A tax is a "pecuniary burden laid upon individuals or property owners to support the government a payment exacted by legislative authority. ” A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name. " In other words, Tax is imposition financial charge or other levy upon a taxpayer by a state or other the functional equivalent of the State.
Important source of revenue for the Government. WHY DO GOVERNMENTS IMPOSE TAXES? Governments need funds for: * Enforcement of law and public order. * Protection of property. * Development of economic infrastructure (roads, public works etc. ) * Paying off the state's debt and the interest this debt accumulates. * Providing services like education systems, health care systems, pensions for the elderly, unemployment benefits etc. * Providing public utilities such energy, water and waste management.
* Day to day functioning of the government. * Defense preparedness. * Providing foreign aid. | TAXATION IN INDIA| | India has a well developed tax structure. The power to levy taxes and duties is distributed among the three tiers of Government, in accordance with the provisions of the Indian Constitution. The main taxes/duties that the Union Government is empowered to levy are:- * Income Tax (except tax on agricultural income, which the State Governments can levy) * Customs duties * Central Excise and Sales Tax * Service Tax.
The principal taxes levied by the State Governments are:- * Sales Tax (tax on intra-State sale of goods) * Stamp Duty (duty on transfer of property) * State Excise (duty on manufacture of alcohol) * Land Revenue (levy on land used for agricultural/non-agricultural purposes) * Duty on Entertainment and Tax on Professions & Callings. The Local Bodies are empowered to levy :- * tax on properties (buildings, etc. ) * Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies) * Tax on Markets * Tax/User Charges for utilities like water supply, drainage, etc.
In the wake of economic reforms, the tax system in India has under gone a radical change, in line with the liberal policy. Some of the changes include:- rationalization of tax structure; progressive reduction in peak rates of customs duty ; reduction in corporate tax rate; customs duties to be aligned with ASEAN levels; introduction of value added tax ; widening of the tax base; tax laws have been simplified to ensure better compliance. Tax policy in India provides tax holidays in the form of concessions for various types of investments.
These include incentives to priority sectors and to industries located in special area/ regions. Tax incentives are available also for those engaged in development of infrastructure. TYPES OF TAXESTaxes are broadly classified into two types: * Direct Taxes * Indirect TaxesDIRECT TAXESTax paid directly to the government by the persons on whom it is imposed. The incidence of Direct Taxes cannot be shifted from one taxpayer to another. * Income Tax * Wealth Tax * Gift Tax * Corporate TaxINDIRECT TAXESIndirect Taxes are the taxes in which of burden of paying the tax is shifted through a change in price.
They are levied on the production or consumption of goods and services or on transactions, including imports and exports. Some of the major indirect taxes levied by the Central and State Governments are : * VAT * Custom Duty * Excise Duty * Service TaxMERITS AND DEMERITS OF DIRECT TAXESMERITS1. EquityThere is social justice in the allocation of tax burden in case of direct taxes as they are based on the principle of ability to pay. Persons in a similar economic situation are taxed at the same rate. Persons with different economic standing are taxed at a different rate.
Hence, there is both horizontal and vertical equity under direct taxation. Progressive direct taxation can reduce income inequalities and bring about adequate social & economic justice. For example, in the Indian Budget of 2007, individual with an income of upto Rs. 1,10,000 are exempted from payment of income tax and in the case of women tax payer, the exemption limit is Rs. 1,45,000. 2. CertaintyAs far as direct taxes are concerned, the tax payer is certain as to how much he is expected to pay, as the tax rates are decided in advance. The Government can also estimate the tax revenue from direct taxes with a fair accuracy.
Accordingly, the Government can make adjustments in its income and expenditure. 3. Relatively ElasticThe direct taxes are relatively elastic. With an increase in income and wealth of individuals and companies, the yield from direct taxes will also increase. Elasticity also implies that the government's revenue can be increased by raising the rates of taxation. An increase in tax rates would increase the tax revenue. 4. Creates Public ConsciousnessThey have educative value. In the case of direct taxes, the taxpayers are made to feel directly the burden of taxes and hence take keen interest in how public funds are spent.
The taxpayers are likely to be more aware about their rights and responsibilities as citizens of the state. 5. EconomicalDirect taxes are generally economical to collect. For instances, in the case of personal income tax, the tax can be deducted at source from the income or salaries of the individuals. Therefore, the government does not have to spend much in tax collection as far as personal income tax is concerned. However, in the case of indirect taxes, the government has to set up an elaborate machinery to collect taxes. 6. Anti-inflationaryThe direct taxes can help to control inflation.
