Treatment of Different Items in Domestic Income

Domestic Income of an economy consists of income earned, i.e., only factor income and not transfer income by all the production units whether they are residents or non-residents, located within the domestic territory of the country, as the reward of their productive services or contribution to the flow of goods and services in the current year.

It is not always necessary that all the items that are included in the domestic income of India are also included in the national income. Similarly, it is also not always necessary that all the items that are included in national income are included in domestic income. It is so because only the income of normal residents irrespective of their place of earning is included in national income; however, the income of both residents and non-residents within the domestic territory of the country is included in domestic income. 

Examples of Items included in National Income, but not in Domestic Income

1. Salary received by an Indian employee working in U.S. Embassy in India.

The salary received will be included in the national income as the employee is an Indian resident. However, this income will not be included in the domestic income of India, as the U.S. Embassy is not a part of India’s domestic territory.

2. Profits of a branch of Punjab National Bank in Hong Kong.

The profits earned by the branch of PNB in Hong Kong will be included in the national income of India, as it is a part of the factor income from abroad. However, these profits will not be included in India’s domestic income as the PNB’s branch in Hong Kong is not a part of India’s domestic territory.

Examples of Items included in Domestic Income, but not in National Income

1. Rent received by an Indian company, which is owned by a non-resident.

The rent received by the Indian company will be included in domestic income,  as it is received within the domestic territory of India. However, the rent will not be included in national income because this transaction is a part of the factor income paid abroad.

2. Profits earned by a foreign bank’s branch in India.

The profits earned by a foreign bank’s branch in India will be included in domestic income as it is received within the domestic territory of India. However, the profits will not be included in national income because this transaction is a part of the factor income paid abroad.

Treatment of Different Items in Domestic Income

Determine whether the following items will be included in the Domestic Income of India or not.

1. Profits earned by a foreign company in India.

2. Rent received by an Indian from his property in Japan.

3. Rent received by an Indian resident from the Japanese Embassy in India.

4. Compensation of employees to the residents of the U.S. working in the Indian embassy in the U.S.

5. Capital Gains.

6. Services rendered by housewives.

7. Windfall Gains.

8. Payment of bonus by a firm.

9. Broker’s Commission on the sale of an old bike.

10. Scholarship given by the Indian Government.

11. Remittances from a non-resident Indian to his family in India.

12. Compensation given by an insurance company to an injured employee.

13. Purchase of goods by foreign tourists.

14. Expenditure on old age pensions by the government.

15. Financial sale and purchase of bonds, shares, and debentures.

Answer:

1. Yes. As they are earned within the domestic territory of India, they will be included in the domestic income of India.

2. No. As the rent is received outside the domestic territory of India, it will not be included in the domestic income of India.

3. No. As the rent received by the Indian resident from the Japanese Embassy in India will be a part of the factor income received from abroad because the Japanese Embassy do not come under the domestic territory of India, it will not be included in the domestic income of India 

4. Yes. As they are earned by the Indian Embassy which comes within the domestic territory of India, they will be included in the domestic income of India 

5. No. As capital gains arise when there is a rise in the price of assets and do not add anything to the flow of goods and services in the economy, they will not be included in domestic income.

6. No. As it is not possible to determine the market value of the services rendered by housewives, they are not included in domestic income.

7. No. As windfall gains do not add anything to the flow of goods and services in the economy, they will not be included in domestic income.

8. Yes. As payment of bonus by a firm is a part of the compensation of employees, it will be included in domestic income.

9. Yes. Broker’s Commission is the income received by the broker in return for the services rendered by him; therefore, it will be included in domestic income.

10. No. Scholarship given by the Indian Government is a transfer income and not earned income; therefore, it will not be included in domestic income.

11. No. remittances from a non-resident Indian is a current transfer from abroad; therefore, it will not be included in domestic income.

12. No. The compensation is given by the insurance company to an employee and not by the employer; therefore, it is not included in domestic income.

13. Yes. The purchase of goods by foreign tourists means the export of goods produced in the domestic territory; therefore, it will be included in domestic income.

14. No. As the old age pensions are given by the government as a transfer payment, it will not be included in domestic income.

15. No. As the financial sale and purchase of bonds, shares, and debentures do not contribute to the production of goods and services of India, they will not be included in the domestic income of India.