CHAPTER - I

THE ROLE OF INDIRECT TAXES IN DEVELOPING ECONOMIES

m.
WITH S P ^ I A L j ^ m B j g E T9.,

Terminology and the conceptual problem*

Public Finance literature customarily classifies taxes into

'direct' and 'Indirect* taxes* Yet the terms 'direct* and 'indirect'

taxes In this respect have remained vague since they come short of

a standard Interpretation* Prof* Bullock found at least a dozen

of different definitions of these terms* Seligman1 went to the

extent of saying that "this criterion of distinction as been

abandoned by modern science"• Though he has gone a bit far by

saying so because even the present day writers still employ it

widely, the fact remains that such classification falls to

attribute a sound, scientific or legal basis for the distinc­

tion* However, In all studies of tax-structure, the distinction

between direct end indirect taxes appears prominently* This

distinction is carried out to refer to conventionally well-

defined groups of taxes* For example, taxes on commoditis and

transactions are looked upon as Indirect taxes* Though it has

little economic Interest but it often has political or adminis-

trative significance* There are embiguities in the distinction

between direct and lndrect taxes put forward by different

economists from time to time end provided we are aware of these

1* Sellgman, E*R*H«, "Essays on Taxation", Mao tflllan & Co*Ltd.

London, 1925, PP*690-91.
2* Dosser* Douglas, Government Finance and Economic Develop­
ment, (Ed«) by Peacock A*T* and Hauser Gerald. Organisation
for Economic Co-operation and Development,Parls,1965,F*127*
 ( 2 )

a m b i g u i t i e s , t h e r e l a n o b a n l a r e g a r d i n g I n d l r e o t t a r e s a s

t a x e s o n p r o d u c t s . *

I t h a s b e e n o u e t o m a r y t o d l s t i a g u l g t b e t w e e n

' u n d e r d e v e l o p e d * a n d ' d e v e l o p e d ' o o m m t z i e s t h o u g h t h e d e f i ­

n i t i o n s p a t f o r w a r d b y d i f f e r e n t e c o n o m i s t s h a v e b e e n r a t h e r

l o o s e a n d a r b i t r a r y t o s o m e e x t e n t # I t i s o b s s r v e d b y s e r i o u s

t h i n k e r s t h a t a l t h o u g h a g r e a t d e a l o f h i g h g r a d e m e n t a l

e f f o r t h a s g o r e i n t o d e f i n i n g t h e c h a r a c t e r i s t i c s o f s u c h

c o u n t r i e s * o n e m a y w o n d e r w h e t h e r t h i s i s a v e r y p r o f i t a b l e

a c t i v i t y # * S h o r e i s n o d s a r t h o f d e f i n i t i o n s o n t h e s u b j e c t

b u t a w e l l - r o u n d e d u p * p r e c i s e a n d u n i v e r s a l l y a a o e p t e d d e f i ­

n i t i o n o f u n d e x d e v e l o p n s n t r e m a i n s s ' c r y i n g n e e d ' i n e s o n a m i e

l i t e r a t u r e # H o w e v e r , t h e r e i s a l m o s t a c o n s e n s u s a m o n g t h e

e c o n o m i s t s t h a t t h e u n d e r d e v e l o p e d c o u n t r i e s c a n b e i d e n t i f i e d

b y s o m e t y p i o a l f e a t u r e s e x h i b i t e d b y t h e m , s o m e o f w h i c h h a v e

b e e n p o i n t e d o u t b y V i n e r * s u o . > a s a h i g h r a t i o o f p a p u l a t i o n

t o a r e a , s c a r c i t y o f c a p i t a l , l o w r a t i o o f i n d u s t r i a l o u t p u t

6
t o t o t a l o u t p u t o r i n d u s t r i a l p o p u l a t i o n t o t o t a l p o p u l a t i o n

e t o . , w h i c h a r e w e l l - r e c k o n e d b y e c o n o m i s t s a s t y p i c a l f e a t u r e s

o f a n u n d e r d e v e l o p e d e e o n o m y # F e r - e a p i t a r e a l i n c o m e h a s a l s o

9 # I b i d , p a g e I P S #

4 # F r e e t * . # k # , P u b l i c F i n a n c e i n D e v e l o p i n g C o u n t d e a # 2 n d s d n . ,

k s g l i a h L a n g u a g e B o o k s o c i e t y a n d V e l d e n f e l d a n d x\r i o o l s o n ,

1 9 7 5 , P . 9 #

5 # V i n e r , J a c o b , S h e B e a n o m i e s o f D e v e l o p m e n t , i n S h e B e c n o n l a e

o f U n d e r d e v e l o p m e n t , l e d . ) b y A # V « A g a r w a l a a n d 3 . P . S i n g h ,

O x f o r d U n i v e r s i t y P r e s s , 1 9 5 8 , B P . 1 0 - 1 2

6 # l e i b e n s t e i n , H « , le e m o s lo B a e k w a z d a e s s e n d B s e n o n i e G r o w t h ,

J o h n W i l e y & s o n s * l n e « , P e w T o r k , 1 9 5 7 , P # 4 0 #
been aooepted an a measuring rod of economic backwardness or
7
otherwise* It has been agreed-upon by ths eoonomiwte as vail

as by ths United nations8 to ba an indicator of eeenomlo

status of various nations* Again, ths tints ' u n d e r d e v e l O T o d ',

'undeveloped', 'developing* sad 'po^r' art is aurreney in

economic literature bat the dlatlnotlon between then is not

well-prmounted* Though tha tarns 'underdeveloped' and

'developing' ara mors In usage than tha other two, yat it Is

not wary clear whether they are looked upon as synonyms or

otherwise* This point has been touohsd upon by ifylnt

a wham ha

assarts that tha expression should bs 'underdeveloped' reeomsw

see and 'backward people' •

.te&spattoian
Under the assuned meaninga of "indLreet taxosM and

"underdeveloped eouotriee” it is observed that I n d i r a at tanas

puLay a vary important role in ths ilnanoes of underdeveloped

oountries* Compared to direst taxes, ladlreet taxes happen to

bo the greater contributor to tax revenues, and hones, figure

prominently in tha fiseal armoury of the developing oountries*

7* (a) F r o s t s h o w s t h e s e f e a t u r e s o n c o n s u m p t i o n eai n r o d u o t l o n
sides) Frost, A .it ., Public Finance i n Developing countries,
V t l d s n f s l d s a d fileolson, 197 9 * F F . 9 - 1 0 .

(b)Bemetoin, £»H., Financing Hoononie Growth in Underde­

veloped Seanomies, in Savings in M o d e m Economy,(£d.) by
Heller, *•*.,University of MLnneeota Frees, Minneapolis,
1953, F*t«7.

(o) Kurihara K *x :*, The Keynslan Theory of Heanomle Deve­

lopment, 1959, F*26.

8* United Nations, M e a s u r e s f o r the S o o n o n i c Development of

Underdeveloped Oountries, 1971, F*3*

9* Kyint H*, The doonomios of Underdevelopment, in in Introdue-

t i o n t o S e o n o m i e B a c k w a r d n e s s (Bd) b y A . 5 . A g a r w a l a a n d $•?.
Singh, Oxford university Frees, 1958, f*93*
 ( 4 )

They seek to achieve tv o broad o b je c tiv e s , v is * (a ) to brin,

revenue to the government exhequer, and (b ) to achieve eouno-
■ io growth* Income and other d ire o t taxes* in e ffe c t * cover
only a frin g e at the top o f the s o c ia l pyramid in economy. 1 1
In d ire c t ta x e r can be used elaultaneoualy to ourb or re/.Luutte
production and/or consumption o f s o e ia lly d osiraole cowoua -

t ie s as w e ll as to d iv e r t resouroes from one lin e ox orouuoticr

to a s o c ia lly d esira o le lin e * In e a r lie r times* * tax v ts usee
to be imposed mostly w itt th is revenue-earning oogactive*
now-a-uaya., & tax i s lo o te d upon as an instrument ox -.ohievloy
various eooio-eoononio o b je c tiv e s as t e l l * I t i s tru e tne
aors democratic a so e is ty ia* the g re a te r is the d is lik e fo r
d ire o t (p h ysica l) oon trol and regu lation by the s ta te . 11 i t re
perhaps in th is sense that burkes remarked nI b e liev e ti - t
Public finance assumes a new s ig n ific a n c e in the fa ce u the
problem o f o a p ita l formation in underdeveloped oountrioR"•
I t i s fo r th is reason that in a demooratio country f ie o ?
p o lic y has become the moot powerful and le a s t undesirable
wsapon o f c o n tro l whioh the s ta te can employ to promote eoono-

mlo develo patent. * ^

10* Balukris^ne. Sac* K* in Basle o$ Taxation in the context ox

the .developing Indian Economy -r* some daner. l Jb^e-^ vtione,
’Rapporteur - Ohelliah* it *J*, Popular ?ra>uishanf hotaoutv ,1 :>6p, ^*3
I t * O nelliah, K . J . , f is c a l P o lic y in Undsrdcvsloped Jountriee,
Georgs A lle n <*. bnwia Ltd* Bombay, 1969* 2*21.
12* Xurfcse, 1'., Problem of C apital forms t i on in underdeveloped
Jountriee, Oxford u n iversity threes* new fork * 1953, ^*143-
13* Uhollioh* ^ *0 ., 5iscr 1 ? o lie y in Underdeveloped Jountriee,
George A llen <* Unwin Ltd*, Bombay, 1969, ?*21.
 ( 5 )

▲ deaooratio country oannot commandeer resources,

rather " A democratic system of pla n n ing eschews direct comman­

deering of resources and it operatee mainly through the r r ia e

mechanism."1* She moet important objective of all developing

oouatriee ie attainment of rapid economic development. Any

underdeveloped country umpiring to make ita way up the e o o n c -

mio ladder ehould neeeeearily have certain requisites or

requiremente of economic growth, in the words of Lewie, "tbr

proxim ate oaueea of economic growth are the effort to •conomire,

the accumulation of knowledge and its application and the

a c c u m u la tio n o f c a p i t a l . " 3 In d e v e lo p e d c o u n t r i e s , th* bulk cf

capital formation ta k e s plaoe through market mechanise, but i r

the underdeveloped countries it i s not possible to have e m i t s 1

formation in the saiae Banner, therefore, the governm ent p of

euoh oouatriee have to shoulder the responsibility. i t ccoe-

eeitates an inexeased government expenditure in many f i e l d s .

She baeio question that emexges in this connection is bow tr

raise the required finance for development.

PL IB
She neoeasttr* resources uay be obtained either from

internal or from external sources or from both. But the inherent

14. duvematent of India, Planning Commission, deoond xive rear

Plan, Few Delhi, 1956, P.58.
15* lew is, 'v.A., 2he Theory of Economic Growth, George U.len
& Unwin l t d . , London, 195>, P . * 4.
 ( 6 )

weakness of ths undsxdevclopod country to obtain resourooo

txom external oourooa oonpells then to turn to the intern*.;

aouzoee* I'hle obstacle atone fron the faet that the under­

developed countries oannot eon pete the International oap3*;?i

markets for new capital, whiah is being attraotea to the

highly Industrialised nations!6 She real and oruoial problem

for an underdeveloped country is its own capital formation.

Shore is also no oertainty that resouroes created by depre­

ssing standards of life and consumption would be automatically

diverted tu inveatuent. Accumulation of eapital alone does not

safeguard its use for investment and proaation of eooconio

grovtn. She will to apply resouroes for this particular 'lurpoee,

knowledge, skill and entrepreneurial initiative are the indis­

pensable prerequisites of eeonomio growth. She prooea. of

voluntary formation of oapital under these eireumstaaoes is

extremely slow in underdsveloped oountries. Goode ooeervee "in

some undsrdevslopad oountries, a eoall but wealthy aiuorit. at

the top of idle sooio-eooaomle ladder disposse of t xeir eoononio

surplus for conspicuous consumption or non-produotivt invest-

17
ment". She propensity to save is low sad it is further seduced

if the population expands eors rapidly than the national incase,

so that the real inoose per-oapita decreases* ine proaese of

16.Horowitz, £«, Government Finance and Economic Irovtn, in

"Goveranent Bxpanditure In Oountries of Aeeelerated drat/tb1
(Bd*) by feaoook A.T. and Hausser d., Organisation fox
Boanomio Co-operation And Bevolo pnent, iarls, 1965, P«6r>.
17* Goode, £•£., taxation and Be ononis Bevels pnent, hats* ?.i‘.
and Jhaudhuxy V* (Bus*) s headings in Bouaonio 9evelo#nent,
Belaout i WorCiworth Publishing oo«, 1963, F.376.
 ( 7 )

aocriaulatian i s fu r t h e r retarded by the fa c t that in s t it u t io n a l

savin gs in these coun tries i s in i t s eabxyonio stage ana the use

o f money as a Medium o f exchange i s lim ite d * So a cc e le ra te

growth, the developing coun trise axe thus ooapelled to re so rt

t o foxoed sawings through tax atio n as the most e ff e c t iv e nnu

sound instrument fo x that purpose* They axe driven to h joint

where "ta x a tio n remains as the only s ffe o t iv e f in a n c ia l in s t r u -

ment f o r reduoing p rivate consumption and investment and tra u e -

18
fe r r in g resources to the -overaroent io r eoonomio development"*
19
T h is preposition has beooote so w idely accepted that there Ls

so shadow o f doubt about the s ig n ific a n t ro le which taxation

oaa play ana " i f w ise ly conceived and s k i l l f u l l y used, i t cin

20
beooae a very e ff e e t iv e Instrument o f p o lic y ’' • In the t o o l

chest o f f i s c a l p o llo y , the instrument o f ta x n ti on ie the t-oet

im portant, ua the one hand i t helps the Government in r.visin*-'

revenue and on the other i t a s s i s t s in ach ievin g v a rio u s ao o ic -

soonomio o b je c tiv e s * But a word o f caution must be utteretf that

though ta x atio n happens to be an e f f e c t i v e instrument t x a c i e -

v ln g v a rio u s sooio-eoonomlo g o a ls , yet, much depends upon in

what way and w ith what o b je c tiv e s i t i s in trodu ced, necause ju st

Id . "Taxation ana Eoonomio Development in j.sian Oountriao",

Economic B u lle t in f o r A sia and Bar East, V o l*£ V ,N o *i,
Nov. 19p 3, P . t .
19* J ah ler, M *ii*(J r*) (S a la s end E x d s e Taxation in In d ia ,
Orient Loi-gtian L tu ., Bombay, 1970, .*10*

20* C h e lliah , K.«T*, i f i s c a l Policy in driderdevoiopea

Countries, 2nd Bdn* George A lle r and Unwin L td . Bombay,
1969, P. 53*
 ( a)
a s t a x * 8 oan produo# fav o u ra b le e ff e c t s » they can aleo adver­

se ly a ffe o t an eoonoey I f they are not properly devised. In

t h is context hrs* U rsu la Hioke remarked "ta x bankruptey wa an

important con tribu tory fa c t o r to the f a l l o f the Roman lsm?irs,

un just and in e f f ic i e n t taxes set the French Revolution aflam e •

An important part o f Germany's f a i l u r e in the was 1914—18 was

h e r antiquated ta x s t r u c t u r e * * * * * * * * in e f f ic ie n t ta x e s helped

t o lo s e B r it a in the American c o lo n ie s * •“ Therefore* the oholoe

o f taxes and •she policy w i l l have t o be made in conformity with

the framework o f development* i t w i l l become u s e fu l ana meaning­

f u l only i f i t i s evolved in acoordanoe v i t a the s o o ia l and

eoanomio g o a ls which the eountry s t r iv e s to accomplish over t i s e .