During inflationary periods, the government may increase the tax rate. With an increase in tax rate, the consumption demand may decline, which in turn may reduce inflation. DEMERITSThough direct taxes possess above mentioned merits, economists have criticised them on the following grounds :-1. Tax EvasionIn India, there is good amount of tax evasion. The tax evasion is due to High tax rates, Documentation and formalities, Poor and corrupt tax administration. It is easier for the businessmen to evade direct taxes. They invariable suppress correct information about their incomes by manipulating their accounts and evade tax on it.
In less developed countries like India, due to high rate of progressive tax evasion & avoidance are extensive and led to rise in black money. 2. Arbitrary RatesThe direct taxes tend to be arbitrary. Critics point out that there cannot be any objective basis for determining tax rates of direct taxes. Also, the exemption limits in the case of personal income tax, wealth tax, etc. , are determined in an arbitrary manner. A precise degree of progression in taxation is also difficult to achieve. Therefore direct taxes may not always fulfill the canon of equity. 3.
InconvenientDirect taxes are inconvenient in the sense that they involve several procedures and formalities in filing of returns. For most people payment of direct tax is not only inconvenient, it is psychological painful also. When people are required to pay a sizeable part of their income as a tax to the state, they feel very much hurt and their propensity to evade tax remains high. Further every one who is required to pay a direct tax has to furnish appropriate evidence in support of the statement of his income & wealth & for this he has to maintain his accounts in proper form.
Direct tax is considered inconvenient by some people because they have to make few lump sum payments to the governments, whereas their income receipts are distributed over the whole year. 4. Narrow CoverageIn India, there is a narrow coverage of direct taxes. It is estimated that only three percent of the population pay personal income tax. Due to low coverage, the government does not get enough funds for public expenditure. Estate duty & wealth tax are equally narrow based and thus revenue proceeds from these taxes are invariably small. 5. Affects Capital FormationThe direct taxes can affect savings and investment.
Due to taxes, the net income of the people gets reduced. This in turn reduces savings. Reduction in savings results in low investment. The low investment affects capital formation in the country. 6. Effect on Willingness and Ability to WorkHighly progressive direct taxes reduce people's ability and willingness to work and save. This in turn may have a negative impact on investment and productive capacity in the economy. If tax burden is high, people's consumption level gets adversely affected and this has an impact on their ability to work and save. High taxes also discourage people from working harder in order to earn and save more.
7. Sectoral ImbalanceIn India, there is Sectoral imbalance as far as direct taxes are concerned. Certain sectors like the corporate sector is heavily taxed, whereas, the agriculture sector is 100% tax free. Even the large rich farmers are exempted from payment of personal income tax. The disadvantages of direct taxation are mainly due to administrative difficulties and inefficiencies. The extent of direct taxation should depend on the economic state of the country. A rich country has greater scope for direct taxation than a poor country. However, direct taxation is an important aspect of the modern financial system.
MERITS AND DEMERITS OF INDIRECT TAXESMERITS1. ConvenientIndirect taxes are imposed on production, sale and movements of goods and services. These are imposed on manufacturers, sellers and traders, but their burden may be shifted to consumers of goods and services who are the final taxpayers. Such taxes, in the form of higher prices, are paid only on purchase of a commodity or the enjoyment of a service. So taxpayers do not feel the burden of these taxes. Besides, money burden of indirect taxes is not completely felt since the tax amount is actually hidden in the price of the commodity bought.
They are also convenient because generally they are paid in small amounts and at intervals and are not in one lump sum. They are convenient from the point of view of the government also, since the tax amount is collected generally as a lump sum from manufacturers or traders. 2. Difficult to evadeIndirect taxes have in built safeguards against tax evasion. The indirect taxes are paid by customers, and the sellers have to collect it and remit it to the Government. In the case of many products, the selling price is inclusive of indirect taxes. Therefore, the customer has no option to evade the indirect taxes. 3.
Wide CoverageUnlike direct taxes, the indirect taxes have a wide coverage. Majority of the products or services are subject to indirect taxes. The consumers or users of such products and services have to pay them. 4. ElasticSome of the indirect taxes are elastic in nature. When government feels it necessary to increase its revenues, it increases these taxes. In times of prosperity indirect taxes produce huge revenues to the government. 5. UniversalityIndirect taxes are paid by all classes of people and so they are broad based. Poor people may be out of the net of the income tax, but they pay indirect taxes while buying goods.
