(4) Special assessment

Question 33

Write four heads of public expenditure?

Answer 33

Following are four heads of public expenditure:

(1) Defiance.
(2) Police.
(3) Civil administration.
(4) Courts.

Question 34

Write four points of importance of Zakat.

Answer 34

Following are four points of importance of Zakat:

(1)Fair distribution of wealth.
(2)Remedy to unemployment.
(3)Remedy to poverty.
(4)Remedy to concentration of wealth.

Question 35

Write four points of difference between Zakat and tax?

Answer 35

Following are four points of difference between Zakat and tax:

1-Difference in objectives: Difference in objectives of zakat and tax.

2-Exemption: No exemption in the payment of zakat at all while government may exempt the tax.

3-Rate: Rate of zakat is fixed for ever while the government keeps on
changing the rate of tax according to the circumstances.

4-Personally or through state: Zakat may be paid either personally or
through state while tax is always paid to the government.