Taxes & National Income
While accounting/calculating national income the taxes, direct taxes and indirect taxes collected by
the governments, needs to be considered. In case of India, to the extent the direct taxes (individual
income tax, corpoarate income tax i.e. the corporate tax, divident tax, interest tax, etc.) are concerned
there is no need of adjustment whether the national income is accounted at factor cost or market cost.
This is so because at both the ‘costs’ they have to be the same, besides these taxes are collected at the
incomes of the concerned person or group.
But the amount of indirect taxes (cenvat, customs, central sales tax, sales tax/vat, state excise, etc.)
needs to be taken care of if the national income is accounted at the ‘factor cost’ (which is the case
with India). If the national income is calculated at the factor cost then the corpus of the total indirect
taxes needs to be deducted from it. Why so? This is because, they have been added twice – once in
the hands of the people/group who pay them (because they pay for it from their ‘disposable income’
while puchasing things!) and other in the hands of the governments (as their income receipts).
Collection/source of the indirect taxes are the ‘disposable income’ (which individuals and
companies have with them after paying their direct taxes – from which they do any purchasing and
finally, the indirect taxes reach the various governments!). Thus, if the national income is calculated
at the factor cost, the formula to seek it will be:
National Income at Factor Cost = NNP at Market Cost – Indirect Taxes
However, if the national income is being derived at the ‘market cost’ the indirect taxes do not need to
be deducted from it. In this case, the governments need not add their income accruing from indirect
taxes to the national income either. It means, that the confusion in the case of national income
accounting at factor cost is only related with the indirect taxes.
While accounting/calculating national income the taxes, direct taxes and indirect taxes collected by
the governments, needs to be considered. In case of India, to the extent the direct taxes (individual
income tax, corpoarate income tax i.e. the corporate tax, divident tax, interest tax, etc.) are concerned
there is no need of adjustment whether the national income is accounted at factor cost or market cost.
This is so because at both the ‘costs’ they have to be the same, besides these taxes are collected at the
incomes of the concerned person or group.
But the amount of indirect taxes (cenvat, customs, central sales tax, sales tax/vat, state excise, etc.)
needs to be taken care of if the national income is accounted at the ‘factor cost’ (which is the case
with India). If the national income is calculated at the factor cost then the corpus of the total indirect
taxes needs to be deducted from it. Why so? This is because, they have been added twice – once in
the hands of the people/group who pay them (because they pay for it from their ‘disposable income’
while puchasing things!) and other in the hands of the governments (as their income receipts).
Collection/source of the indirect taxes are the ‘disposable income’ (which individuals and
companies have with them after paying their direct taxes – from which they do any purchasing and
finally, the indirect taxes reach the various governments!). Thus, if the national income is calculated
at the factor cost, the formula to seek it will be:
National Income at Factor Cost = NNP at Market Cost – Indirect Taxes
However, if the national income is being derived at the ‘market cost’ the indirect taxes do not need to
be deducted from it. In this case, the governments need not add their income accruing from indirect
taxes to the national income either. It means, that the confusion in the case of national income
accounting at factor cost is only related with the indirect taxes.
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