6. Influence on Pattern of ProductionBy imposing taxes on certain commodities or sectors, the government can achieve better allocation of resources. For e. g. By Imposing taxes on luxury goods and making them more expensive, government can divert resources from these sectors to sector producing necessary goods. 7. May not affect motivation to work and saveThe indirect taxes may not affect the motivation to work and to save. Since, most of the indirect taxes are not progressive in nature, individuals may not mind to pay them. In other words, indirect taxes are generally regressive in nature.
Therefore, individuals would not be demotivated to work and to save, which may increase investment. 8. Social WelfareThe indirect taxes promote social welfare. The amount collected by way of taxes is utilized by the government for social welfare activities, including education, health and family welfare. Secondly, very high taxes are imposed on the consumption of harmful products such as alcoholic products, tobacco products, and such other products. So it is not only to check their consumption but also enables the state to collect substantial revenue in this manner. 9. Flexibility and BuoyancyThe indirect taxes are more flexible and buoyant.
Flexibility is the ability of the tax system to generate proportionately higher tax revenue with a change in tax base, and buoyancy is a wider concept, as it involves the ability of the tax system to generate proportionately higher tax revenue with a change in tax base, as well as tax rates. DEMERITS1. High Cost of CollectionIndirect tax fails to satisfy the principle of economy. The government has to set up elaborate machinery to administer indirect taxes. Therefore, cost of tax collection per unit of revenue raised is generally higher in the case of most of the indirect taxes.
2. Increase income inequalitiesGenerally, the indirect taxes are regressive in nature. The rich and the poor have to pay the same rate of indirect taxes on certain commodities of mass consumption. This may further increase income disparities among the rich and the poor. 3. Affects ConsumptionIndirect taxes affects consumption of certain products. For instance, a high rate of duty on certain products such as consumer durables may restrict the use of such products. Consumers belonging to the middle class group may delay their purchases, or they may not buy at all.
The reduction in consumption affects the investment and production activities, which in turn hampers economic growth. 4. Lack of Social ConsciousnessIndirect taxes do not create any social consciousness as the taxpayers do not feel the burden of the taxes they pay. 5. UncertaintyIndirect taxes are often rather uncertain. Taxes on commodities with elastic demand are particularly uncertain, since quantity demanded will greatly affect as prices go up due to the imposition of tax. In fact a higher rate of tax on a particular commodity may not bring in more revenue. 6.
InflationaryThe indirect taxes are inflationary in nature. The tax charged on goods and services increase their prices. Therefore, to reduce inflationary pressure, the government may reduce the tax rates, especially, on essential items. 7. Possibility of tax evasionThere is a possibility of evasion of indirect taxes as some customers may not pay indirect taxes with the support of sellers. For instance, individuals may purchase items without a bill, and therefore, may not pay Sales tax or VAT (Value Added Tax), or may obtain the services without a bill, and therefore, may evade the service tax.
Elaborate analysis of merits and demerits of direct and indirect taxes makes it clear that whereas the direct taxes are generally progressive, and the nature of most indirect taxes is regressive. The scope of raising revenue through direct taxation is however limited and there is no escape from indirect taxation in spite of attendant problems. There is common agreement amongst economists that direct & indirect taxes are complementary and therefore in any rational tax structure both types of taxes must find a place.
GOODS AND SERVICE TAXGST is a tax on goods and services, which is leviable at each point of sale or provision of service, in which at the time of sale of goods or providing the services the seller or service provider can claim the input credit of tax which he has paid while purchasing the goods or procuring the service. On most of the goods and services the rate of tax remains the same but as per the necessity of the nation some goods or services can be declared as “exempted” or “Zero rated”.
The whole system is developed in such a way that it avoids the cascading effect and the final consumer bears the burden of all the tax. Generally, in such a system Exports are zero rated and all the taxes paid while purchasing and manufacturing the goods including the taxes paid on raw material and services are returned to the exporter to make the exports competitive. The sellers or service providers collect the tax from their customer, who may or may not be the ultimate customer, and before depositing the same to the exchequer, they deduct the tax they have already paid.
This is simply very similar to VAT which is at present applicable in most of the states and can be termed as National level VAT on Goods and Services with only one difference that in this system not only goods but also services are involved and the rate of tax on goods and services are generally the same.
A CHRONOLOGY OF TAX REFORM COMMITTEESIn the literature on tax design and reform, the thinking on what constitutes the best tax system and an implementation strategy to achieve it have undergone considerable change over the years, mainly because of the changing role of the state in development and internationalization of economic activities. Designing tax policy and reforming an existing tax regime can be two distinctly different exercises, not always generating the same set of results. It is possible to argue that the objective of tax reform should be to chart the course for turning a given tax regime into one that has been “optimally” designed.