Taxation system

Taxation system in India

• Tax is an amount of money paid to the government that is based on your income or the cost of goods or services that one have bought.

Characteristics of Good Tax System

• It should provide maximum social benefit to the peoples.

• The taxation system should provide to the government increased income with the increase in the national income of the country which is known as Tax Elasticity (Tax Bouancy is also another term in taxation which means change in tax revenue with change in GDP).

• The tax structure should facilitate the use of fiscal policy for achieving stabilization and growth objectives.

• Good taxation system is the one which is easy to implement and easy to monitor.

• The objective of a tax structure should be to enhance market efficiency, rather than causing any distortions to it.

• The distribution of tax burden should be progressive.

Types of Tax

1.Progressive tax

• Progressive tax is the one where the tax rate increases with the taxpayer’s income

Example-

• Direct tax

2.Regressive tax

• A regressive tax is a tax where the tax rate decreases as the taxpayer's income increases.

• As a result, those with higher incomes will have a lower tax liability than those with lower incomes.

Example-

• Indirect taxes like- Sales Tax,Excise tax etc.

Some other terms related to Taxation

A .Pigovian tax-

• It is a tax placed on any good which creates negative externalities like pollution etc.

B.Sin tax -

• It is a tax levied on goods or services that are considered to be harmful or costly to society

Difference between sin tax and Pigovian tax -

• A Pigouvian tax imposes costs on socially harmful goods, for example, imposing a carbon tax on factory pollutants.

• But sin taxes are designed to discourage internalities or negative effects that occur for the user. for example imposing a tax on gutka, pan masala, etc.

C.The Tobin tax -

• The implementation of a tax on currency trades executed immediately, also known as a "spot currency tax," aims to discourage short-term currency trading, stabilize the market, and reduce speculation.

 D.Ad valorem tax-

• Ad valorem tax is a type of tax that is calculated based on the value of a transaction or property. The tax amount is a percentage of the value, and can vary depending on the nature of the transaction or the type of property involved.

Different types of Taxes

It is of Two Types

A.Direct Taxes

B.Indirect Taxes

A.Direct Taxes

• Direct taxes are taxes that are paid by the person on whom they are imposed.

• The burden of the tax cannot be shifted to others, so the impact and incidence of tax fall on the same person.

Some of the Direct Taxes are as follows-

1.Corporate Tax-

• Corporate tax is imposed on the net profit of domestic companies and foreign corporations whose profits appear or are deemed to emerge through their operations in India.
• The income of a company, such as dividends, interest, and royalties, is also taxable.
• Companies with a gross turnover up to Rs.250 crore are currently required to pay corporate tax at 25% of the net profit.
• Companies with a gross turnover of over Rs.250 crore are liable to pay corporate tax at 30%.

2.Minimum Alternative Tax (MAT)-

• The Minimum Alternative Tax (MAT) is a tax imposed on companies that report little or no income, in order to prevent them from avoiding tax liabilities.
• These companies are commonly referred to as "zero tax companies".
• The MAT ensures that such companies pay a minimum amount of tax, based on their book profits.
• This helps the government to collect tax revenue and prevent tax evasion.

• It was introduced in 1997-98

3.Fringe Benefits Tax (FBT) -

• The Fringe Benefits Tax (FBT) is a tax that is levied on non-salary perks or benefits provided by companies to their employees, such as the provision of drivers and maids.

• It was introduced in 2005 and was withdrawn in 2009

4.Dividend Distribution Tax (DDT)-

• The Dividend Distribution Tax (DDT) refers to the tax that is levied on the amount declared, distributed, or paid as dividends to shareholders by a domestic company. This tax is separate from the income tax paid by the shareholders on their dividend income.

• It is applicable to domestic companies only.

• Foreign companies distributing dividends in India do not pay this tax and such dividends are taxable in the hands of the shareholder.

• It is abolished since 2020.

5.Securities Transaction Tax (STT)-

• The Securities Transaction Tax (STT) is a tax levied on taxable securities transactions and is applicable to the income earned by companies through such transactions.

• It was introduced in 2004.