In stead o f viewing at the p o s s ib ilit y o f a p a r tic u la r tax in

r e a lis in g sim ultaneously a l l the set o b js o tiv e s , i t vaJ l be more

p rso ise t o have an o v e r a ll view o f set o b je c tiv e s and the comb­

ined e ffe c t o f a l l taxes* At the same time i t may not be possible

to aohleve a l l the set g o a ls sim ultaneously but some o b je ctiv es

may have to ce postponed and may have to be attempted at only

a f t e r the accomplishment o f r e la t i v e ly more urgent onec. It I s ,

th e re fo re , d i f f i c u l t to a r r iv e a t a g e n e ra lise d ta x ay*ton

which i s oacable o f meeting a l l r e q u is it e s o f developing o©en­

t r i e s . hut alnoe a l l developing coun tries share o e rta in oongrm-

msnts or s im ila r g o a ls i t i s not im possible to evolve some oommcsi

normative fe a tu re s o f ta x a tio n . There i s another liioitin.^ fa c t o r

in the underdeveloped c ou n tries with regard to taxation* The tax

21* Quoted by Vargava, ?•£*, i Essays on Indian Public finance i

Chugii whxblioaticns, A llahabad, 1978, P.13.
 ( 9)

administration in theae countries are net satisfactory. 2'-.®

fast that these countries have not as yet succeeded in evol­
ving an effective and e ffic ie n t system of direct taxation
and their structure of indirect taxation has tended to oe
highly oogt&icated, has added to the oroblems of the adainie-
tra tive machinery which ie not fu lly adapted to operate
complicated system of indirect taxation effectively a. a e l i
oiently. aoreuaily i t takes a considerably long jer oo l ; r tie
administrative iiaePirery in these countries to become e ff i­
cient.

Seasons for ore-d oalnrat use of in dir e c t ta x:

In the context of developmental finance of the under-
devclcyett countries the role of in d irect tuxes ueaumes on *i-deo
s i n ificer.ee. Ihe cere for e oredominent uae of in d irect ta, e«
in the orocese of e a rly economic dovelo went seene to oe b aso
on the following grounds.
a) The excess burden of in d irect taxes r.re not convinci­
ngly proved because the a n d s is of the aunt is de ’srae -t on a
larg e umber of u n r e a lis tic or e x tre re iy ab stract "sawn z>ti one.22
b) I t socoa th at aany of the f is c a l experts are corain/, to
a consensus th at even in d irect taxes can be -eud# su ffic ie n tly
progressive to ensure equity 23i
o) d irect taxes alone cannot finance the inoreaain^ zoecs
of development expenditure.
22. k it t l e , The ^conotaic Jourru.i, ^eot. 1S61,
?2 . 577 - 584 .
23. lewis, k , The Theory of Aooaomio Growth,
• 2aox,;-
* Unwin I t a ., london, 1 9 5 403; , « ? . »
 ( 10)

d) In d ire c t taxes on the other hand are higttly

productive.

e) Xndireot ta x e s , i f ju d ic io u s ly used and timon,

beoone e ffe o t iv e s t a b ilis a t io n instrum ents. 'ihe.y t.ix .-o-.

u s e fu l in s a t is fy in g the fundaaental f i a o a l ta rg e ts ol ^ : ■>>i;v

uo a part o f in c re m e n ta l inooae whioh otherwise ,, j « 3 f u

inoreaeed eonsufflotion.2^

f) In d ire c t taxes are le s e p o lit i o a lly s e n s it iv e .

g) The su oeessfu l developmental e f f o r t s oust be c o n tri­

buted by maximum possible number o f population and in d ire ct

taxes are the most e ffe o t iv e instrument of aohievin*, the

purpose*

yhile in d ire c t taxes play a very important cart in

the finances o f underdeveloped cou n tries, t h e ir o ru o ia i ro le s

a re 1) a llo c a t io n o f reso u ro ts, 2 ) re d is t r ib u t io n o f inoo.ti»,

and 5) s t a b ilis a t io n of eoonomy*

in d ire c t taxes have a v i t a l r o le in a llo c a tin g soaroe

resouross in an optimum manner in the underdevelooed countries *

assuming perfect competition in existen ce, an ootimur* a llo c a ­

tio n o f resouroes oan be ascertain ed when marginal ooete ^-re

equal to p ric es throughout the eoonomy and that the p rices ol

productive resouroes are equal to th e ir marginal orodh'otivitv.

In such a situ a tio n the productive resouroes w i l l not have any

inducement to s h i f t from one use to another. When suoh an

24« O h ellia h , K .J ., f i s c a l Pollay in underdeveloped Countries,

2nd JSdn., George A lle n ana Unwin l t d . , Bombay, 1969,
P .86.
 ( 11 )

optimum allocation of resources exists* the divergence

between marginal private and marginal eoclnl cost~ ana oc-re-
f i t s w i l l be equalised. Itut, it ’'s g been poirtec’ out 1m t f*.e
fa r as optimum allocation o f reeouroes are concerned, in;’*'rest
taxes are in fe rio r to the direct taxes on account of thp
"excess burden of indirect taxes". ?he theory o f e r o © « buedsn
of indirect taxes which goes to prow© the superior! tv ot direct
taxes over indirect taxes was str xr.gly oleade' by i-Ivs.otse >:•>
and J.n. u io x s ^ who endeavoured to establish the the <r*« with
the help of indifference curve technique. II e e.;oep? burcsr
has been explained in teri-ta of lo ss of consumer eatisfec ti x ,

through a distorted preference >attem. When an indirect tax

raises tne sexlln^ trices a d thereby indices the consumers to
sn iit from taxed-goods to untaxed goods* the result of t i ?
Shift amounts to a loss of oonsumer satisfaction and hr>.« oeer
dssoribed as an exossa ourden. The indirect taxes raise the
prices of goods and services and compel the consumer t~’ move
down to a lover indifference curve in his indifference mao rnd
thereby distort consumer*a preferences and melee the consumer
bear an exoess burden equal to the lose erf eatlefneticr over
ana above the Vardan of paying the tax on commodity, irom the
consumer's ;oint of view, an indirect tax discriminates ‘v r ln s t
certain purchases and thereby causes loss to society in excuse
of the ^ain to the sxonequsr because it makes price - ’ tr*'--■<->
from m rginal cost, irom the point of view of a producer also

25. a) Joseph, M.P.V. t The £xcess Burden of Iadlreot Taxation}

Review of economic studies, June, 1959, 1.227.
b) Holes, J.k. t Value and Oapital, P.41.
 ( 12 )

I t causes Bone lo s s to s o o ie ty by Baking the returns to the

fa o to ra o f production d iv erge from t h e ir marginal products,
i t ha a been argued th at an inooae ta x on the oth er h r>/d . e^ves
the p rice s u n ifeotea and does n ot d is t o r t the p referen ces o f
consumers* On tn ia oountf income ta x has been olaimed to oe
su p erior t o in d ire o t taxes*

This treatment of s lowing the s u p e r io r ity o f <i r c :

taxes over in d ir e o t taxes* however, i s not fr e e from d e fe cts
26
as pointed out by walker* The assumption on whiia i t i. - ■sed
axe u n r e a lis t ic * In tiio words o f ta lk e r , the Jose v-.;- ota
t h e o r e t ic a l dem onstration o f tee s u p e r io r ity on w elfa re grounds
o f d ir e c t on in d ir e o t taxation * i s only a s a t is fa c t o r y nroof
on the twin assumptions o f com pletely i n e l a s t ic sue fly of
la oou r with resp eot to income and ou tlay ta re-' and ’ id e a l i n i -
27
t i a l c o n d itio n s '* The term 'i d e a l i n i t i a l c o n d it io n ' r e fe r s
28
t o a p osition o f no taxes in e x isten ce* Milton Friedman <Lso
o r i t i o i z e u the theory on the grou >d that th ia treatment is
r e la te d to a s i ^ l e ta x -p a yer. I t did not aoply to the whole
community o f ta x-p ayers because th is epproaol ignored the
expenditure aide o f the budget end the production p o s s i b i li ­
t i e s in the eeonoiqy. The o ft-q u o te d theorem th a t a l l conned i t '

26* rfalcer, 2*t The h ir e o t -I n d ir e c t Tax frofclen i F ifte e n fe a rs

o f Controversy * Publlo Finance, V o l.1 0 , 1955, F \ 1*3-77,
Reprinted in Hughton, R .4 .(i£ d »), P u b lic Finance, Penguin,
2nd Snd*, PP.417-43*
27* walker, ft*, O o .o it* , Reprinted In Hughtan, O o .o it , P.423*
28* Friedman, M*, The Welfare E ffe c ts of an Inooae Tax and an
Excise Tax, Journal o f P o l i t i c a l hoomoroy, F ed ., 1952,
PP. 25-33*
 ( 13 )

ta x es are burdensome than la ooa e ta re a, f o r reasons oth er than

d is t r ib u t io n a l ana f l s o a l p o lic y o n s ld e r e t lo r s , oannot be
su bstan tiated on a p r io r i ground* Wilfred ffeirsh fill^ o r ig in a l
p ro p o sitio n that in d ir e c t m xes r e s u lt in a lo s e o f ccnoo-.
mer*s su rplus f o r which th ere i s no payment t o the orohuoer
or to the State i s a ls o a o o llo a b le to oerta in d ir e o t t-
29
i . e . income tax' • 5?ven d ir e c t taxes are not fr e e from exoe3a
burden in so f o r as they d is t o r t ^reference r .tte r n o f tax­
payer as between earning o f income and consumption of le is u r e ,
fh ia i s due to the fa s t that a more gen era lised tax w ill not
brin g about d is t o r t io n in the ohoioo-<xvfctem o f the Individu al
as among the com m odities. I . ” .2 . l i t t i e has sow n in -.n a rticle^ ®
that the excess burden theory com pletely breaks i f we taka int<
account the fa c t that when income i s earned, le is u r e i s »• o r i -
f i o e d . Hence, when inoorae ta x i s tm o s e d , the tax-a*. er would
seek t o s u b stitu te le is u r e fo x Incom e* This would a r ' n ; about
worse a llo c a t io n o f resou rces and the consumers woulr be lo c a ­
te d in e. lo v e r in d iffe r e n c e o a tte m than in t h e ir l n i t i 1 id ea l
s it u a t io n . A lso an income tax d istu rb s the preference w-fctc'.n
so fa x au i t induces peoole t o change t h e i r a llo c a t io n o f inoome
between investment and l i q u i d i t y p referen ce, fhi , whatever
m erit the exoeaa burden d o ctrin e might have i s s e r io u s ly weak­
ened. This i s the reason why Walter has ch a ra cterised d ix e o t -
ln d ir e o t ta x problem as a " s t e r i l e con trov ersy"

2 3. ‘a id , l i . A , The O la ssio e l Indictment o f In d ir e c t Taxation,

qu a rterly Journal o f noonomlos, AWg.1945, ^*377.
30. l i t t l e , : l i r e c t /a* In d ir e c t fa x e s, The , oonomio
Journal, S e c t ., 1991, f.5 ® 4 .
31* .‘.a lk e r, i)» The D ir e o t-I n d ir e o t 1'ax Problem, P u blic fin a n ce ,
F ifte e n Years of Controversy H o.2, 1955. P.173.

