Business Environment

In an economy, there are four main sectors involving the economic activities, such as Household, Business Firm Government and Foreign Sector. In household, they have the resources such as Land, Labour and Capital etc. Business firms hire the factors of production and utilize them in their production process in order to earn profits. In return, households receive Rent, Wages, and Interest etc. Government as a third party involves in this process by providing goods and services which are not satisfied by the business firms of the economy. In order to provide the goods and services government collect their income mainly from taxation.

Tax

Tax is a compulsory payment done to the government by all the households and firms in an economy which can be also defined as a burden lay upon individuals or property owners to support the government a payment .Taxes consist of direct tax and indirect tax.

Subsidies

Subsidy is assistance paid to a business or economic sector. It can be defined as a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The basic characteristic of all subsidies is to reduce the market price of an item below its cost of production. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry. Mainly subsidies are to encourage the sale of exports. Subsidies can be regarded as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports.

In our project report we will be discussing how the taxes and subsidies affect to the developing economies, whereas as an example we will be discussing the impacts on taxes and subsidies for Sri Lanka.