6.Capital Gains Tax-

• It is a tax imposed on the net profits earned through capital investment in stock market ,Real estate, Gold and Jewelry etc.

It is divided as follows-

Short Term Capital Gain (STCG)-

• Short Term Capital Gain (STCG) is applicable when an asset is sold within 36 months of being owned.

Long Term Capital Gain (LTCG)-

• It applies ‘if the asset has been sold after 36 months of owning it’.

7.Wealth/Property Tax -

• Property tax, also known as wealth tax, is a form of taxation that is levied on the value of an individual's property. This includes land, buildings, shares, bonds, fixed deposits, and valuable items such as gold and jewelry.

8.Income Tax-

• It was introduced in 1961.

• It is imposed by the government on annual income generated by businesses and individuals.

• It is progressive in nature.

Merits and Demerits of Direct Tax

Merits of Direct Taxes-

• They are considered just and equitable.

• They have certainty.

• They are productive in nature as they can give more revenues to the government.

• They helps to reduce inequalities.

• Direct taxes are employed as anti-inflationary weapons.

Demerits of Direct taxes-

• They are less popular and directly impact the tax payers.

• There is high possibility of Tax Evasion in Direct tax.

• They are Expensive because the tax-authorities have to collect tax from every tax payer separately.

• Direct taxes may discourage saving and investment.

Initiatives related to Direct Tax

1.The Direct Tax ‘Vivad se Vishwas’ Act, 2020-

• It was enacted  March 17, 2020, with the objective to reduce pending income tax litigation, generate timely revenue for the government and to benefit taxpayers.

• It focuses on reducing tax related Litigation.

• In case of payment of tax, a taxpayer would be required to pay only the amount of the disputed taxes and will get complete waiver of interest, penalty and prosecution provided he/she pays by March 31, 2020.

• After the resolution of a dispute, the authorized body is not permitted to impose any interest or penalty regarding that particular dispute.

2.The Direct Taxes Code (2010)

• The Bill replaces the Income Tax Act, 1961 and the Wealth Tax Act, 1957.

• The Bill removes the distinction between short term and long term capital gains for all assets except securities listed on stock exchanges.

• The Bill introduces General Anti Avoidance Rules to allow tax authorities to classify any arrangement as one entered into for evading taxes.

• Its main focus was to Simplify tax structure in India and To bring horizontal equity among different classes of taxpayers in line with best international practices etc.

3.General Anti Avoidance Rules-

• The General Anti-Avoidance Rules (GAAR) is a provision in the direct tax system that gives discretionary power to tax officials to deny tax benefits to any firm that they deem to be engaging in tax avoidance.

• It is an anti-tax avoidance regulation.

• GAAR usually consists of a set of broad rules which are based on general principles to check the potential avoidance of the tax in general.

What is tax avoidance?

• Tax avoidance refers to intentional efforts made by individuals or companies to lower or evade tax payments.
• Tax avoidance is not typically defined in tax laws.

• It  is any legal method used by a taxpayer to minimize the amount of income tax owed.

What is Tax Evasion ?

• Tax evasion is the unlawful act of intentionally avoiding payment of a tax liability by an individual or organization.

B.Indirect tax

• Indirect taxes refer to taxes that are imposed on one group of people, but ultimately, the burden falls on another group of people.
• The impact of tax and the incidence of tax are on different people.
• With indirect taxes, the tax burden can be shifted.

Goods & Services Tax -GST

• The Goods and Services Tax (GST) is an indirect tax that has replaced many other indirect taxes in India, including excise duty, VAT, and services tax.
• The GST Act was passed by Parliament on March 29, 2017, and was implemented on July 1, 2017.
• The GST Bill was first introduced in India in 2014 as The Constitution (122nd Amendment) Bill.
• It was approved in 2016 and renamed by Rajya Sabha as The Constitution (101st Amendment) Act, 2016.