Z O 't e f t S ,
 ( 14 )

Among tne indireot taxes in developing oou-itri.?* *

Sales fax stands out prominently as a r e v m u e r a i s i n , *

and also as a good fisoal measure, i t oan be eifeo . i / e l uied

for mooiliaation of resources* redistribute in o o .a c i u t '

desired manner and o u r b inflation, s a l e s S a x has g o s s ' •?

added advantages like making e v e r y individual ti- it, j

those woo c a n e v a d e i a c :*ie t a x ana o t h e r d i r s o i fcaxec <-.id

als3 oat o/i e x p e n d i t u r e s o f 0.0c uaul. .t e d w e a l S';. iAls., *<■ x

to r e a u o s spending ana promote s a v i n g s , hug, 1+ ?'f. A ~t .a

important part in t h e e c o n o m ic d e v e lo p m e n t of a un-

tries. Put in spite o f t h a t t h e r e h a s been a lo t . -yx v*i; j .tro­

vers/ r e g a r a i n g its superiority over in co m e t a c t i c . : . ■ iil.s

r o g r o s s i v i t . o f t h e t a x h a s b e e n the main p o i n t c t 00 > o s i t i o n *

the controversy h a e e e n t r e d rouno t h e economic e f f e c t s .

fhe olaeeical eoonomists attempted to prove the eu >e-

riority of direot taxes over indireot taxes vhioh underestimated

the qualities of Sales lax to a very great extent beo .use jales

Tax occupies a orominent position amoxo? the indirect taxes .but

the claim of superiority of direot taxes over indireot taxes

.was baseu on the assumed neutrality of direct t- \at5on. This * ae

expressed in i>arnoe's •excess burden theorem'• but oritios 'nve

pointed out that the argument was valid only if U u|p*-‘H i h * l

revenue allocation was an optimum and tie patten, oi economic

distortion was a preferred one. l.ii.i). Tittle has demonstr <.;e<;

the folly of the exoees burden argument as mentiousu earlier,

llis explanation brings out the fact that distortions of choices

are cause u by Potu direot vncjUidirsot taxes* it is* therefore,

evident that the superiority argument; which was so axiomatic

 ( It* )

has loss its grourd.

(kk t h e o t h e r h a n d s o n s economists have put forward

the superiority argument in favour of indirect taxes.''‘T h e y

hare pointed out that Sales f a x must haws a regressive income

e f f e c t . l'he s t i m u l u s to work w o u l d naturally be greater, the

l o w e r the income level* Also the substitution effeot will

depress work to a s m a l l e r d e g r e e at all income levels than in

the case of proportional income tar and more so in the ones of

progressive Income tax* But all these theories failed to aooo-

mmodate the expenditure aide of the budget* 11 w e take note of

fiscal policy as a whole, and then try to find out tne supe­

riority of d i r e c t a n d indirect taxes, the result say be diffe­

rent* ouoii a a o d e x presented by Prof* Ben c l e a r l y states t/v-t

indirect taxes ar e superior to dixeot taxes."'*'

un a balan ce, inoouo tax ie not nvperioa t O c !. Ity

ta x ec an instrument o f a llo e u t iiv ; resou rces in n o iti muo
manner simply beoauoe She chargee made again st commodity taxa­
tio n e re equally a p p lic a b le to income taxes ant., tu e r e i .tv,
income .tijc c*anot have an edge over commodity tc-xr.ticri nt i j a s t
on the cou n t. On tne con tra ry , a oonnoditv ta x .mainly sa le ?
ta x ) w i l l be fr e e from such d ie t o r t iv e e f f e c t on renewre3 11c-
ca tj o. , c>>oi»id the p r io e -e la e t J o it y , income e l . s t i c n t ' w
s u b s titu tio n e l a s t i c i t y be z e r o .

32. see, for example, talker, D, The Direot-Indirect fax

Problem — F ifteen ). ears o f C ontroversy, Pub] 5 ? i in noe,
Bo* 2, 1S55*

33* s e n , *.*K. x'he E f f i c i e n c y o f I n d i r c o t 3‘a x e s , I t s P r o b l e m s o f

.Economic E y t r d c r t n d P l c n n i i f ; E r r e y e i n h o n o u r o f M l o b & e l
K&le a k y , BUK, P o l i s h s c i e n t i f i c P u b lishers, fcarwawa,Pi.3*5-72.
 ( 16 )

But, in certain oases, a distortion of consumer's

prefsxsnosa nay bosoms neosasary am in that oaaa sales tax
(with a d iffe re n tia l tax xata) w ill prove i t a a l f to be u* auoh
help* fo r example, a high xata of tax on liq u o r w ill be c-adtt-
oive to tha health and walfaxa of the people* utnax a ia ila i
oaaea vhaxa a distortion of consumer's prafaxenoas is weloowe
fo r the eoonoaio development of undardawalopad countries are
diverting the productive xeaouroea from the oonauuer ^ooda
aaotox to the invest want eeotox and also diverting the jrodao-
tiv e resources from non-functional oaasumption to eutentxal
production.

4a regards auoply of resources, w te s o f io o ir e o t tnree

are net bo hi;;*, as to hav*, adverse e ffe o t on work, lucent ?.ve*» *e
in the case o f a progressive tax on income* so fa r a& su ■>>1; of
savings are concerned, in d ire o t tares- innosed or cor,i- a< rti on
goods only w all discourage t ’-ieir production end ooneumot i on
r e la t iv e ly to o a p ita l goods and, as a re s u lt, the eun l r o f
savings w i l l in crease. According to ? r e a t^ "the ^.5v-tt,a o n of
in d ir e c t taxes in favour o f savin;.- and investment m ateria lise
only i f ce > lta l goods are not aubjeot to t a x " * I f .n direet t ;xee
are imposed at f l a t rntes, no d isin cen tive e f f e c t on suoxLy oi
reaoarcos w i l l res u lt as done by a orogresaive income taxation*
But high rates on commodities o f wide-spread consumption aj»d
le x u r ie e may t r ig g e r adverse e ffe c t s on in cen tives nr; even h

h o s t ile popular reaction* In that case, the resu lt w i l l be the

34* -Prest, A.k*, Public finance in Theory and fractio e, la^iish

language book society and -eidenfeld and ilo o la o n , London,
I960, 2 . 962*
 ( 17 )

same as found in the case of a steeply progressive mcowe

taxation* Due^* ha s remarkd, ’'to tue extent to waioh t.'fci'i

goods a x e taxed and made much more expensive, the affeis x;.
%'

the same as if the t a x were imposed directly on income.

While income tax takes away a part of p e o p l e *3

disposable income and thereby redueee savings of the oommo-

dity,, sales tax, as a n individual t a x affects oily the consum­

ption causing people t o save more by reducing expenditure.

This results in a rise in savings-inoome ratio, of course, it

is a ma t t e r of emg&rioal a n a lysis as to ho w muo reouotior, is

caused by sales tax, but it is c lear that it onuses a compul­

sory saving or soil motive savings# lere lies the most imoortant

function of sales tax* In a developing economy, the nee for

raising the Incremental saving ratio is v i t a l because in these

countries the marginal propensity to consume is high for -1 ^st

part of the economy* .pales t a x can thus h e l p t ~.o In oronpin -

capital foinvitian in the eoonoay by increasing the available

aupoly of investible resources.

2 £„,
'iXi.Li.ZbO■ ti-.'ces >le.;/ a vitrJ L r o l e a s r.r* j 's t r 'H e t of

r e d is tr ib u tiv e p o lio , in t ^ e d e v .^ lo o i n s c o u a t r iv ,. i"': :.t

ru e i.o sh i.a f i e l d 1 m l i m i t e d b,; v a r i o u s fa e jo r s ; ~ t be

o o -a iv ie r id c»b 1. p-trt o f t;>.e v r a o le o o m p x o h c n s iv e i r %\T2Lttrp in

o o ..pon-vnoe -w ith o t h e r .in s tr u m e n t s o f m o n e ta r y a n d fie or*! p o l i ­

c ie s * T ie c o h e r e of iu fiu e n c e o f i-.u ir e o t ta x e s in t -i' f \ ? l'i

of b a ttlQ is t i o i p f o r s com x i r o t i v e l : * n a r r x ? . But tv o r ^ le of

3 5 * i>ue J * ! * , l a x a t i o a an d ia s n o iic TJeval opsreat i n '’ r o o i o a l

Africa, Op.sit. P.157.
 ( 18 )

indirect taxation as an instrument ox reaouree aot>ili3 utx m

or supply of produotive resources is of price i a p o r t a n o e jve ,
in this fie ld , the structure of indirect taxation in t.*es»?
countries lias to be fashioned with the same objectives os
direct taxation* It is in this context that Irip a th y ^ remar­
ked "Developing countries nave placed more emphasis on the
role of taxation as an Instrument o f resource oobiIi?aSior it-

the in it ia l stages of tn eir development and it s role \a ^

instrument o f lnootke redistribution has bee.: i'jLreu » subordi­
nate i*a lortaaoe" •

in t.4C uevelo pin^ countrloo i t is o f ut jo-^jm -

to m obilise resources fo r raisi.-..*, the vclu-.e o t jt»,js tjujoi. ^
along with the growiu of savin, .a in tin-, eoonumv for
Ca.pitc^l jlwrua 1 1 on• j.f taxation succeeds xu ^ivi'r u* ? *. \ ^
■jubi.4c ,£ tu fit.J t:»;. ■ there ivouct..... >

o r it..t* s a v in g , i t e i l l not rr is s the savin s f.^;- V : «.••..» \ )»r-

as - .’hole* iu a p riv -te sector dominated economy, eva-e if
p rivate savings are see? Jed up, a high margin;.! r ✓ iioti
may -t.»ve o>o:xcei»oxc disincentive effect. - f cuuxec, on Ideal
t;-x ,:.* sta:.« r ic u li. n-">t re'ir.c® savings. In the v o iw of

"taxation does not nosearilv comoete n it1, ?3Vin v*, . .>■

it reduce savings*” On the cor.tr2.3^, mmy ty pec of t «n - .«<
f i s c i procedures far from reducing av* H a ile savin ten. to
3€. Tripathy, f * . * , F isc a l Policy in Underdeveloped . ountries,
ine *orld Free£ Fvt* L td ., Calcutta, 196d, f . l f l .
37* t r i i-lcrro, t-cverc-: ent iim u c e end Fsc.noT.ic .r tv l.\ «ic r .t, 'i ’d. ).
Allan T* Peacook and derail Hauser, In "Soanomie Planning
«uxa xux f o l i c y " , Cx^axiisatioa fo r acus.oi>Ic Go-' a* " t i e ’ id
Development, F airs, 1365* J?*55*
 C )

in c r e a se them* i’iie obvious example i s ta x e s on luxury consu­

mption. ihe icteal system , i f I t oould be e f f e c t iv e ly a ^alien,
would be Progressive ta x a tio n on o v e r a ll expenditure o f the
type proposed by Oarl bhoun or by S l c o l a s K aldor, hut
from having a q u a n tita tiv e r o le , the ta x e s have t o play a
q u a lit a t iv e r o le a l s o * I t should bs tne o b je c tiv e of tax* tie**
t o oiuanexiae iav e sti.e n t in p riv ate se c to r from sp e e a li.tiv .
and unproductive f i e l d s to the sooi& .ly and econom ically
d e sir a b le f i e l d s * J o e l l i a n ,^ 0 fo llo w in g P?ui linran e >e Jsa o*.
an 'economic su r p lu s ' which in h is view s goes to u a ste c;e a t
l e a s t to "unproductive cor sumption or unproductive investment"
in unupricveloped economies, but which, i f m o b ilised and ha?.
^360 t v V e tnan ox development, would open up the doors to ar.
n^e o f proa p o r tty i-ud a c e lt “ C i v i l i s a t i t * * , ha s a y s , " i s made
p o ccib ie fo r any so c ie ty or nation when i t s economic o. st^n
begins t o generate a su rp lu s over esu u n t il ©ons»:.iptiau......... Lie
or.am .ctcr o f a c i v i l i s a t i o n one i t s fu tu re pro^rc- sr t*f *o •<; 3 Pi­
th s our-vosss fo r which anc, t'*e sin n er in which- t h i s sv r lu s La
33
u t i i i z e d . B' f i s c a l policy should a l s o be u se* fo r the
o f preventing th e su rp lu s from beinr: used in ^ h u c iv '
to uevt-lw^Mien*.* xu an underdeveloped economy, ns ineom- in c r­
e a s e s , ir e v » sr iv e .no tne m arginal p ro p e n sitie s to acu.«-i<»»-e has
a tenaencp to in c r e e se * Ib is i3 beer.uae the v » s t r.-joi ty of
th e people- li v e oelcw tne su b siste n c e le v e l, bo, the u .i -lur
l e f t over e a su rttia l 30ns act yt ion tends to be lie n lp e w e *1 . **.yi>
which sr o s o c ia lly u n d e sira b le , x.xC 6 1 * c, overnme.it .3* a

33 . y ie li.i-i i l . J . , >1.32U P o l i c y i n J a d e r d e v o l o p e i O o u n t r le a ,
George A llen & Unwin (In d ia ) ? v t . I t d . f io ib ay , ?
39* I b id , £ *6 4 *
 ( 20 )
r e s p o n s ib ilit y to r e s t r ic t oo&smagtxan besyo.-d & l i u i t b., ae ns

ox taxation * In f a c t , declared the India-: x-axatioi! dUQjti-.y

Coatniaaion,^ "ta x a tio n way be most e ffe c t iv e r*»a*is oi x.ior-- -

sin g the t o t a l volume o f saving awd in vest nent in «'■, eco*

where tne bropeasit.y to oonauae i s normsll.T ni&h". To >9, t'm

economic su rp lu s can be d iv e rte d tov-ards desired U n a s ' i.u

t h is way i t see as to jromote u s e fu l in vest <M<esit in ‘V - *;■ v ?

se c to r oiiu tu prevent the resources from bein,: d i t - u r e r

sp ecu la tive and unproductive invest nent a a wvU <•.<* ovea •\*>#i
41
and luxury consumption. • Of source, views have . x-s • :? n; ••* >re-

ased contn-ry to tn ia* It ha# been oointeb out t>, f t eoe t -xet

impose a buruen upon the low er micictle-d-fls **e ' «e e 1“>.olit'

o- t.:c ./•.">Juxi- Ivor. arc hardly vouou the uooer consuxst^ on ror )t-

fo iu in ,, t..e 'v.1: arf-ouxcuin .scanotny * • diiey are act very « f f i o t « t t.

iaetruB aatg o f r ;d:‘ 3 t:?ibut' on, although the re/.re^4-i v* xj-,em is

to aomr; exten t, bue only a i l c l ; , tecve-reu by ir-cre- .•»«»■ +. <>a

d u ties on Aooa j x i d " ia by t*v„ upper i “ •*" ” ev“ -,

id e a lly , it is e.-oier t o u.:o V. y.>:6ior. -e# kp. i*:-. t >-.■ >#••• ‘ oi «■“ .••o-

u res m obilisation in the uruerdevelobed oounhri-:-» ’:••■»<? »>"• ir.

toe unuerdevolopen coun tries the voluntary aavi». . ■ ver. loi

hi**U inltfi.V'i'ia-J X"tt if t i l jj. w U—V3 UCtVt?X-'-'cO '|fi i‘ t" "if?

