ntrod    tion    1.19
     (the wage someone gets in hand per day or per            purchasing things from the market, and again at
     month), the second form is real income (this is          the point of the governments (as their income
     nominal income minus the present day rate of             receipts). Collection/source of indirect taxes are
     inflation—adjusted in percentage form), and the          the ‘disposable income’ (which individuals and
     last one is the disposable income (the net part          companies have with them after paying their direct
     of wage one is free to use which is derived after        taxes—from which they do any purchasing and
     deducting the direct taxes from the real/nominal         finally, the indirect taxes reach the government).
     income, depending upon the need of data). What           Thus, if the national income is calculated at factor
     happens in practice is that while the nominal            cost, the formula to seek it will be:
     income might have increased by only 5 per cent,               National Income at Factor Cost = NNP at
     it looks 15 per cent if the inflation is at the 10       Market Cost – Indirect Taxes
     per cent level. Unlike India, among the developed
                                                                   However, if the national income is being
     nations, inflation has been around 2 per cent for
                                                              derived at ‘market cost’, the indirect taxes do
     many decades (it means it has been at lower levels
                                                              not need to be deducted from it. In this case,
     and stable, too. This is why the difference between
                                                              the government do not have to add their income
     the incomes at constant and current prices among
                                                              accruing from indirect taxes to the national
     them are narrow and they calculate their national
                                                              income. It means, that the confusion in the case of
     income at current prices. They get more reliable
                                                              national income accounting at factor cost is only
     and realistic data of their income).
                                                              related to indirect taxes.
     tAxes & nAtionAl income
                                                              subsiDies & nAtionAl income
     While accounting/calculating national income
                                                              Similar to the indirect taxes, the various subsidies
     the taxes, direct and indirect, collected by the
     government, needs to be considered. In the case          which are forwarded by the governments need to
     of India, to the extent the direct taxes (individual     be adjusted while calculating national income.
     income tax, corporate income tax, i.e., the              They are added to the national income at market
     corporate tax, divident tax, interest tax, etc.) are     cost, in the case of India. Subsidies are added in
     concerned, there is no need of adjustment whether        the national income at market cost to derive the
     the national income is accounted at factor cost or       national income at factor cost. This is because the
     market cost. This is so because at both the ‘costs’      price at which subsidised goods and services are
     they have to be the same; besides these taxes are        made available by the government are not their
     collected at the income of source of the concerned       real factor costs (subsidies are forwarded on the
     person or group.                                         factor costs of the goods and services) otherwise
                                                              we will have a distorted value (which will be less
          But the amount of indirect taxes (cenvat,
                                                              than its real value). Thus, the formula will be:
     customs, central sales tax, sales tax/vat, state excise,
     etc.) needs to be taken into account if the national          National Income at Factor Cost = NNP at
     income is accounted at ‘factor cost’ (which is           Market Cost + Subsidies
     the case with India). If the national income is               If the national income is derived at the market
     calculated at factor cost then the corpus of the         cost and governments forward no subsidies there
     total indirect taxes needs to be deducted from it.       is no need of adjustments for the subsidies, but
     This is because, indirect taxes have been added          after all there is not a single economy in the world
     twice: once at the point of the people/group who         today which does not forward subsidies in one or
     pay these taxes from their disposable income while       the other form.