History of GST in India

Salient Features of GST

• GST has comprehensive transitional provisions for easy transition of current taxpayers to the new regime.
• Under GST, tax is applicable on the "supply" of goods or services, rather than on the manufacture, sale or provision of services.
• GST follows the principle of destination-based consumption taxation, instead of the origin-based taxation principle used previously.
• The Harmonized System of Nomenclature (HSN) code is used for classifying goods under GST. Taxpayers with a turnover above Rs. 1.5 crores but below Rs. 5 crores use a 2-digit code, and those with a turnover of Rs. 5 crores and above use a 4-digit code.
• Taxpayers can claim input tax credit on taxes paid on inputs, and use it to pay output tax.

• It includes certain indirect taxes from the Central and State government.
• The Centre levies and collects an Integrated GST (IGST) on the inter-State supply of goods and services.
• GST allows for electronic filing of returns.
• An anti-profiteering clause is in place to ensure that businesses pass on the benefit of reduced tax incidence on goods or services or both to the consumers.
• All goods except for alcoholic liquor for human consumption and five petroleum products, namely petroleum crude, motor spirit (petrol), high-speed diesel, natural gas, and aviation turbine fuel, are subject to GST.

• GST is largely technology-driven. It reduces the human interface to a great extent.

Structure of GST

There are four categories of indirect taxes under GST-

1.Central Goods and Services Tax (CGST).

2.State Goods and Services Tax (SGST).

3.Union Territory Goods and Services Tax (UTGST).

4.Integrated Goods and Services Tax (IGST).

1.Central Goods and Services Tax (CGST)-

• GST levied by the Centre on intra-State supply of goods or services or both is called CGST.

• The amount of CGST will go to Central Government.

2.State Goods and Services Tax (SGST)-

• GST levied by the States on intra-State supply of goods or services or both under their respective SGST Acts is called SGST.

3.Union Territory Goods and Services Tax (UTGST)-

• The Union Territory Goods and Service Tax, commonly referred to as UTGST, is the GST applicable on the goods and services supply that takes place in UT

4.Integrated Goods and Services Tax (IGST)

• The Integrated Goods and Services Tax (IGST) is a tax applied on the interstate supply of goods and/or services under the GST regime.
• The Central Government is responsible for collecting the taxes through IGST.
• The taxes collected by IGST are divided among the respective states by the Central Government.

Different Slabs under GST

Goods and services are divided into four slabs:

5% GST, 12% GST, 18% GST, and 28% GST.

Taxes at the centre and state level are incorporated into the GST

1.At the State Level-

• State Value Added Tax/Sales Tax.

• Entertainment Tax (Other than the tax levied by the local bodies).

• Octroi and Entry Tax.

• Purchase Tax.

• Luxury Tax.

• Taxes on lottery, betting, and gambling.

2.At the Central level

• Central Excise Duty.

• Additional Excise Duty.

• Service Tax.

• Additional Customs Duty (Countervailing Duty).

• Special Additional Duty of Customs.

GST Council

It is formed under Article 279A  of Indian constitution

Chairperson –

• Union Finance Minister.

Vice Chairperson -

• To be chosen amongst the Ministers of State Government.

Members -

• MOS (Finance) and all Ministers of Finance / Taxation of each State .

Quorum-

• It is 50% of total members

Weightage/voting powers -

• States - 2/3 weightage and Centre - 1/3 weightage and  Decision by 75% majority 

Power-

• The council is responsible for making recommendations on all matters related to GST, including laws, rules, and tax rates.

Composition scheme

• The Composition Scheme is designed for small business owners supplying goods and restaurant services.
• Under the scheme, individuals with an annual turnover of up to 1.5 Cr (75 Lakh in specific states) are required to pay a tax of 1% to 5% of their annual turnover.
• The Composition Scheme is also available to service suppliers with an annual turnover of up to 50 Lakh in the previous fiscal year.
• These service suppliers are subject to a tax rate of 6% (3% CGST + 3% SGST).

GST Network (GSTN)-

• It is a not for profit, non-Government, private limited company incorporated in 2013.

• The organization was established with the main objective of offering IT infrastructure and solutions to the Central and State Governments, taxpayers, and other stakeholders to support the implementation of the Goods and Services Tax (GST).