#*
it h a .»>eac in the ^av—:ceu coun tries* ;o. ci. -o ' * ,gr'~ ♦. iv

40. tion in.uir. 0 3max3i?io:i, e io rt, Sr-'ver;•••' •; »."•• i ,

f o l . l , P.27*
41 * I r i iw.th,/, &.« .* i i j o u i ? o iio , in hi'-derdeveiopen u n t n o s ,
" V ’ " ’'rid Jr e « r- •>«'t*‘»t*i* i, 1h66, r.
42 * *'thur, dnutai.n, ,?.b rvs.it- l x in r Con jo#l+e • cote
•<.-> . 4 •___
>< . « •.. ' ■• 4 -Vy.-T 7• » f •>
, '."he
- w «rw* v •U V-. i . Jv t i ) * S 1 .* f

13* ':u ckee -,v*, .Pro:.!, r-o o? > i oit- .1 -ov •>'■t *,e.\ o f *• •{••*• ", • ><•d
douatriae, Oxford thabl.lontioxa, 1 ^ 3 *
 ( 21 )
44
view whereas Batter and Yaai pat t h s ir T i « v t to the con trary.
However, i t la true that in tha unde rdeveloped countries people
tend to save in terns of hoards, preolous metals and the lik e
whiea do not help t o lnoreaae the productive oapaoity o f the
economy.

alalia,.mi...................... .Ian
The q u a n tita tive r o le o f a ta r policy in try in g to
m obilise reaouroes may have two aapeots I ( l ) s t a t ic , end
(2 ) dynamlo.

In the s t a t ic aspect i t is found tb r* when an underde-

veloped country is caught up In the low -equilibrium trap and i t
stru gglin g to come out o f i t , the n ecessity to m ooilise resources
from private non-functional consumption and in e s s e n tia l in vest­
ment to bo unde a v a ila b le fo r the oublic seotox increases* aut
t h is ma„ res u lt in an absolute f a l l in the le v e l oi oofiauaotior .
In these oountrica t ie ioor masses are already at the subsistence
l e v e l arid on top o f that i f consumption reduces furt. t r , i t may
t r ig g e r p o l i t i o i l problems. On the other h.uid, i t w i l l not be
vary easy to tax the conspicuous consumption o f the middle o la -
sssa because they play an important part in flrm u lation and
implementation of the developmental plan* Ihe only group l e f t
out i s the rich but to reduce th e ir ooi motion taxation w ill
fig h t shy because "ta xatio n is not enoug.t; i t is neoeesar a ls o
t o use con trols vhioh ra tio n luxury its m a "^

44* Bauer and Yarn! have argued that a polio;/ o f saving bj the
public may have rep ressive e ffe c t s on prlv. te savings and
i t may prove tJ be a s e lf-d e fe a tin g policy*
je e Economics o f underdeveloped Countries, O p .eit. <*.13*
45* Quoted by T rlpath y, P.N ., Public finance in Underdeveloped
Countrise,The world Press P v t.ltd .C a lc u tta , 1963, P.143*
 ( 2t )

The dynanlo volt of tax poll 07 will bo preventing

the lnoreaent In out put fron being eonauned by deliberately

ploughing book in inoroaelng proportions of It into the pool

of invertible reaouvoes of the public sartor* This eaane that

the m x g i n a l sate of taxation aoat riae with the growth in

aggregate output ao as to aobiliae an increasingly larger pro­

portion of the additional output* In the developing eountriee

this aethod has to be adopted and continued to accelerate the

eoonoaio growth of auoh oountriea* In the developed countries

production has shown a rate wnioh is faster than the r*te of

oonsuaption and there has baen an aooeler&ted grovth o f oaoittl

foraation* But in the underdeveloped oountriea since the publle

aaetor is sailed upon to play the role of a "load Beet o r " , an

Increasingly larger proportion of the Inare&ee in output should

be available to the pttblio sortor* And this la the f i e l d where

a flexible and dynanlo tax policy will be very u rg en tly c a lle d

fox* L e w i e ^ reaarka that "while it is diffioult to in crea se

the g o v e m a e n t '■ share of a given national inooae, it la not ao

diffioult politically to anaura that greater share o f in crea se

in the national lnooae should aeorue to ths govemaent." This

is the sain hope of inoreasing the share of govem aen t In the

national lnooae.

In order to plough back the inoxeaent in output, t ie

tax structure should be designed in auoh a way that it oooeesses

an element of built-in-flexibility in It* It demands . growing

tax base as t^e income grows* In other words, in leas develo jied

46* Lewis, w« a . » Vhe Theory of Economic Growth, O o.C it,

P.442.
 ( 23 )

countries the marginal rata of taxation should always be

47
greatar than the average rata.

Taxation and » n consumption goM si

It la in th is aontaxt that the ldsa o f insrensntal
sawing ra tio figures proainantly. Indiraot taxes should ba used
more fo r ohesJclng potential increase in consumption than fo r
cu rtailin g the actual consumption of the masses. It is always
believed that in direct taxes w ill rest r io t the ear.sumutlon of
luxuries and other commodities whioh are not essen tial fox
health and e ffic ie n c y . But in the poor underC-."doped countriat
t ie in direct taxes f a i l to sa tisfy th is norm o f levying the tax
only on the elegant of surplus. In suoh a ease i t w ill be highly
desirable to force the poor masses to oontxibute to eoononio
development out of th eir meagre incomes. Here ariees the ques­
tion o f whether taxation of mass consumption goods has any roxe
to play in the economic growth of underdeveloped countries.

Even from the point o f view o f functional finanoe the

neosssity o f levying tax an the somnoditiee o f mass consumption
i s "not to raise the rate o f investment at any given moment; it
i s to prevent consumption from risin g as muoh as income ri-»es
as a result o f past i n v e s t m e n t O b e l i * a h ' s * ^ observation
a lso goes to the same e f fe c t • It is on thie ground that the
taxation o f commodity o f mass consumption can be ju s tifie d in
a developing economy.
47. Ibid.
48. Chelliah, S . J . , i'iso a l Policy in Underdeveloped Countries,
George Allen A Unwin (India) 2 v t . I t u . , Bombay, 1 % ; , P.S6.
49. Ib id .
 ( 24 )

In the developing countrlee i t ie o f utmost necessity

to raise the incremental savings but i t i s found that i t ie
very d if fic u lt to m aterialise i t in practice* It ie of not
much help to persuade the rich classes to save and in vest, ;.t
is because "In many developing oountries the p o litio a l ore*
eaure expressed by the high income groups has prevented the
development of an e ffe c tiv e system of orogreesive taxation"
With long-standing experience on suoh matters iCaldor reraarke,
"what oan actually be aocom ilished does not depend merely on
the individual good w ill of ministers or on the correct in t e ll­
ectual appreciation of the technical problems involved, ‘.t is
* 51
predominently a matter of p o litio a l power". Thus the peoole
o f the group oan re s ist pressure exercised by the government
and, i f necessary, they can even chant:© the p o litio o l structure
or at least the policy of the government,

r9M, 3&S&U<m
When the income of the poor masses increases, th eir
marginal propensity to consume a lso increases by the anme extest.
This tendency is found to be more or less the same in a ll the
develooing oountries during; the oerioa o f economic development,
th e ir marginal propensity to oonsume bei*v» very near unity,
5i
th e ir oonsumptton w ill tend to rise as ouoh ae th e ir incomes.
I f th is is the case then the increased productivity wi l l he

50. fripathy, l . d . , Puolie finance In Underdeveloped Countries,

The World Press P v t.lt d ., Calcutta, 1963, PP. 145-46,
51. Jtaldor, X ., W ill Underdeveloped Countries learn t - Tax,
O p .oit. P.264 (quoted by luK.frintvthy, .'?ublic finance in
Underdeveloped Oountries, World Preae,0mlotttta,l963, P.146.)
52. Chelliah, 3.W., f is c a l P olicy in Underdeveloped Countrise,
ueorge Allen 4 Unwin (India) l t d . , Bombay, 1969, p.86.
 ( 25 )

almost absorbed by increased consumption. Increased commodity

taxation could be used at th is point to re strain increase in
consumption and thus re lease some facto rs fo r purposes of inve­
stment. Though i t makes tins poor masses to s a c r ific e relatively
more, yet they ought to be nrepared to afford th is for t:,e
economic development of the country. Levis remarks, * n o n at lorn
i s eo poor that i t could not save 12,6 of i t s n ation al income i i
i t wanted to ; poverty has never preventer, nett lone from laun­
ching upon wars* or from wasting th e ir substance in ofccer
ways." 53'

The ease ^fo* oropensxty to oonguo.e ia not d ifferen t in

the Oise of a g ricu ltu re. An increase in the agrxoultural a c t i­
v ity ia followed by an increased deatana fox1 farm ^rouuoxs,mainly
food fo r consumption purposes. Again, whan some under-employed
labourers are employed in tie in d u stria l seat or, those aao
remain on the farms may increase t a e ir oonsum rtion. I f there
takes place a continuous expansion in the in d u stria l sector i t
w ill require an Increase in t ie marketable surplus o x agricu l­
tu ra l products. It ie fo r th is reason that the growing surplus
has to be tran sferred from the ru ral sector to the urban sect ox
and in d irect tax can be made instrumental fo r bringing about
th is m obilisation of surplus.

It does not mean that there should not be any increase

in the out out of consumer goods rather i t only io o lie s that
increase in productivity should not be fu lly absorbed la the
consumption gooaa sector 54 • a rapid increase in the m s A y ai
3-/• VJ.A. Op.oit* P.236
54* Ohelliah, f i . J . , f i s c a l JPolioy ia Underdeveloped Countries,
George Allen A Unwin (India) Pvt.Ltd.,Bombay, 196 9, P.87.
 ( 26 )

■ oiim types of consumer goods is called for sp ecia lly In the

context of tae wide-spread disguised unemployment — le t alone

humanitarian and p o litic a l reasons* This w ill beeoms d e a r
when we try to find out the meaning behind increasing the
'incremental saving r a t i o '.

fciaarinlnation as bstwesn nsesssariss

and non-neosesacteet__________________
Consumer's goods can be oleeeii'ied Into a) neoesaaries,
b) non-necessaries, and c) luxuries, in order to discuss tne
subject mentioned above. Assuming a oonstant copulation and
aboenos o f disguised unemployment, any net investment w ill
increase the real Income of the people, which w ill lnduee them
t o climb up the upper rung o f the ladder o f consumption. Possi­
bly they w ill move the seals of consumption from neeesof-
r ie s to lu xu ries". *^But i f th is movement can be restrictectf ther
there w ill toe inersassd production o f investment goods lnnteaa
o f an increase in non-necessaries and luxuries. I f the abovo toe
done, the le v e l o f liv in g w ill remain oonetant or rise only a
l i t t l e , tout the ra tio o f Investment to income w ill r i« e .

Again, assuming that there i s disguised unemployment

which the country is trying to overcome over a period of time
by providing employment to the underemol id people in tr>e indus­
t r ia l sector, i t w ill oreate a 'wage-goods-gmp' because in the
f i r s t place they w ill receive a le v e l of real wages wiioh is
higher than th e ir average c o n s u lt iou in partial ialenaau -*ndf
secondly, those who remain in the agricu ltu ral f ie l d , w ill be

55 • Ibid.
 ( 27 )

relieved of their depart! enee and w ill tend to consume more.

I t beoomea imperative to produee an insreaaed aaoiing of w&^e-
goods in ordar to bring down tha le v e l of diaoruiaed unemoloy-
mant in thaaa oountriaa. What followe ia that tha out :ut of'
naeaaaariaa and gome non-neoessariea ty e ie a lly consumed by
workers oust inorea&e, i f we are to reduce the volume of U ls -

guises unemployment.

I n is terdeacy w ill gt.t ie r moments t voen tty* .0 ->\ ■ u o»:

lucre, 'mere w i l l be r* >;.rcater need fo r teccr 1 • r-i< >

■ ■-> 0

aval. eO";e non-i;ecenmris:i. Thic Phenomenon i s on1 . t>" oo-.» .-i-

coons ir the u do rue v doped oountriaa. '.t f o l l o w th-. r -. u

i-ole of in 1 i t t t<- :o”.t i rn in the unuertlevelo whs ooui‘ -,j x,;-t

not to reduce \he o u tle t of necesss-riee but to 21 i-e i >e if ore—

uentu'J. suvlng n t i o . In order to c o r f 02^ to t h i s , the in u ireo t

t n m t i o u iu-s to function in such 1; ranurer t i n t {aj it r e s t r i c t s

the out put of ti ny non-necessaries end luxuries* ;m vt ) ,/uo e

t r e fciuue r . v c i i a d e to the invectr-ieut <»nd/or incus t r it i seotor.

IL io w i l l m k< possible £ ?r the ©conor ;< to • i . f e i>, t,:.-,

u ltiii: te rut. mtfls of t ’— ta x a tio n of mass o ;n•’ Um >txcr • oot

file foro^ola,: dlsousel or should na^r the-'- n_

U-h' econiiV the oone auction of onl r n >n-n®oe3' ■» « - * o«i < h«

cu rt.tiled to b-3 .side o v ’ il& b le to the invest^en4- s«ot^-»*. i>

•order to .ic’iiovo t h i s I t i s not necessary t o t^ v ■*•'"? T •os

fenciSeeltea. Taxation of mn-ne 30s varies *oulo h- vs t ■*■'** • f a c e t if

nehievlii.i .i bttfUer le v e l of income Tie the yrowt’i >-f ' -eac. >1

economy and thus i«oula eno-ole the consumers to oor.sm-e vo^-..

