Net Indirect Tax

Date : 1.4.2020
Sub  : Economics
Class: 12
Day  : 1
Period : 7
Time : 12:20pm - 1:00pm

Learning Outcomes

• Meaning of Indirect Tax and Susidies.
• What is the difference between Factor cost and Market price
•  Calculation of the Net Indirect Tax.
• Why is the Net Indirect Tax calculated.

A very good morning gentlemen.

Today we will be learning the treatment of Net Indirect Tax.

Net Indirect Tax ( NIT) =Indirect tax - Subsidies

                           OR

NIT = Difference between Indirect Tax and Subsidies

Indirect Tax =Are those taxes which are imposed by the government on production and sale of goods and services.

Example = GST, Sales tax, Excise Duty etc

Subsidies = Are those financial assistance given by the government to an enterprise on theproduction of certain commodity.

Example =In India, LPG cylinder is sold at subsidised rates.

Factor cost = It is the actual cost of producing a commodity by the enterprise.

Market price = It is the cost at which the commodity will be sold in the market.

Im going to try and explain this concept to you on my own today.

Please read my explantion well. It will help you to understand the concept well.

You are to comment if you do not understand any part of my explanation.

Let us begin with our explanation.

Suppose there is an enterprise that produces Cigarettes.

We know that for the production of a commodity we require the Factors of Production ie Land, Labour, Capital and Entrepreneur.

These Factors of Production will get factor payments ie Land gets Rent, Labour gets Wages, Capital gets Interest and Entrepreneur gets Profit.

Taking a hypothetical example.

Let us assume that the Factors of Production recieve money for thier services.

Let us see the Factor cost of producing Cigarettes.

FACTOR OF PRODUCTION	MONEY RECIEVED (RS)
LAND	Re 1
LABOUR	RS 2
CAPITAL	RS 3
ENTREPRENEUR	RS 4
FACTOR COST	RS 10

From the above example you saw that the actual cost of producing Cigarettes ie Factor cost of producing cigarettes is Rs 10.

But the government believes that Cigarettes are injurious to health and therefore a hazardous substance.

The government says that those who want to purchase cigarettes will have to pay Rs 2 extra,

This Rs 2 is the Indirect tax that is charged by the government.

So now the cost of cigarettes in the market will be Rs 12 in the market.

Thus you can see that the Market Price of cigarettes is Rs 12.

How did we get the market price. We added the Indirect tax to the Factor cost

Through the above example we see that Indirect taxes are added 

Always remember Indirect taxes are added.

We are now going to see the treatment of subsidies.

Let us take the example of producing LPG cylinders.

Again taking the example above 

Let us see the Factor cost of producing LPG cylinders

FACTOR OF PRODUCTION	MONEY RECIEVED (RS)
LAND	Re 1
LABOUR	RS 2
CAPITAL	RS 3
ENTREPRENEUR	RS 4
FACTOR COST	RS 10

We see that the Factor cost of producing LPG cylinders is Rs 10.

The government believes that LPG cylinders are an  essential commodity for every household.

The government decides to give a Rs 2 subsidy for every cylinder to be sold in the market.

So the cylinders will be sold for Rs 8 ie (Rs 10 - Rs 2) in the market.

Thus we see that Market Price of LPG cylinders is Rs 8 whereas its Factor Cost (actual cost of producing it is Rs 10)

How did we get the Market Price.We substracted the subsidy given by the government..

From the above example we see that Subsidies are Substracted.  

Always remember Subsidies are substrated.

Coming to the most important part of the chapter.

If National Income is given in terms of Factor Income but we have to calculate it in terms of Market Price. How do we convert National Income in terms of Factor Income to Market Price.

Conversion of National Income in terms of Factor Cost to National Income in terms of Market Price

National Income (Market Price) = National Income(Factor cost)+ ( Indirect tax- Subsidies)

 National Income( Market Price) =    National Income(Factor Cost) + Net Indirect tax

Conversion of National Income given in terms of Market Price to National Income in terms of Factor Cost

National Income ( Factor Cost) = National Income ( Market Price) - ( Indirect tax - Subsidies)

                                                      National Income (Market Price)- Indirect tax + Subsidies 

                                                                The above happens when we open the bracket

 National Income ( Factor Cost) = National Income (Market Price)- Net Indirect Tax

Now if there is any difficulty in understanding my explanation, you can also refer to the video link sent below.

https://www.youtube.com/watch?v=svWmAnqgXgE

Let us try a sum

Suppose National Income ( Factor Cost )= Rs 1000

               Indirect  Tax                              = Rs  100

               Subsidy                                      = Rs  50

Calculate National Income in terms of Market Price

Solution

National Income ( Market Price) = National Income ( Factor Cost) + NIT( Indirect tax - subsidy)

                                                                                              Rs 1000 + ( Rs 100- 50)

                                                                                               Rs 1000 + Rs 50

                                                          National Income ( Market Price)= Rs 1050

Assignment

1)  National Income( Factor Cost)= Rs 2000

      Indirect Tax                              =Rs 200

      Subsidy                                     =Rs 100

Calculate National Income in terms of Market Price

2) National Income ( Market Price)= Rs 5000

     Indirect tax                                  = Rs 100

     Subsidy                                        = Rs 50

C alculate National Income in terms of Factor Cost