• Previously it was Majorly private entity but now GST council has decided to make it a government entity.

National Anti-profiteering Authority

• The National Anti-Profiteering Authority (NAA) was constituted under Goods and Services Tax Act, 2017

Functions of the National Anti-Profiteering Authority (NAA)-

• To ensure that traders are not realising unfair profit by charging high prices from the consumers in the name of GST.

• The NAA has the authority to verify if the reduction of tax rate or the additional input tax credits claimed by registered individuals have led to a corresponding reduction in prices.
• The NAA has the power to investigate instances of anti-profiteering even in the absence of any complaint from a citizen.

Composition of The National Anti-Profiteering Authority (NAA)- 

• NAA comprises of Chairman, four Technical members, a Standing Committee, Screening Committees in every State and the Directorate General of Safeguards in the Central Board of Excise & Customs (CBEC

E-Way bill-

• The E-Way bill system is intended for GST-registered individuals or enrolled transporters.
• It generates an electronic waybill document that must be carried by the person in charge of conveyance.
• The system is used when the movement of goods exceeds the value of Rs. 50,000.
• It applies to both supplies and reasons other than supply, as well as to inward supply from an unregistered person.

• It offers the technological framework to track intra-state as well as inter-state movements of goods of value exceeding Rs 50,000, for sales beyond 10 km in the GST regime.

• The e-Way Bill has been made compulsory from 1st April 2018.

Input Tax Credit (ITC)

• Input Tax Credit refers to the tax already paid by a person at time  of purchase of goods or services and which is available as deduction from tax payable.

• Input tax credit is tax reduced from output tax payable on account of sales

Example of Input Tax credit

• Mr. A purchased goods worth Rs. 100 on which GST @ 18% was Rs. 18.

• He sold goods worth Rs. 200. GST payable @ 18% is Rs. 36

Let us calculate and understand net GST payable and input GST credit.

Thus, net GST payable through cash   Rs. 18(I.e. 36-18)

What is Reverse Charge in GST?

• Reverse Charge in GST refers to the liability of the person receiving goods and/or services to pay the tax instead of the supplier.
• This concept is already present in service tax and has been introduced in India under GST.
• Reverse Charge under GST is applicable for specified categories of supplies for both goods and services.
• At present, there is no reverse charge mechanism in the supply of goods.

Benifits and concerns of GST

Benefits of GST

• Elimination of cascading effect,eliminate double taxation and improve resource allocation.

• Subsuming of all major indirect taxes will result in the removal of inefficient taxes.

• Reduction in Tax compliance costs.

• Reduction in tax evasion.

• As GST is a tax on consumption and not on income there fore it encourages savings and investment.

• Due to digitization of Tax system under GST,there will be better regularization of unorganized sector.

• The final price of goods is expected to be lower due to seamless flow of input tax credit between the manufacturer, retailer and supplier of services

Concerns regarding GST-

• Lack of preparedness by the government.

• Lack of skilled resources and re-skilling existing workforce.

• Multiple rate structure as the GST presently has a four slab structure with tax rates kept at 5%, 12%, 18% and 28%

GST exemption for businesses

• GST exemption is available for businesses and individuals supplying goods if their aggregate turnover is less than INR 40 lakhs in a financial year.
• The limit for hilly and north-eastern states of India has been revised to INR 20 lakhs for goods.
• For businesses and individuals involved in the supply of services, the limit for claiming GST exemption is INR 20 lakhs.
• In hilly and north-eastern states, businesses and individuals supplying services can claim GST exemptions if the aggregate turnover is up to INR 10 lakhs.

Some of the other Indirect taxes in India(Other than GST)

• Entertainment Tax (Levied by Local Bodies).

• Road Tax.

• Entry Taxes and Toll.

• Tax on Sale and Consumption of Electricity.

• State Excise on Liquor.

• Motor vehichle tax by state government.

• Antifumping and safeguard duty by central government.

• Surcharge on custom duty and custom cess.

• Basic custom duty(tax on imported goods in India).

• Excise on petroleum products by central government.

What is taxation in India?