 ( 28 )

The tax rates on articles of mass consumption can be raised

after making sure that the per-oapita output of suoh articles
is rising* In this context, the recommendation of the taxation
56 that additional taxation of a wide range
Enquiry Commission
of luxury or semi-luxury products, at fairly substantial rates*
accompanied by broad-based taxation of articles o f mass oonsua i-
t io n at com paratively low ra te s be adhered to i s vortr. n o tic in g .

Sales ta x as a su b s titu te f o r
income tax in poor economy *

Sales ta x , as an individual tax among the in d ir e c t

ta x es o f developing cou n tries* c o n s titu te very d e s ir a b le source
o f develoamen iuauoe. Sales tax serves as a s u b stitu te fe r
income ta x in those co u n trie s where an e f f e c t iv e s y -t ;-. c f ir:c>ir>e
ta x a tio n has not been evolved . Moreover, in a develcnin - ecantuy
s a le s tax helps in ploughing back a portion o f the in ' r >■. si •
income in t o p u b lic savings* Sales tax stru ctu re c c r tc- ie^i'n^-c
in such a way that i t con tain s a proper b u i l t - i n - f l e ? i p i n t . ?c
that i t can moo-up t i e increr.eiit in consumption c f r. ov- -
r ie e as a r e s u lt o f a r is e in income. Ihs r. t r a ir u c t ’ -ra ~f
s a le s tax oan be moulded in such e. fash ion th: t it r^ trirt'
consumption o f c e r ta in n on -n eces3aries as desired by t ? t >-
le v y in g a u th o r ity , pales ta x plays a vital r o le in re ' ’ •■tribu-
tin g income in developing cou n tries in a d esired i.uj'r. lee
ta x i t s e J -' i s r e g r e s s iv e , expenditure Incurred by gov*? ..a.-aon!;
through resou rces r&isea by the tax are a l l the more r-> re iv e .
as a r e s u lt , i t goes in favour o f r e d is tr ib u tin g i n 30 - to reduoe

56. taxation Enquiry Commission (Heport), ocveroment c f

India (1955-54) V o x .I, 149.
 ( 29 )

eoonomio in e q u a lity . This la in conform ity w ith the acoecteu

g o a l o f ta x atru otu re o f d ev e lo o ln , cou n tries* The important
r o le played by s a le s ta x in r e d is tr ib u tin g income in d e v e lo ­
ping oou n tries has been put forward by G albraith in h is theory
o f s o c ia l im b a la n ced He s ta te s th at the present sooiet.y has a
*s o c ia l im balance*. I t produces to o auoh in the o r ir a te se o to r
re x .itiv e t o the public s e o t o r . I t needs tr a n s fe r o f regouroes
from the form er t o th e l a t t e r beoause ou b lio s e r v ic e s are more
imoortunt in underdeveloped c o u n tr ie s , dales tux i s a very
important measure t o r a is e resou rces bsoause o f i t s crou a oti-
▼ity and i t should be adopted t o undertake ou blio expenditu re.
Though there have been sons c r i t i c s to argue ag. le s t fc lie
theory yet th ere i s no qu estion about the fa ot t i a t th is theory
puts forward an argument f o r p u b lic s e r v ic e s which ar a-v.rt
at the present stage o f development in most of the aevalopin*
oou n tries and sa les tax can play a v i t e l r o le in t . : c reg~.ru.

fiate schedules o f the tax t

Inoidence and r egr e t s i vit.y»

One b s s ic op p osition to in d ir e c t ta x es V as t»®er on the

ground of r s g r e s s iv x ty . i t has been pointed out that the indi­
r e c t taxes are a n t i-r e d is t r ib u t io n a l beoauss the.y -t* regressiv e
in n atu re. I t has osen argued th a t d ir e c t tazes 11. *e .inoo-re tsx ss
are b e tte r a d evice t o narrow-down the g u lf o f d iffe r e n c e oet*een
the r ic h and the poor because these ta xes can be *.Rde etee ily
p rog ressiv e.

57 . G albraith . J.& .? The Affluent S ociety j Sughtnn i f fir %

host on. 1953.
 ( 30 )

Taxation in developing c o u n trie s i s bound to be

r e g r e s s iv e , taking the ta x system a s a 'dhole* I t I s because
o f the fa o t th a t income and other d ir e e t ta x e s , in f a c t , cover
only a frin g e at the too o f the s o c i a l pyramid in eco^-nv • eace,
the bulk of the economy oould be reaohed through coom^-ii r.,
t a r e s * In gen era:., cosamodity t a : e s tend to be r e g r e ssiv e - 1

consumatior expenditure forms s hlvher percent' -c >f i >;;o» «

f o r the poor than fo r the ric.r.. ."ereover, they If ' te.-a \ oe
in e q u ita b le amotigst people o f the se re income .~rou 3 trough id le -
re n tly with d iffe r e n t s iz e o f fam ily anc fir^ r.cit-l obi*. • «.i >na,
due to which "income ta x a t og can be o u sily made 010 , l i s a v t ,
w nile commodity ta x a tio n even with a heavy ra te c l t .» i < ■>.,
lu x u r ie s cannot be tnc-.de p r o g r e ss iv e ", 58 I t i s a t on t e -•
o f commodities and whosoever ourchaces the com? edit.; r to
pay the t a x a t t e same r a te ir r e s p e c tiv e of ^ is inco r or
a b i l i t y to pay. T herefore, the t a r i s r e g r e s s iv e .

The n otion thi.t in d ir e c t ta x e s are r e g r e ssiv e ».s o

only he l a in the developed c o u n trie s a s waul* o'ode h • -j canien-
ded th a t th ere i s s a t i s t i o a l evldenoe to support tM e ev alu atio n
fo r some o f the p rin c ip a l in d ir e c t ta x e s in c e r ta in o f the r io t e r
co u n trie s*

On the other hand Lewis i s on.- ? the f©r s e n *mi-jt -? - o

hes regarded the id e a that in d ir e c t ta x e s nre n e c e ssa r ily l e s s
p ro g ressiv e tnan d ir e c t ta x e s r.s the 300r, t n ric h :-.r 1 t'-n
middle c la s s e s consume d iffe r e n t goo a in d iffe r e n t .report-.pm .

5 8 * ^axcaw '-la, o . l . , E xp an sion o f r a x r e s o u r c e s , m h ac& ou

the dec one riv e xsur H an , uovemaaent of In u io , I lin in g
Coomiiesion, 1955, £*5 0 2 ,
 ( 31 )

In that case i f low ra te s o f in d ir e c t tax®8 are imposes on

what tiia poor oonauae and high ra te s o f taxes on what t.-e rio**
ooii3U.ce, in d ir e c t ta xes oan be taade aa progressive as w ireot

ta x e s •

Shis view hae bean opposed m the ground th at there

taxes it? -one a burden noon tr»e lower-mldfil* cle.«? and weaker
s e c tio n s o f the copu lation and hardly touoh the u )aer inoome
r.roxxos :■ o h&rce "they ° r e n ot wary e f f i c i e n t instrument* of
r e d is t r ib u t io n , although the regreeeiven ees to s o n ex ten t,b u t
only m ildly i s te a pored by incroassfi ra tes n? dr+t** - n geode
5J
oonsumed by the upper income ,srou >a".

go
tiOaiah sit ■'.jap ' does not agree to she on t v .t
any ay ate* o f in d ir e c t ta x a tion oan be jrOcroe liv e * .{e has i >in-
t«u out that no system o f ta x a tion ; f c omioJ.it le x n-. •: .yst succ­
eeded in being prooerly iro^ rea siv e. I he fa c t t-'afe toa a / even
some o f the b a sic neoesaaxiea are brought under tax net fox the
sc.de ox earning revenue strengthens the argument that in d ir e c t
taxes are Dasioail^ regressiv e* The sore te e oreseuxe o f taxa­
t io n i s in creases in a given cou n try, the more, ot-ier oonclit .one
r |
oein a Si.uul, the in d ir e c t taxes in creases* I'hie ex >lalne why
in d ir e c t tu xu tioj , in s p it e o f the l i v e l y attach e on them by

57* .iathur, « . { d isp a rity la x in a oomposit* noon '-v , -he

liOittillun Comoany o f lnu ia L t d . , I e l h i , 1 J75,
60* dtaw>, J ., ihe fundamental :r in c i o le s o f y - x = t . 1 ,
1936, 9*71 *
61* he V i t i , n .w ., i i t d t P rin cip les o f iu b lia iin «a ;oe, \ jo' ,
- •137•
 ( 32 )

democratic parties* represents a neoossary and often ore•xm-

derant pert of the inooms in sodern states* It is the revenue

consideration, whioh overshadows all other considerations like

equity®^ and Justice for which the cver-inoreeelng relienoe on

indireot taxes is "brought about by a systenatic violous-olrole

of helplessness".®^ It is also found that in relatively poor

countries with a high tax burden it is not possible t> exempt

entirely goods of general and neoeasary consumption, alnoe they

are the only goods that provide a bass broad enough to rsaure

an adequate revenue for the treasury.®* The lnoidenoe of indi­

rect taxation generally fails on the poor masses whioh eviuently

makes it regressive* Reran views indirect taxation as "Altoge­

ther reprehensible as long as nothing has been undertaken to

65
utilise potential soononio surplus for development ouroose".

however, to do proper Justice to the ieeue and to be away fro*

any faulty oonolueion, it eeene eafer to reconoils with ftehlex'i®

remark that "it is probably not possible to make any generalisa­

tion oonoemlng the regress!vity of indireot taxation in undex-

developed countries." She lnoidenoe of an indirect tax eystem

62* ftyrdal obeervea that equity oannot be explained unaabigu-

ouslys It depends upon interpretatione - % r * a l , C . ,Political
Element in the Development of Boonomio Theory,Harvard Uni­
versity Press, Mass*, 1934, P.17,4.
63* Chandrasekhar,3.,in the Limits of Indireot Taxation in
India i Vlshlsshan ) VI, 3,Sopt. 1980| £.10*
64# De Vitl,D.M.,First ^Principles of ?ubllo Finance, 1 952,P. 31 f .
65* da ran Paul, Reflections on the Planning of the Boonomio
Development of India, Published in "Economic Weekly" 2 )56
(18th Feb.) £.223.
66* Staler, W.R., Jr. sales and Ixoiss Taxation in India,
Orient Longman Ltd., Bombay, 1970.
 ( 33 )

depends on the artio le s taxed, the relative rates and a

variety of other things* In sons countries they undoubtedly
are regressive, in others they are progressive and in noet it
i s uncertain*
It i s observed that the regressive nature of indirect
taxes i s susceptible to overmenohasis in spite of the fact
that high taxes on luxury a rtic le s," non-neeessary ooamoditiee
etc* ana levying of advnloren duties instead of soeeiflo duties
adds to the degree of progression*

Regressive taxes are opposed on the ground o f "equity"*

Regressive taxes are also Interpreted to have "excess burden1* on
the poor consumers*
HorisontaX and vertloal equity
tfMLSfrg ft _____________

According to the conventional analysis, "just treatment

of unequals" (vertical equity) is best achieved by direct taxes
whereas "equal treatnsnt for equals* (horlsontal equity) oan be
achieved by indirect taxes* But the c lassic al analysis suffers
frost i t s inherent defects* Moreover, the effects of any tax
must be seen in the light of a couplets budget ohanges. The
incidence or econoaio effeots of an indirect tax cannot be
inferred fron the aeahanles of the in itia l sh iftin g. Moreover,
talcing for granted that Indirect taxes are regressive, we cannot
be sure that indirect taxes have the effects on rich and ocor
households superficially suggested by the tax structure* Inoi-
denoe oannot be ascertained solely fron structure and hence
vertical inequality of indirect taxee, even under a non-Progre­
ssive tax structure would remain unfounded. 'Equity* upon which
 ( 34 )

a prejudio* again st indireot te x ts i s sometimes founded, i s

67
"a t best a slip pery concept varying over tin e and space*.
Conventional notions of equity mostly re la te to diserim ination
by incone le v e l which i s a narrow sense* The idea would acquire
a new dimension i f ether relevant groups lik e rural oeoole and
urban people, educated people and ill-edu cated people are also
brought into picture* In an equity case, we can oonfine atten­
tio n to re la tiv e income s ta tu s , but when we axe oonoemed with
the re a l e ffe o ts on national income in the s t a b ilit y and growth
a sp ec t, a l l relevant groups o f deoision makers must be oonsl-
dexed68 • Say, income being equal, people liv in g in ru ral areas,
where* in such countries non-manitised eeotor i s conspicuous,
taxation w ill not e ffe o t them while those liv in g in the urban
areas w ill be affeoted* Moreover, there remains a oonce itu.-.l
problem of equity in the economic sphere* Though there i s a
general agreement that taxes giould be equ itable, y et, there i s
considerably le s s agreement oonoemlng what exactly should be
equitable* alnoe everyone commends equity, one should not exieot
i t s meaning to be precise* I t i s a p o litic a l and not a s t r ic t ly
economic concept* Thus, many economists 69 have regarded equity
a s more properly the province of statesman and so c ia l Philoso­
phers* Therefore, in p ra c tise , i t is found that when an

