The Role of Non Tax Revenue in Business and Finances

The government has many sources of income, but if we were to classify them, they can be broadly divided into tax revenue and non tax revenue. While tax revenue makes up the lion’s share of the government’s income, non-tax revenue also plays a crucial role in the country’s development. Let’s understand what constitutes non-tax revenue, how it’s generated, and why it’s important.

What is Non-Tax Revenue?

Non-tax revenue is an umbrella term for all of the government’s sources of income that are not related to taxes. This includes fees, fines, royalties, sales, interest, dividends, and more. These sources supplement tax revenue by providing some extra funds which support various government operations and public services.

In a way, the government is also diversifying its income sources and not relying solely on tax revenue. Just like how you would diversify your investments with vehicles like a sip investment plan, stocks, or portfolio management services, the government makes investments in public enterprises and assets that generate dividends and interest. 

This diversification helps compensate for lower tax revenue during economic downturns. For example, during a slump when corporate profits fall, investments slow down, and unemployment rises, the tax revenue also decreases. The government can balance this lower yield with its non-tax income.

Some kinds of non-tax sources are meant to recover the cost of services provided by the government and to improve them over time. For instance, the government collects fees for running services like state transportation. While these fees don’t bring in huge profits, they help cover the operational expenses and make the service more sustainable. 

The revenue generated can be reinvested to improve these services. So in a nutshell, what is non tax revenue? Any income earned by the government other than taxes can be classified as non tax revenue.

What is Non-Tax Revenue with Example?

Let’s have a look at some examples of non tax revenue to understand the concept better. 

Suppose you break a traffic law by jumping a red light. The government will impose a fine, which you’ll have to pay. Since this fine is not a tax on your income or goods, it will be classified as non-tax revenue.

Here’s another non tax revenue example: The government owns many natural resources like forests, minerals, and water bodies. When the government allows private companies to extract resources from these areas, it charges royalties, which contribute to the total non-tax revenue.

Just like your financial planning includes making decisions about investments to generate an income, the government has to plan how they generate revenue. They own shares in public sector enterprises like ONGC, which earn income through their business activities. In return, they pay dividends to the government which becomes a significant part of non-tax revenue.

Sources of Non-Tax Revenue of State Government

The sources of non tax revenue of state government include:

• State governments provide various services like water supply and state transport. They charge fees for such services which become a part of their non tax revenue sources.
• Fees charged for administrative purposes and examinations for government jobs also contribute to non-tax revenue.
• States own shares of public enterprises which generate dividends.
• Natural resources owned by the state like mines are leased to private entities. The state earns royalties on these leases.
• Issuing building permits, driver’s licences, and various other certificates counts as sources of non tax revenue for state governments.

Components of Non-Tax Revenue

Components of non tax revenue include:

• Dividends: Just like you can earn dividend income by investing in companies, the government also earns dividends from its investments in public sector enterprises like SBI and ONGC.
• Fees: Many kinds of fees are collected by the government for providing different services. For example, you pay a fee for getting a driving licence at the RTO, when applying for a passport, or at the time of registering a property.
• Fines: These are penalties that the government collects when laws are broken. For example, if someone violates traffic rules, they may have to pay a fine.
• Interest: The government lends money to states and public sector enterprises. In return, it earns interest on these loans, just like a bank earns interest when it gives you a loan. Interest receipts and dividends make up a significant chunk of non tax revenue sources.
• Rent and Royalties: The Indian government owns a huge amount of land, buildings, and natural resources. When it leases out its properties to someone, it earns rent. On the other hand, when companies use natural resources like coal, oil, or minerals, they pay royalties to the government. Even telecom companies pay fees to use the radio spectrum to provide services.
• External Grants: External grants from foreign countries and global institutions are usually given to support development projects, as disaster aid, or for special purposes.
• Selling Assets: The government sometimes sells its assets, such as shares in public sector companies, land, or other properties to private entities. While these sales bring in a good amount of money for the government, they are not a regular or sustainable way to generate non-tax revenue.
• Forfeitures: When individuals or businesses fail to meet their obligations, for example, if someone defaults on a government loan or breaks the terms of a contract, the government can seize their assets as a penalty. The defaulter is thus legally bound to forfeit their assets.
• Escheats: If someone passes away without leaving a will or heirs, the government can claim their assets like land or bank accounts through the process of escheat.
• Power Supply Fees: The government collects power supply fees from consumers (residential, industrial, commercial, etc.) to recover the costs of generating and distributing electricity.

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Importance of Non-Tax Revenue

Recovers Expenses

The government provides us with many services which adds up the expenses. Non-tax revenue helps them recover some costs and improve their services.

Diversifies Income

Just like financial consultants suggest you diversify your portfolio, governments also benefit from having different income streams. Non-tax revenue diversifies the government’s earnings, as depending solely on taxes can be risky.

Important During Economic Slumps

Tough economic times mean reduced business activities, consumption, investments, and employment. As the tax collections slow down, earnings from sources like dividends, interest, and fees help the government to keep essential services running.

Reduces Tax Burden

If the non-tax revenue goes down, the government may have to rely on increasing taxes to meet its expenses. That’s why a healthy amount of non tax revenue helps ease the tax burden on citizens and businesses.

Promotes Growth

Income from the various sources of non tax revenue gets reinvested into sectors like infrastructure, education, and healthcare. When the government makes these investments, not only does it boost the economy but also improves services and creates a better standard of living for all.

Difference between Tax Revenue and Non-Tax Revenue

Taxes make up the majority of the government’s revenue. For the financial year 2024/25, the projected tax revenue is approximately Rs. 25.83 lakh crore, while the non-tax revenue is expected to be about Rs. 5.45 lakh crore. 

As you can see, most of the funds needed to run the country come from the taxes we pay, but non-tax revenue still plays an important role. That said, here are some differences between tax revenue and non tax revenue:

Is GST a Non-Tax Revenue?

GST stands for Goods and Service Tax. It is a kind of indirect tax levied by the government whenever consumers purchase a product or service. For example, if you purchase an AC, the price you pay includes a 28% GST. The seller collects this on behalf of the government and then deposits this tax with them. Not everything you buy has the same GST rate. Some things are taxed higher, some lower, and a few essential ones are completely GST-free. 

Sellers and providers must comply with GST rules carefully to make sure they collect and pay the correct amount of tax. If you run a business and need to submit GST, it’s important to stay on top of your filings to avoid any penalties. You might want to consider an income tax advisory to help with compliance, record-keeping, and timely filing.

So is GST a non-tax revenue? The answer is no as non tax revenue includes earnings from sources other than taxes. Since GST is an indirect tax, it is part of the government’s tax revenue.

Conclusion

Revenue receipts can be split into two main categories: tax and non-tax revenue. Tax revenue includes both direct taxes (like income tax and corporate tax) and indirect taxes (like customs duties, excise duties, and service tax). Non-tax revenue, on the other hand, comprises the income earned by the government other than taxes. Some non-tax revenue sources are fines, fees, rent, interest from loans, dividends from investments in PSUs, escheats, and royalties. A good tax planner considers both tax and non-tax revenue aspects while creating effective financial strategies for individuals and businesses.