Taxation is an amount of money paid to the government that is based on one's income or the cost of goods or services bought.

What is tax elasticity?

Tax elasticity is the change in tax revenue with change in GDP, which should increase with the national income of the country.

What is a regressive tax ?

A regressive tax is a tax where the tax rate decreases as the taxpayer's income increases, such as indirect taxes like sales tax or excise tax.

What is a Pigovian tax ?

A Pigovian tax is a tax placed on any good which creates negative externalities like pollution.

What is a sin tax?

A sin tax is a tax levied on goods or services that are considered to be harmful or costly to society.

What is the difference between a sin tax and a Pigovian tax ?

A Pigouvian tax imposes costs on socially harmful goods, while sin taxes are designed to discourage negative effects for the user.

What is the Tobin tax ?

The Tobin tax is the implementation of a tax on currency trades executed immediately, aimed at discouraging short-term currency trading, stabilizing the market, and reducing speculation.

What is an ad valorem tax ?

An ad valorem tax is a type of tax that is calculated based on the value of a transaction or property.

What is the minimum alternative tax in India?

The minimum alternative tax (MAT) is a tax imposed on companies that report little or no income, in order to prevent them from avoiding tax liabilities.

What is the Fringe Benefits Tax ?

The Fringe Benefits Tax (FBT) is a tax that is levied on non-salary perks or benefits provided by companies to their employees.

What is capital gains tax ?

Capital gains tax is a tax imposed on the net profits earned through capital investment in the stock market, real estate, gold, and jewelry.

What is Service Tax?

It is a tax levied by the Central Government on certain services provided within India.

What is Additional Customs Duty (Countervailing Duty)?

It is a tax levied by the Central Government on imported goods to offset the effect of Central Excise Duty on similar goods produced within India.

What is Special Additional Duty of Customs?

It is a tax levied by the Central Government on imported goods as a countervailing duty to offset the effect of sales tax or value-added tax (VAT) on similar goods produced within India.

What is the GST Council?

It is a constitutional body responsible for making recommendations on all matters related to the Goods and Services Tax (GST).

Who is the Chairperson of the GST Council?

The Union Finance Minister is the Chairperson of the GST Council.

Who can be the Vice Chairperson of the GST Council?

The Vice Chairperson of the GST Council is chosen among the Ministers of State Government.

Who are the Members of the GST Council?

The MOS (Finance) and all Ministers of Finance / Taxation of each State are the Members of the GST Council.

What is the quorum required for a meeting of the GST Council?

The quorum required for a meeting of the GST Council is 50% of total members.

What is the weightage/voting powers of the States and the Centre in the GST Council?

States have 2/3 weightage and Centre has 1/3 weightage in the GST Council.

What is the required majority for taking a decision in the GST Council?

A decision in the GST Council is taken by 75% majority.

What is the Composition Scheme under GST?

It is a scheme designed for small business owners supplying goods and restaurant services.

What is the turnover limit for individuals under the Composition Scheme?

Individuals with an annual turnover of up to 1.5 Cr (75 Lakh in specific states) are eligible for the Composition Scheme.

What is the tax rate for individuals under the Composition Scheme?

Individuals under the Composition Scheme are required to pay a tax of 1% to 5% of their annual turnover.

Is the Composition Scheme available to service suppliers?

Yes, the Composition Scheme is available to service suppliers with an annual turnover of up to 50 Lakh in the previous fiscal year

What is the tax rate for service suppliers under the Composition Scheme?

Service suppliers under the Composition Scheme are subject to a tax rate of 6% (3% CGST + 3% SGST).

What is GST Network (GSTN)?

It is a not-for-profit, non-Government, private limited company incorporated in 2013 to offer IT infrastructure and solutions to support the implementation of GST.

What is the National Anti-profiteering Authority (NAA)?

It is a body constituted under the Goods and Services Tax Act, 2017 to ensure that traders do not realize unfair profits by charging high prices from consumers in the name of GST.

What is Input Tax Credit (ITC)?

It is the tax already paid by a person at the time of purchase of goods or services and which is available as a deduction from the tax payable.