67* Dosser, D*, government Finance in Eoonomio Development, in

Indlreot Taxation and Beonoaio Development, (Bd*) Peaoook
A.T* and H auser,0*f Organisation fo r Bocnomlo Co-opsration
and Dsvelopmsnti P aris, 1965, P.134*
68. Ib id , PP. 130-31*
69* Coin. 0 *, Bssays in Fublis Flnanos and F iso al ?olioy,
Oxford l&tivsraity P ress, New fo rk , 1955, F*57*
 ( 35 )

underdeveloped oounixy ha* to ohoose between mobilising,

re30uroee fo r raaid eoonomio development and distrib u tive
justice# the la tte r gets a second position* In soat developing
countries# therefore# the poos ana i s nade to contribute tfcou*fc
7C
th is kind o f taxation* Here# the oonoept o f fu rction al eauity
deserves attention* Aooordlng to th is oonoept# in a development
oriented system o f taxation# two persons situated in an equal
statue (say# one in p riority seotor and the other in non-priority
sector)# should not necessarily be treated equally* The basis
o f rate o f taxation w ill not be taxable oapaoity# but the amount
o f disincentive and d iffe r e n tia l incentive neoesaary fo r morin*
resources out from non-essential uses to essen tial ones* This is
how equity is achieved# fo r by taxing people in favoured posi­
tion d iffe re n tly froa those la le s s favoured positions# one is
establishing economic denooraoy through equality o f o port uni tj .
This w ill ensure optimum a llo ca tio n o f resouroes at the suae
time*

Ooaing back to the point o f regressivity o f indireet

taxes# It can b# assorted that at least idsally# an element o f
progrossl+cnsss is oftsn sought in the underdeveloped countries
to be Introduced in in d irect taxes by levying higher taxes on
luxuries than on neosssariss* But luxuries have a completely
e la s t ic demand and high rates on them may not be productive of
any large revenue* In fact# from the view point o f productivity
taxation o f a r tlo le s o f mams consumption is the most appropriate*
This is undesirable because i t is insquitous* Almost a ll autho­
r it ie s ob taxation have emphasised the cr ite rio n o f 'j u s t i c e '.
 ( 3« )

When Adam anith^' wrote the maxims of a good tax system,

•equity* was in the forefront* Not only that, even today, in

poor and developing eountxd.ee, where the urge for equality In

the distribution of ineoae la too pronounced, this aspect of

the tar oannot he Ignored*

g ftiu a i.,js E ifti... *a m x n tm

In an underdeveloped oountry, lndireot taxes should

play an important role la reduolng the Inequalities la Ineoae

and wealth# She eonditloa of eatress Inequality in the distri­

bution of inoons and wealth nay predate adverse off sets oa the

eoonoalo dsvelopaant of underdeveloped eountrles* It has been

72
pointed out that extreme inequalities in the distribution of

ineoae and wealth are detrimental to eeoaealo development in

so far as they reduee the nutritional, wealth and living stan­

dards of the people, oreateo an ezoeselve deaand for imported

luxury eensuaptlen goods, further an exeessive transfer of funds

abroad and prevent the growth of internal markets*

Sax policy has a role to play to eliminate at least

the non-funetional Inequality* Ion-entrepreneurial ineoae and

mon-functional eoneuaption ehould be highly taxed providing et

the eaae time sufficient differentials in reward to entrepreneu­

rial and risk taking activities of a socially useful character.

71* Smith, A#, An Inquiry into the lature and Oattsee of Wealth
ef Nat lone. M o d e m Library Ida*, Band on House, Ino*,Sew York,
1937, 1*777*
72* "Methods of JFinanolng leomomie Development in Underdeveloped
Countrise", U«I* Department ef Sooneaie Affaire, 1949, f .15.
 ( 57 )
It w ill give stimulus to th# ores* a 0 of eoonomio development
in th* underdeveloped countries* In the words of Haller,
"Bediatxlbutive flnanoa appears to of fas greater gains and
IxrrolTa leas ooata to underdeveloped than to developed coun­
trie s.* 73
It oalls fox a highly progressive tax policy in auoh
countriee. Hut, i t la diffloult to achieve a highly regre­
ssive tax policy in developing countries at least at the
in itia l stages of development. At the same time, taxation hat
to be relied upon heavily fox the development purjoses of
euoh oountries, Shis proposition hae become so widely u»oeeot«d
that i t seems almost beyond questioning7*, lioraally in suen
oountries where the revenue from the direct taxes axe ehy,aore
relianoe hae to he plaoed on indixeet taxes* And the indlreot
taxes tend to be xegxeeaive in euoh countries. Besides, the
unorganised oharactex of theix economy, absenoe of tsx morality
and the laek of an effiolent figoal adainietxation make the
task a ll the moxe d ifflo u lt. Thus# indixeet taxee, nay, the
entire fisoal policy in euoh countries axe greatly hamate*! »eed
to eerve the purpose of xedietxibution of inooae and wealth,
nevertheless, it la and i t ought to be, an objective of indlreot
taxee in the underdeveloped oountries to seduee the inequali­
tie s of income and wealth.
7J. Heller, .v• w• , "CSi)*a, stabilising Budget Polioy after fen
tears, Amsxioan Boanomic Beview*, (1957),
74. Mahler, W.B* Jx .| Sales and Bxoise Taxation in India,
Orient Longman ltd ., Bombay, 1970, P.10.
 < 38 )

Though sales ta x can play a v i t a l r o le in r e d is t r i­

buting inooas in developing countries y e t there have been
soae arguments against th is view* The nost s ig n ific a n t argu­
ments against sales taxation are those based on equity consi­
derations* The ta x favours those persons who accumulate as
savings unusually high percentage o f t h e ir incomes. Moreover,
unlike the spending ta x , i t i s extremely d i f f i c u l t to make the
o v e r a ll burden progressive by adju stin g the ra te etm ature,and
i f the ta x i s applied uniformly to a l l consumption expendi­
tu res, i t i s lik e ly to be re g re s s iv e , and hence in e q u ita b le .
Shis olaim i s t o be analysed in the lig h t o f those p rin ciples
o f d is trib u tio n o f tax burden vhioh are w idely meoeoted and
o f f e r general g u id e lin e . They are b en efit theory and a b i l i t y -
to-pay doctrine* We eannot defend ea lee ta x on the baeie o f a
rigorou s a p p lica tion of the b en efit p rin c ip le s , but, i f i t ie
aooepted that a l l the c it iz e n s have a r e s p o n s ib ility to make
some contribution to the government fo r the b e n e fits received ,
even though p reelse raeaeurement o f euah b e n e fits ie im possible,
then sales ta x may be an a d m in istra tively fe a s ib le way o f rea­
ching a l l e itis e n s ^ * A a fo r a b i l i t y to pay aoproaoh, tb# main
problem la about fin d in g out the moat appropriate standard to
judge ths a b ilit y * Moat w rite rs ha vs accepted cars anal income
represented by consumption plus increase in net worth, ah the
best p ra ctica l standard by which a b ilit y can be judged.' On

75* Oates, Q.V.; State fie t a il dales Taxation; Ohio State

U n iversity, Ohio, 1937, -P.35.
76* Hungrave, it. a . , The Theory of Public Finance, Hew York,
1939* P.161,
 ( 39 )

the other hand, there are economists who fay our expenditure
77
to be the most important Oasis of taxation • If mo aooetrt
th is b a sis then the s a ls tax would not be considered inequi­
ta b le *

Consideration! of equity n e c e ssita te s an an aly sis

of horizontal and v e r tic a l equity* As regards horlsontal
equity9 the sa le s ta x la apparently equitable according to
expenditure b asis of tax atio n * But# In th is regard droves
ganaon's* argument of p e rv e rsity '7* oaprioioumness , and
Of
u n c e rta in ty ' deserves due consideration* Am fa r a s eaprl-
oloueness la oanoerned, Davis 82 has rig h tly argued that sxoevt
per-oapita ta x , a l l other taxes are oaprioious and therefore
s a le s ta x should not be mingled out for sp eeial indiotment.
The same argument applies to perversity* But only the argu­
ment about unoertainty holds water* In th is regard it can be
suggested that exemption o f raw m aterials and other producers'
goods w ill relieve s a le s tax of th is indiotment to a conside­
rable extent.

77* Host prominently Prof.K sldor. See Kaldor, V ., fhe Expen­

d itu re fa x , Allan and Unwin Ltd*,
78* Hanson, H.E., Jut Empirical Analysis of the fietall ja lo s
fax with .Policy Beoonmsndations, national Tax Journal,
15 * 1-4, Marsh, 1962*
79* She ta x would be perverse i f the tax burden at the same
income le v e l Increases vith the increase In the f a m i l y
e lse *
80* She tax oan be oaprioious i f the fam ilies of sim ilar sice
income sued expenditure bear d ifferen t tax burdens beo&uet
of toe d ifferen t pattern of expenditure far there may be
differen ces in ta s te s *
81* Unoertainty re fe rs to the incidence of the ta x . This occurs
p articu larly when producers' goods are taxed causing d iffu­
sion of inoidenoe*
8 2 . Davis, Op. C it. P.415.
 ( 40 )

Am fox v o rtic a l equity, sa le s tax a s suohf i s not

equ itable* Bat an objective ap p raisal of sa le s tax equity
deserves a proper an aly sis in terms of tb s nature and extent
o f i t s re& ressivity and a lso the equity of sa le s tax or any
other tax in re latio n to the to t a l ta x and e x ; nditure ay ate a .
as regards the nature and extent of regression* i t i s rather
d if f ic u lt to aaoertain the regreseiv ity or P ro g re ssiv ty of
sa le s ax sinoe difference of etruoture and also oan auction
pattern say vary widely* However* st^udies in eoae countries
show that the s a le s ta x i s not highly regressive ae i t i s nor-
83 t
mally aooused to be * It i s evident frost the findings of •-’r o f.
O stsr when hs remarks " i t appears that a r e t a il e^.lee tax with
food exeaptim i s v irtu a lly proportional between inoomee of
1,000 and 10*000 d o lla r s " • 84 Other stu d ies a lso bring-out the
fao t that the etruoture of sa le s tax oan be made more nxogre-
salve with exemption of food* 83'

It i s Important to a sse rt that even I f these la *

sin gle regressive tax in the whole tax etruoture i t does not
matter much but what matters i s the nature of the en tire tax
etruoture* Moreover* i f we take into aooount the ex penditure
aide of the budget made possible by sa le s tax revenue* It

83* Groves, II. M., Financing Government* Henry Holt & Jo .,

Mew fo rk , 5th JMId** 1958* P.248.
84* Oster, 0 *? *, 8tate R etail Sales taxation t Ohio state
U niversity, Ohio, 1957* Op. C it. Pi?.35-43.
85* Mte Grow* J .U ., E ffects of food exemption on the incidence
of a R etail Sales tax , Rational tax Journal* 2 1 362-67*
Deoerabsr, 1949*
 ( 41 )

r e v e a ls th t,t b e n e fits o f the expenditure which these taxes

support are more re g re s siv e * As a r e s u lt , the ta x ana ex sen*

d itu re re d is t r ib u t e income in favour o f the lowest income

86
group* Thus, i t d riv e s home the conclusion that equity

con sid eration s do not stand in the way of s a le s t a x 's ,J iv in g

an important r o le in the economic development of underdeveloped

co u n tries.

d t a b ilig a t io n of economy*

In d ire c t taxes can play a v i t a l ro le in s t a b ilis in g

p ric es in the developing coun tries* S t a b ilit y of the orlo<

l e v e l i s a necessary condition fo r many of the other o b je c tiv e s

to be r e a lis e d during the developmental process in sue' coun­

t r i e s . In fla tio n a ry price r is e is almost in e v it a b le in such

coun tries when the governments a re s a ile d f o r in cu rrin g heavy

investments to e s t a b lis h heavy and b a s ic in d u s trie s . There i t

plenty o f evidence8^ to show that spending pressure h; s been

in c re a sin g in such countries in resent tim es. In fla t io n Is

fu rth e r jaoked-up when investments are Bade on in d u strie s

having a long g e sta tio n p eriod . The s itu a tio n i s sometimes

fu rth e r aggravated when investments an unproductive lin o s

86. A d le r, John. H .f The F is c a l system ; The D is trib u tio n o f

Income and P u b lio W elfare. I in Poole. £ .E . ( M . ) , F is c a l
P o lic ie s and the American Soonomy, Englewood C l i f f s , W.*T.f
P ren tioe H a ll, 1951, PP.359-401*

87. Madison, a . , ISconomio Progress and P olicy in Developing

Countries, A llen and Unwin, London, 1970, P.71.
 ( 42 )

auoh aa defence e to . become imperative. Inflationary n ioe

risa cannot be haload In auoh oountries where on the >no
hand production la carried out at a low le v e l, but or xh.
other, the pro penalty to oonaune I s auoh hl.^h*

Consequently, i t glvaa riae to in fla tio n in auoh

countries. In some oases, the in fla tio n aaaaa to have bean
ju s tifie d as a lubricant to eoonoalo growth. In others it
appears that rampant in fla tio n has disrupted the aeon :my and
retarded economic development.

A few possible conaequenoea o f a risin g orloe 1 >v'l

* *■* 4 4
*re that, f i r s t , it* iiilteata rational calculations far tho
future which w ill a ffe c t programmes designed fo r eoonorio
growth. Secondly, i t e ffe c ts a distribution of wealth fro i
persona with net monetary olaims to those with net d^'its
and th irdly i t brings about balance of payment d iffic u ltie -t.
hut the Inherent in flation ary pressure stemming m fron ^'oesn
demand oannot be controlled by tax policy alone, nay, not
by the entire fis o a l and monetary p o licy . Thus monei-’ i.nu
fia o .l oolioytfia not tue t o ta l answer to the oroble^; o, i n a ­
tion in underdeveloped countries.
♦

The sta b ilisa tio n fu not ion of an indireot tax «

comparatively new concept and i s concerned with muinc - t
high le v e l o f resource u tilisation , ana a stable value c : u-nej 8•
Ih® origin o f the concept o f compensatory finanoe de +np back to

88. Muagrave, L .A ., The Theory of Public finance, Interactions1

student Edition, Kogrow-Hill, Kogakusha L td ., Tokyo,
P .2 2 .
 ( 43 )

tho Great .depression of the Thirties and recast subsequently

by the in fla tio n pressure o f the war aah tae yeare tiwt i o l l -
owed. Tho whole world ha a suffered the jo l t of depression and
the neoeseary accompanying e v ils of it* at the same tiu.e in i l l -
tion hae had and is s t i l l having i t s u gliest Denlfestat. au in
d ifferen t parte o f the world. After th is experience, there is
l i t t l e reason to expeot that future deoades w ill orovide a

more stable setting unless appropriate p o licie s are u- dertaxei .

