While accounting/calculating national income the taxes, direct and indirect, collected by the government, needs to be considered and various subsidies which are forwarded by government need to be adjusted.
1). Taxes and National Income:
In the case of India, to the extent the direct taxes (individual income tax, corpoarate income tax, i.e., the corporate tax, divident tax, interest tax, etc.) are concerned, there is no need of adjustment whether the national income is accounted at factor cost or market cost.
This is so because at both the ‘costs’ they have to be the same; besides these taxes are collected at the income of source of the concerned person or group. But the amount of indirect taxes (cenvat, customs, central sales tax, sales tax/vat, state excise, etc.) needs to be taken into account if the national income is accounted at ‘factor cost’ (which is the case with India).
If the national income is calculated at factor cost then the corpus of the total indirect taxes needs to be deducted from it. This is because, indirect taxes have been added twice: once at the point of the people/group who pay these taxes from their disposable income while purchasing things from the market, and again at the point of the governments (as their income receipts).
Collection/source of indirect taxes are the disposable income’ (which individuals and companies have with them after paying their direct taxes-from which they do any purchasing and finally, the indirect taxes reach the government).
Thus, if the national income is calculated at factor cost, the formula to seek it will be:
National Income at Factor Cost = NNP at Market Cost – Indirect Taxes
However, if the national income is being derived at ‘market cost’, the indirect taxes do not need to be deducted from it.
In this case, the government do not have to add their income accruing from indirect taxes to the national income. It means, that the confusion in the case of national income accounting at factor cost is only related to indirect taxes.
2). Subsidies & National Income:
Sim ilar to the indirect taxes, the various subsidies which are forwarded by the governments need to be adjusted while calculating national income. They are added to the national income at market cost, in the case of India. Subsidies are added in the national income at market cost to derive the national income at factor cost.
This is because the price at which subsidised goods and services are made available by the government are not their real factor costs (subsidies are forwarded on the factor costs of the goods and services) otherwise we will have a distorted value (which will be less than its real value).
Thus, the formula will be:
National Income at Factor Cost = NNP at Market Cost + Subsidies
If the national income is derived at the market cost and governments forward no subsidies there is no need of adjustments for the subsidies, but after all there is not a single economy in the world coday which does not forward subsidies in one or he other form.
Putting ‘indirect taxes’ and ‘subsidies’ together, India’s National Income will thus be derived with the following formula (as India does it at factor cost):
National Income at Factor Cost = NNP at Market Cost – Indirect Taxes + Subsidies