Product Tax & Product Subsidy
Product Tax and Product Subsidy are essential terms in economics that are used to understand price determination and national income accounting. They directly impact the pricing of goods and services in the market.
1. Product Tax
A product tax is a tax imposed on the sale or production of a specific product. These taxes are linked to the value of the product and are added at the time of sale or production.
Key Features:
- Levied on specific products.
- Included in the market price of the product.
- Paid by consumers indirectly as part of the purchase price.
- Examples: GST, VAT, excise duty.
Impact of Product Tax:
- Increases the final price of goods and services.
- Reduces consumer demand for expensive goods.
- Increases government revenue.
Example:
- Normal Example: A 28% GST levied on luxury cars increases their price, discouraging excessive consumption.
- Current Affairs Example: In 2023, the Indian government increased the GST on carbonated drinks and cigarettes, aiming to reduce their consumption for public health.
2. Product Subsidy
A product subsidy is financial support provided by the government to reduce the price of specific goods or services. It is meant to make essential items affordable for consumers or to promote production in certain sectors.
Key Features:
- Granted on specific products to reduce their cost.
- Included in the final price calculation.
- Encourages consumption and production of subsidized products.
- Examples: Subsidies on LPG, fertilizers, and food grains.
Impact of Product Subsidy:
- Reduces the market price of essential goods.
- Increases affordability for the public.
- Places a fiscal burden on the government.
Example:
- Normal Example: Subsidy on urea fertilizer reduces its price for farmers, promoting agricultural production.
- Current Affairs Example: In 2023, the Pradhan Mantri Ujjwala Yojana continued providing LPG subsidies to economically weaker sections to ensure clean cooking fuel access.
Comparison of Product Tax & Product Subsidy
| Aspect |
Product Tax |
Product Subsidy |
| Definition |
A tax levied on the sale or production of goods |
Financial aid to reduce product price |
| Objective |
Revenue generation and regulation |
Affordability and promotion of production |
| Effect on Price |
Increases the market price |
Decreases the market price |
| Impact on Demand |
Reduces demand for taxed goods |
Increases demand for subsidized goods |
| Examples |
GST on luxury cars |
LPG subsidy for households |
3. Formula in National Income Accounting
Before 2015
Market Price and Factor Cost Relationship:
GDP at Market Price:
After 2015
- The 2015 revision shifted focus to GDP at Market Price, aligning with international standards under SNA 2008.
- The concept of GDP at Factor Cost was replaced with Gross Value Added (GVA) at Basic Prices, which excludes product taxes and subsidies.
Formula:
Explanation:
- GVA at Basic Prices: Includes the cost of production and factor payments but excludes product taxes and subsidies.
- Product Taxes: Taxes directly associated with the product (e.g., GST, excise duty).
- Product Subsidies: Subsidies directly linked to the product (e.g., LPG subsidy).
4. Current Affairs Impact
-
Product Tax:
- India's GST reforms (2023): Changes in GST rates on goods like gold, packaged food, and automobiles aim to rationalize tax collection and boost revenue.
-
Product Subsidy:
- Free Food Grains Scheme (2023): Under the National Food Security Act, the government provides subsidized or free grains to 80 crore people.
5. Conclusion
Product taxes and subsidies are significant tools in fiscal policy. While taxes help generate revenue and regulate consumption, subsidies ensure affordability and equitable access. Their effective implementation plays a critical role in economic stability and welfare. Understanding these concepts helps evaluate government initiatives, especially in the context of poverty alleviation, industrial growth, and sustainable development.