It is true that a free eoonoa^y, i f uncontrolled, tends to* rds
more ox le ss drastic fluctuations in prices and employment j
and apart from re la tiv e ly short-term swings, mulaajustmente of
a secular sort may arise towards unemployment ox in fl; tio- . In
order to avoid these unwanted circumstanoes, public Doric* must
assume a sta b ilis in g function in order to hold within tolerable
lim its departures from high employment ahd prioe s t a b ilit y . In
the oontext o f development taking place in the underdeveloped
countries and the complexity acquired along with i t , which has
an inherent tendenoy towards in s ta b ility , the concept of comoen-
satory finance gains a ground o f permanent importance.

The tax policy say be used as a weapon to figh t the

e v ils lik e in fla tion during the period o f economic development
but it has got it s own lim itation s to figh t alone the b a ttle .
Thus, i t follow s that in underdeveloped countries in fla tion is
more than a problem of f is c a l and monetary polioy alone — it
i s nothing le s s than ths problem of sound economic development.

It has been pointed out that in direct taxes su ffer froa

some serious lim itation s fo r which it cannot be looked upon as
 ( *4 )

an e f f i c i e n t Instrument f o r curbing i n f l a t i o n . In the t,

p la c e , i f in d ir e o t ta xes reduce saving rather thrn oonm. )otion

the a n t i-in fla t io n a r y Impact o f such tuxes i s reduced * 1 i
e x te n t, secon d ly , the d is t in c t io n .neae oetween i r f l s -tio.it c-

p rice r is e and p rice r ic e due to in d ire o t ta xes cm o lo a e r scru­

tin y seems to be u n r e a lis t ic . I t i s argued that in the <r, »e of
in fla t io n a r y ?rio e r is e t ie r a i s not only in crea se in rrom ot
p r ic e but a ls o in the fa c t o r in ooa es which support a d a i .l o u .i l
money demand and orop el the in fla t io n a r y s p ir a l . As against th is ,
in d ir e o t taxes are considered a n t i-in fla t io n a r y oeoause they
d riv e a wedge between p rices paid by the consumers and t o ; a i
retu rn s t o the oroauoers with the d iffe r e n c e going to govern -
o e :it . 3y absorb in.? the purchasing oower, theas taxes li>ce others
h o ld prioea from r is i n g . 3ut t h is h olds good only whan alom<
with the m ob iliza tio n o f in d ir e c t ta x e s , rea l government ex pen­
d itu r e send va;;§a?- do not rl3 S . In d ireot taxms can lim it i n f l a ­
tio n a r y pressures only as 1 oxig as they do not generate o u iv lent
f e e t or p rice in c r e a s e s . I f they d o, th e ir e f f e c t become n essen­
t i a l l y in fla t io n a r y . F in a lly , in d ir e o t taxes s u ffe r from t ’^r
fu r th e r lin it a t io r . ae fa r as t v.o ru ral s e c to r is concert*va. . he
scope o f in d ir e c t taxes in ru ra l s e c t o r i s touch lim iter- ••* i •**
prooortioti o f rural income spen*- on com aoditiee and service-:; *<f
the kind that cur. be brought w it h in the soo.ie i s much "a*
tuUA tnai ol the uruan in cou e. 39 i4uch. o f th e consur. n : *n v
c a r rie d on without any market tra n sa ctio n s ; hence s'>oh consump­
t io n s in kind ie d i f f i c u l t t o ta x . fu r th e r , i n d i r e c t tv.xet on

89 . Lakdavala, l . i . , D irect ta x a tion o f A g r ic u ltu r e , Indian

Journal of A g ricu ltu ra l Economics, V ol.X X l, N o.4 (Oot—D eo.,
1975).
 ( 45 )

agriculture is no»tly Ineffective because the export taxes

i

on agricu ltu ral exports I s U n ite d * the ta x on inputs are

considered as Inadvisable beoause it nay discourage snail
farmers to insrease th e ir productivity* Doubts have been ex­
pressed whether indirect taxes can re a lly reduce consumption
expenditure vhen it shows a tendency of increasing at a more
than proportionate ra te to the increase in iro o a e . Ihe e x is -
90
tence of international *demonstration offset* malte3 peoole
to in itia te others belonging to the next higher inoo ae group
whioh renders Indirect taxee in effective.

Though in d ir e c t taxes are subject to those lim ita ­

tio n s as an a n ti-in fla tio n a r y f i s c a l measure, y e t, they are
expected to play an important r o le in s ta b iliz in g prices In
an underdeveloped oountry. In these countries, t ' e frvemment
expenditure is bound t o be steoped-un in order to cu rvy out
the developmental programmee. But the in d ire c t taxes should
take care o f the fa c t that suoh increased expenditure ehould
not cause in fla tio n * I t w i l l not be possible fo r xh* in d ireot
taxes alone to counteract th ie tendency, fa th er the e n tire
f i s c a l policy w i l l have to be geared-up to pi?,y t'-'e r o le o f a
compensatory f is o a l p o lic y . N evertheless, In d ire c t tr-xs# can
play i t s part by reducing the consumption o f cert; tr. goods*
But suoh a s ta b ilis a tio n programme has ,%ot some serious lim i­
ta tio n s * In the f i r s t place, the Increase in the dev^loomsnt

90. Mathur, d. D isp arity fax in a Coaooslte Iconomy, ?o d lla n

(In d ia ) lt d * , D elhi, 1J75, ? • 121*
 ( 46 )

expenditure car.not 05 stopped or even kept in abe.ance, it

0)4
hc>3 been pointed out. 2 he main d i f f i c u l t y in oounter-oyc] ieni

f l o c a l polio;; in underdeveloped countries ie that any ;oh<,,me

f o r averaginr, the rat^ o f increase in governrw it exoer.ii+rre

w i l l have to ooerate a gain st a strong and p erfe ctly n atu ral

tendency f o r expenditure to inoreaee in booms. This i s T irtly

t i e re su lt of tae b u i l t - i n - e t a o i li z e r a in the e x p su d itv r. ro

n artly the re s u lt o f a la c k o f appreciation among the >ublic? o f

the advantages o f contra-oyolica.1 a c tio n . I t has also ooei

pointed out that, the Problems a re c o rs id e ra b ly g r e a t e r wher

op
tnere c.re public manufnctu •**.*.; operations.

The d iffe r e n t ln d ire o t taxes which are coauaati-i., i- ;ed

in the developing oountries are the custoias d u tie s, oz-oieo

a u t ie s , ex j-r t d uties and s a le s ta x . Export o u tle t . ’ig n i -

fio a n t position in oountries whose exports consist of jr . ry

products mainly. Export d u tie s are a ls o an e ffe o t iv e :T l-' f lo ­

t i onary measure, frequent adjustments in export end l^ p .e t

d u tie s have, however, to be made to s t a b iliz e >rice?. ,'xc. 5

and s a le s taxation a ls o h elp in ao?-;ing-uo tic in ev o -..-v , corns

p a r tic u la rly when they oover a la r g e number o f comuouiti of

mass consumption. As f o r s a le s ta x , i t i s found thot It c„i

accomplish a b e tte r re s u lt than the income-based ta x e s.

incomo-biisia i s r. somewhat olumsy way o f ecoomoliohin* th is

51. jSane3S.thr.san, 5 ., uxoort I n a t a b ilit ; and Uounter-cycliu: 1

iiiscfci Poiioy in underdeveloped Export Sccnnules,
3 ta ll Papers, A p r il, 1959, ?.7?.

92. I b id , P.70
 ( 47 )

resu lt, ain os i t s tr ik e s a l l income in order t o reduce spending.

Tne Inooo« basis gives no lnosntiTS to reduce consumption. on
the other hand, sales tax i s said to he a n ti-in fla tion a ry beoanse
i t xeduoes the purchasing poser o f the oansmmsrs* In t h is sense,
o f oourse, erery tax nay be regarded as an ti-in fla tion ary i f it
xeduoes e ffe c t ir e deaand without a oorresponsing reduction in
output* however, e a le s ta x has a p a r ticu la r aavanta.?e over other
ta x es in th is r e s e c t * ta le s tax takes away jv roanein'-; power
from tl.ose a ls o whose marginal propensity to consume i s hi/ .er*
in the u&derdevelooed cou n tries th ib nii'gi.val rooer.city t o con­
sume i e h igher n .t oni.- in tne case o f poor uiaua&t* but aia o in
the case o f Higher income g ro u p s ^ * i t ie Docause o f th is fa ot
th a t s a le s tax can be used as an u s e fu l t o o l t / reduce exoen ai-
tu re on consumption* Of oourse, whether sa les tax wouli reduce
suob expenditure or not depends upon wnether tae tax causes a
r i s e in o rice r or n o t. I f the ta x r a is e s p r io e s , i t s a n t i-
in fla t io n a r y e f f e c t s would be o ffs e t * Jut th is r is e in orioe?,
is purposive (so th at expenditure on consumption Is r e s t r ic t e d ) .
hut what i s more imoort&nt is th at w hile s a le s tu x r a ise s the
•rices o f fi n a l consumption goods so as t o r e s t r ic t cons urn >t L<r;.
;ujaa dsmxnu o f oecola , i t should not stim u late r is e in factor-
p rice s , l e s t , the e f f e c t s o f the sa les ta x beoome sim ila r to
th ose in fla t io n a r y ri3 e in c rlce s*

.as f o r the in cid en ce o f s o lo s ta r , the old er theory w»e

based on p a r tia l a n a ly sis under the con d ition s o f p erfect oo.i >e-
t i t ion or monopoly anu thus tne approach, was an expansion oi
33* holph, n .i i ., a Proposed r e v is io n o f lixoi.oe „f.x . sory t
Oourntl o f p o l i t i c a l Economy } 60 s 102-107, (/>. i r i l 195" )«
 i 48 )

ga
the price theory • It ex& ain that capital being uubile,
marginal firms w i l l be foroed-out causing reduction in euoaly.
This w ill increase prices and sake possible a forward shift in#,
o f the tax* Kolph’ s analysis on the other hand states i*.at t »e
tax la borne by factor owners only and does not oause t- rise
n5
in price* But Bolph's analysis has cone under severs oriticiamb
fo r oeing: incomplete and based on *differentio.l incidence* only •
L a t e r , auohonan 96 hac put forward a new a oorcpch ac 50 id in*-, to

whicr » t a x need not oe a t t r ib u t e d as a f a c t o r ox r i s e to a rise a*

The :aain f a c t o r o f ?i i c e - r i s e i s th e nonet o r "tnn ^ in itir -
te u and auaoorteo by th e economic vate-r.* a.ut tai.*. n * ro- oh i s
&l«o a - t floe- irotn u .-fe cts* i t does not d iatin ^ u ld b between
p rice r i s e because oi monetary ad justm en ts ana ir io o r i s e s
because o f in p o sitio n o f t a x . I t i a not t r u ? in. t :nl,y nonet r ’

changes can e rase in c r e a s e s in g e n e ra l orice l e v e l , rhe ta * al* o

oeuses th e o rice a to r i s e because t r e g e n e ra l in ten t!cm i s th a t
i t w i l l be s h ift e d forw ard t o consumers through h ig h e r ) r io e s .
Thus, i t i s th e t a x and not the aonetazy adjustm en ts w: ioh -m;y
97
be regarded as th e oauae o f g e n e ra l p ric e l e v s ! in o re <--e. but

9t* ueo, Von .ierria g, Otto, The S h iftin g a r t Incidence o f

Taxation; The nlaokistan do., Jnilu delphia, 1H2.
95* -Vain oritiu u oa a re, (a) Due, J . r . ; Toward .-1 Deney 1 Theory
o f Sales Tax Inoidenoe; Quarterly journal of loon >»ilos>,
67»253-67» (b) iiusgrave, d .n ., On Incidence, Jourral o f
focnomios; 61 *306-23, (Au#s*1953), ( 0) d u ll, O h a ili* ' heviow
o f f.olofa*s Public finan ce; in '.nericul be xomic * :-riew;
52i2fc8 (3Saroh 1962), (d) Jenkins, Ii.J?.B*» Bxoise a>.x S h if­
ting suid incidence, A Honey flo w Approach; Coon 1 o i
P o lit ic a l toonosny, £3* 125-50 { A p ril, 1365).
96* iiuenonan, f i s c a l Policy and P o lit ic a l economy, ■ j o - - . >e3 i l l ,
flew York, 1961.
‘97* Due, w.x. : ^ales taxation and bonauraer ; ..aaric-r feouorafe
Review, 8 1 1073 - 1084, (Deo. 1963)•
 < 4 9 )

th is theory vhioh has been developed under conditions wf

monetary equilibrium and stable prices in the context of
developing economies, is not wholly apolioable to dcv^lo >in
eo n o aiesf la the developing countries price in ore; pop ,r n t
a deviation from general price s ta b ility * Price increese, ic
caussd by massive exuenaiturs on investment projects of lcr
gestation Period, d e fic it financing, outdated ^^-.r;cultural
praotioo, transport but tie.os sk, Irto’i oi oo-3 >*r-- ..ion fact
aui u i i f ' i r s i g n exonan^e position*

Id judge .1Vie t i e r th e * e a d it i n & l c-wrc*? oh o\ <•] •.•*

a n a ly s is i s c o r r e c t needs e m p iric a l e tu i/ * 3olph h-:.a -\t i st
#ho»,n th a t s a lq s t a x i s not, a on 3urno r yurdcn in ju .v . .< u si -us
form * f s e v e z t o e le g s , it
ap p ears th a t t.ie c o -iv o u tio -z 1 v ie w s re
Q»
more c o r r e c t t m m ijo lp b * s a n a l y s i s *

c i ‘. j&elo r: i a x :

nut a g la r in g defect of both the old a n a ly s is m l

hoi ih'r arguments i s the.'; th e ,1 run in is o l a t io n 01 «';ve?uJiao‘

expenditure through the revenue raised by the ta x . ac.Jhol. i;.b

has aovioaaodntcu th i3 as sect and the t h e s is shows th ’ >ri~-e ;

nouia r is e oecausa o f imposition o f t s y . This a n a ly s is ouroerts

th a t t.,e su lcs tax i s ia f l a t too ary because i * couse«i ri-e V.

pricer** but t h i s conclusion warrants that the i n x l . t i ^r?

e i i o c t b 0*. u ta x should h o t do judged In i s o l a t i o n . * tax y

be ii.i‘2 r.-.iiorary rels.t.v-’-e t<-> e.nr-tvsr t e r , but rn-.y be i O t i -

iaiiouionur., r s i c tiv o t 1 covronin,--* vh«w i s a jook J *h&t

s>8 . *.*,»«. Vxii, oaa been au r? *>rt-?i by "-'organ and vovior. •.-so,
•fur..;.*nf O c . c i t * , cvtc‘ i ^ t i o o , £•? . $ A .farther -*e;.' >r i r l
oi l«ij.aa ta x a tio n , *lct .tonal Tax J o u r n a l , ,
(lnc* 1963 )•
 ( 50 )

t h i s would bo trie oaee wi.tr- s a le s t a x a t io n * * ' moreover, i> 1 1 ;-

t io n aa a ta x ahould be d iffe r e n t la tad from a tax-1 dt-oed
in fla tio n . ►
‘inert i n fla t io n i s caused without any r is e Jr l » r r-" t
i t s advantages are w holly a v a ile d o f by c e rta in <%r©ooj! in
s o c ie t y but when i t ia tax-induced i n f l a t i o n , the .visit- of
9

i n i i ’ t t o ' ? iss to ra is e the nmounts o f the a ta t a ’ s ex cl s c i e v .

in « deft $Jon, tax-induoed i n fla t io n i s ouroosive ( i t is t-r - r f
i or r e s t r ic t l n « conaunot1on o f taxed « o o d a ). ihuu, i i i «se
ta^es r-^isa rricen , th e cone urnntion o f the tsxed eowc-dit.v is
r e s tr io t e d and the y ie ld o f the i: f l a t ion ia 1*0001vac by t - e
*£ovaminent •

.o.y redvxir.--. conavnot ie n , sx ica tax ,»xv.vs a dofinit--.

i*;cohtivn to in crea se carings* Of cou’ -^e, how f* *• i t - t i l oe
e f f o c i i v r would da pend uoon the ra te o f t a r , ihe v a il .c £■..
v ’- ic '! the t v r ia in..oe?ci and so o n * if the ta x i a ii-ooeta 1-
fi'-V t i* .fl.:t io n ana It i e maae known to oeoule that g-i*' t'\x
v i 1J l i f t e a a f t e r in fla t io n a r y pressure <3iaa 0 .3n s , ft i
l i k e l y to te su cce ssfu l* A lso tbs- e n a c t i t ?ni-i<£ of .niles t r in
b r i / l r . r s.bout a per-are 1 redu ction in ocneiwser s yeni '.»< i*
e ffe c t e d by i t s coverage* Xf soaio ita .-e are sxea ^tec, . - ?.re
w ill e ^ itt t h i t r purchases iro n taxed t o non-taxea xia u *. x -.uh,

ccrgrr.er e*n era ltu re w ill not d e c lin e and 1 onax... '*?-• ^
w i l l continue* ..ia a t o o l o f c o n t r o llin g trifle c io n , even fon;- m o
*
o+aer n e cessities: »:* cult* n~t t>e exempt an* nut such axe act lo r e
are u sually r.doomed t**> s v c ic 1 e x c e s s ! vs burner. ou Vie 1 -*nd
miciilt i t cor o t-re u :£ •
9b* oi.oti0, C*C* • f i s c a l Theory t j-iceuEci-m 1 .onerioei»
y c v io a ic Review, 42 * 1C? 1352)*
 c )

In xam Ox 3 - l.f i t-vx tiio.cr-* i s ~ x im o t -if? v- -1 "•Mbr:

between te e tXss/aeat *Jl* cuo wax u.*a c >.e tr u e . T" ?*>»■—
suiuer is awvre o* iuos t -•>*; jy rofuwin*: t o b j f =>. sc*-- -c 21-.
he cert eao.voe the xv/xenE ox to# p artl-i'ila r .5".l-?: t c x . .1r t >o
ease 03* Ancoa# ta x , the.ec xa no suoli o i r e o , aa#cr?.’. i i r •> i-
the- s.-synatt or tne ta x ant- the L>ux,a.-&.s0 f. n&de • [ ' i s i : t :•.
gp.ios t a la acre cx’jfcotivc- in e e r trie + ir ; c:r.i-v-h : .f Dr - * v --
f.ootia Hf.fi thereby curb ii.^1- XI -.r..

o r s e v e x , the* i-iaxdou'j^} aX *3 :c tn r f ’ -lV* j

I r tr j- feed lie n and Person# to low ir.eo.r^ a x ' ■? y->->-:o

w o density to couduxe la ?ii*h • 'fheee yrou'-s - « h<

j «

: .noft} t^rratlcn but tv# fact re:.- Aut t <*.*•► +h^y ou :t + «. uui-t il
V’ f f*-3 :-*nci f o r <*ooge t o a ^ r e c to r e-rfcer.t t/w’ * t r t -'s •»--•.. be in.*!,
t •.* t- r hi--her incon© .roupe. onls-M t.n- nerve* * b .>.:•» n r *ctv!. .'/•

t " - ’ .’ t'^,* . r r. nr.nnex and though *cIsa ta x rsr.y os noiH.rr.’ a -u?

5'"c ■v-i# In th in r e .v is ci, yet t* c •.-•*•.in cor «*•*<'#*• . n v. s.:~ ; •

r. st or o? ty b»»t C ontrol ox i-iiM -tiu ...

iiiooxn to x 'Ou,/ ixi ibu ..ivoo t . w r*‘ :

t i o n n 1 i r o o x # e a r n e d v i i .1 .-•* v? ■ _ u ’ U f c © 3 n : : i , r . i.i, •, n V- = : i l l

n e t ; t l t c t i.c s e n t i V v ? n u o Y a r - s s i y . ? s o . d a n '.'iditio -«1 i.:«- til Q

ir.il 1 , o/ij.y ii * It iii f-oc'i. e» t'-io»tsls cccx-e. • l*ti. u X t

i t le xov.iu t;! i t n w o r k ciOit- t r4 a c m -rc, - i

till 1, • c--.ntj.dcr Ir=s 15 r- o* l i t ,- to incc've 1,-»v nr a cot c vne

--,y» .r.n order to r*«p\.»vxn in i’! ...tier f t.* oj Income 5: r

* ?.3.1 ''-iv-s «.» ;••»« t.-m::, .* os* ..»•.• i. * 4*.cen-

tinon *.» t i .‘ .m '-n rontex* cuut., i Vi-.x o. t ■- ■•.•») te r

in «lw "s r t of i/; n o t i o n oontrol f, ia a incons te.x#

 ( 52 )

Of course, the e ffe c tiv e n e s s of s a le s ta x as <uu i n t i -

in fla t io n a r y measure would depend upon the form of sa le s

which i s introduced in the developing cou n tries* As &r a n t i-

in fla t io n a r y t o o l, i t w i l l be more e ffe c t iv e i f (a ) cubit J

faocaa are exenpted from s a le s ta x a tio n , (b )th e tax is iajose>

only at the r e t a i l ets e «o tli&t aonguiaers become oA

the tax i (o ) too ta x •'•an the broadest o w c n .. r ■ thi 1 there

couxci be auu* u i ^ o o i a v * ^ t * . w.v-c *.■,* ttto

iiuz ah-nO.fi have pro >er rate ui fro rent it%*lun *i.t -ie*. \ j uut- in

a more suitable- x V / j j a of -jurueii uis'*i:-luut- vju us. t - is c o u -

ra-|o the use o f certain cissuee of ^oeda wiiic’.. -ire i»» e x tre ­

mely ahort-su ??ly.

.■'.Onover, there i s no aen./iny the i .of th«\ >. a •» <

fi 9 >3-ire t £ oe i n f e r io r to novaon.l expenditure- tnx •• •-. *».v in<-

tu x . axosn lltur? t'-.r, vhioa 13 a o ire s t t : x o..n bo iuu: ,• hi.v-.ly

p ro gressive, sc much so, tnat add..Gianal a. .id in-- o; :

c e rta in point can as mad# pro& ibiviva, nut 3a le s • . j v r . i t >c

laude steep ly or a*; res Give. sx pond leu re ta x can se x-ouii:> oour**

cii.,- to tiio a b ilit y -t o -p a y p rin c ip le by »xem jiia?-, the 1 : m

iitooico groups whereoy the burden oi the ta x can oe d i s t r i b u t e

according to tho a b i l i t y ot jaksix-s . c*u - , tiki a i « not uoesibie

w ith tax and obviously th » d ia trib u tic r. o f ta^c fcuruet. is

lu eo tiitah lo . hut galea ta x enjoys an advent a* e avei* t: -kcc itnre

t.VA in that i t i s easy to adm inister s a le s tax but t <. i®>uonal

expenditure tux i s xeooKhxaea by a l l as an auw in i s ir. l i v e l y

d i f f i c u l t tax.

s.
 1
( 53 )

The foregoing discussion brings bow the idea th-.t

sales tax* though Inflationary* has to ba used in developing
countries to raise resources t o finance developmental ilana.
Of course* tha oharaatar o f tax-induoed in fla tio n ia t c be
observed whathar it ia purposive and cu r ta ils oonsuaot on of
taxad goods* Thus* It oauaaa rise in prices but does bring
tha affaota o f pries riee as anticipated by tha government.
In the past* sales tax vaa looked upon only as a device to
o o lle o t revenue. But now, besides baiiv.; a devioe fo r o o llo o -
t lng n t m m i i i t baa beoome an important fia o a l instrument
t o con trol inflationary Pros auras. In the undardavalo oed ooun*
tries* sales tax oan play a vary useful ro le both as a souroe
o f revenue fo r developmental purposes and also to control
in fla t ionaxy pressures which accompany rapid soanonio dsveloo-
nsnt* provided utmost s k i l l is employed to design the struoture
o f the tax to eurb inflationary tendency*

Thus* in direct taxes in general and sales tar in

particular are able t o fig h t in flation * though in a lla it e a
way* to curb in fla tio n i f the tax struoture is deliberately
■ads fo r the aooompllehment o f tbs said purpose*

Besides the a llo c a tiv e , red istribu tive and a n ti-

in flation ary ro le s o f the in direct taxes in the developing
countries* i t i s found that In ouch countries the o o litlo a l
considerations ev sr-rid s eoanoale considerations as a result
o f vhloh d irect taxes* though progressive* are rendered laprao-
tisa b ls* In su«h a ease* in direct taxes arc to be Increasingly
 ( 34 )

r e l i e d upon as a sou roe o f xevenue* pox example, in In d ia ,

th * S t a te s ' povoro to t a x lnooasa r o la t a t o agxioultux& l

inooaas and lan d raren a*a* s a t i t l a because o f th * f e a r o f

un popularity w ith tha aaasae th at no vhaxa in In dia a g r i o u l -

t u r a l inooa* t a x haa aaaonad tha r e q u is it e lap o rtan o a. Natu­

r a l l y , i t l a tha in d ixaat ta x *a whioh axa to be g ra n tly ra ile d

upon* Among tha In d ira at ta x a a , a ala a tax la tha aoat oroduo-

t i r e o f revenue in auoh cou n tries and at tha aaaa t ie s i t ia

a d m in is tra tiv e ly aaay t o handle* On tha other hand, d ira e t

taxaa ax* d i f f l o u l t to a d n in la ta r and axa nor* expensive to

a o lla a t * Shla l a noxa ao I f v * want to ta x th * low er inoona

groups* But aala a t a x i a not only adm iniatxatlT aly f e a s ib le

but i t I s convenient to tha tan-pay axa a ls o * Salsa ta x ia tha*

su p e rio r t o expanditoxa ta x which l a a o lla a ta d from a la r g e

nnaber o f In d lv ld u a la and a la o to any oon eelv abl* inoona ta x

r e la t i n g to lo v Inoona groups* fh u a, aalaa t a x atanda out

p roaln an tly among a l l tha taxaa aa an a d a in la tra t lvaljr s u ita ­

b le type o f ta x *

Zt l a evident that In dixaat taxes l a g en eral and aalaa

ta x e s In p a r t ic u la r oan ba employed to play an important ro le

during tha developmental yvoeesa o f the underdeveloped o e u a trle s*

Though, doubts have beam expressed about tha p o s itiv e so le that

In d ix aa t taxes oan play in tha eeonoalo development o f th *

underdeveloped o o u n trle s, yet a o lo a a r look at those re v ea ls

th at the opposition s have bean on s o ft grounds* b a s i c a l l y , tha

op p osition to in d ire c t taxes haa bean on tha grounds o f tvo

reasons s (1 ) B a g ra sa iv ity and (2 ) Exoeas burden* But a proper

a n a ly s is re v e a ls that nest o f these o b je c tio n * have seen

 1
( 55 )

one-sided, considering only the revenue aide o f the taxes

and th eir Incidence lmt ignoring the expenditure o f each
sevenues« Moreover, these theories have been based on some
controversial assumptions, Share ars anomalies in regard to
the basic assuaptions o f the th eoretica l framework* It may
not he out o f place here to mention that a proper theory o f
taxation i s yet to emerge and the academia exeroiae o i eco­
nomic thinkers is s t i l l in the research process*