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According to Raja Chelliah, the three criteria on which a sound and practicable system should be based are equity, economic efficiency and administrative ease. Thus, the normative principles for a sound tax system are :
The criterion of economic efficiency requires that the tax system should not distort economic decisions, needlessly other choices, or escalating costs of production. Purposive and selective interference by the state in resource allocation would of course be justified, but such interference should be minimal and shown to clearly be in the social interest.
To avoid administrative complexity and to preserve horizontal equity, the introduction of numerous incentive provisions, deductions and concessions should be avoided.
In the case of progressive tax, the rate of tax increases with an increase in income.
In the case of regressive tax, the rate of tax decreases with an increase in income subject to tax.
It is a tax that is specified as a percentage of value. For example sales tax, excise duty, custom duty.
A specific tax is such a tax that is specified as a percentage of volume
Taxes are broadly classified in two parts; direct and indirect
Personal Income Tax is levied on the income of individuals, Hindu families, unregistered firms and other associations of people. Income tax is progressive in nature.
Corporation Tax is levied on the incomes of registered companies and corporations. The rationale for the corporation tax is that a joint stock company is a separate entity, and thus a separate tax different from personal income tax has to be levied on its income.
Customs duties comprising duties levied on imports and exports are indirect taxes and they perform functions:
Excise duty is a commodity tax levied on production.
Sale tax is a tax on the business transactions involving sale of goods and services. It is an indirect tax paid by the buyer but collected and deposited by the seller.
Service tax is a tax on services provided. It was introduced in 1994.
Goods and Services Tax (GST) came into effect w.e.f. July 1, 2017. It is an indirect tax that has subsumed many indirect taxes such as excise duty, VAT, services tax, etc. It is a comprehensive, multi-stage, designation-based tax that is levied on every value addition. Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.
Dumping is said to occur when the goods are exported by a country to another country at a price lower than its normal value causing injury to the domestic industry. Anti dumping duty is imposed to prevent it.
Countervailing Duty is a special additional import duty imposed on a commodity to offset a reduction of its price as a result of an export subsidy in the country of origin.
A NITI Aayog member has favoured imposing a Border Adjustment Tax (BAT) on imports to provide a level-playing field to domestic industries. This suggestion comes in the backdrop of the USA-China trade tensions (trade war) which are expected to rise even further post-Covid-19.
BAT is a duty that is proposed to be imposed on imported goods in addition to the customs levy that gets charged at the port of entry. BAT is a fiscal measure that imposes a charge on goods or services in accordance with the destination principle of taxation.
Under this principle, a government taxes products based on the location of their sale to the final consumer rather than on the location of their production or origin. Thus, to adjust a tax “at the border,” a country taxes imported products and domestically produced products sold on its market on the same basis and at the same rate; and exempts from this tax products exported for sale to foreign consumers.
These taxes are belonging to the centre exclusively. In other words, no part of the proceeds of these taxes can be assigned to the states. The following taxes fall under this category:
The following taxes are included in this category:
There taxes which form part of the union list are levied by the centre but (a) collected by the states within which such duties are levied; and (b) collected by the centre when such duties are levied within any Union Territory.
This category includes the following duties and taxes:
The following taxes and duties exclusively belong to states. They are mentioned in the State list. Every state is entitled to levy, collect and appropriate these taxes. The taxes are
The value of goods, services, and incomes on which tax is imposed. When economists speak of the tax base being broadened, they mean a wider range of goods, services, income, etc. has been made subject to a tax. In the case of income tax, the tax base is taxable income. Some kinds of income are excluded from the definition of taxable income. For sales tax, the tax base is the value/volume of items that are subject to tax; essential goods, for example, are not part of the tax base.
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It refers to the percentage change in tax revenue with the growth of national income. That is, growth-based increase in tax collections.
Tax elasticity is defined as the percentage change in tax revenue in response to the change in tax rate and the extension of coverage. Buoyancy, on the other hand is the response to economic growth when the base increases but there is no change in the rate.
It means no frequent changes and continuity of policy in a predictable and transparent manner. Although revenue from different taxes varies from year to year, revenue stability is desirable because it makes it easier for a government to build a credible spending and borrowing plan for the year ahead.
Tax inversion, or corporate inversion, is the practice of relocating a corporation's legal domicile to a lower-tax nation, or tax haven, usually while retaining its material operations in its higher-tax country of origin.
L K Jha Committee: Indirect Taxation Enquiry Committee, 1978 laid the foundation of the Modvat reforms.
Chelliah Committee: 1991-92; most comprehensive and analytical treatment of Indian tax policy and reform issues since Independence.
Kelkar Committee: set up on 9th September 2002, submitted its report in year 2003.
Manmohan Singh, starting in 1991 introduced far reaching changes in his five full budgets
The momentum of Manmohan Singh's tax reforms was largely sustained by Chidambaram and Yashwant Sinha in the remainder of the 1990s,
Both the Parliament and the state legislatures to have concurrent power to make laws related to the GST. It allows Parliament to retain exclusive power to legislate in the case of inter-state trade of goods and services.
In the case of inter-state trade where GST is levied and collected by the Union Government, the tax revenue proceeds to be apportioned by the centre between the centre and states in a manner as may be provided by the Parliament by law on the recommendations of the GST Council.
It empowers the President of India to constitute the GST Council. Article 279A speaks about the constitution and functioning of GST Council also.
The Tax Base is narrow for both Direct And Indirect Taxes. In the case of personal income tax, the exclusion of tax on agricultural income, administrative difficulties of taxing the unorganized non-agricultural sector, provision of exemptions and deductions for various purposes, and difficulties in reaching the hard-to-tax groups have rendered the tax base extremely narrow. (in a country of around 1200 million people, only 35 million people are assessed to income tax and, what is worse is that 89% of these fall in the Income Group of 2.5-5 lakhs. This minuscule proportion of about 2.89% of taxpayers compares very unfavorably with advanced countries like USA where around 45% of the people pay income tax and Denmark and Sweden where over 80% of the people pay income tax).
Progressive increase in indirect taxation over the plan period, revenue from indirect taxes has increased at a faster pace than from direct taxes apparently because of the following.
The trend is being reversed in favour of direct taxes after the initiation of tax reforms aiming at a rational direct tax structure on a wider base and a gradual reduction in customs duties and excise.
Fiscal consolidation entails revenue augmentation and expenditure rationalization. In the post-FRBMA (Fiscal Responsibility and Budget Management Act 2003) period from 2004-5 to 2007-8, significant fiscal consolidation could be achieved largely due to buoyant tax revenues with net tax revenue to the centre increasing by 1.9 percentage points of GDP. Fiscal consolidation was paused post the financial crisis that led to tax concessions and higher public expenditure, as part of the growth revival strategy.
But post 2011-12 when the impacts of financial crisis faded away, Tax Revenue has seen a considerable rise and is favorably led by rise in Direct taxes as can be seen from the given table.
Though land revenue and a constrained agricultural income -tax (essentially on plantation agriculture) are the two major direct taxes paid by agriculturalists, they form an abysmally low percentage of income originating in the agricultural sector. Though the service tax was introduced in 1994, but its scope is very limited in comparison to its contribution to national income (more than 50%).
The tax structure is also highly complicated and is riddled with elaborate laws and administrative rules, many of which are antiquated and unenforceable. An important result of structural anomalies, legal complexities and procedural rigidities has been the increase in tax evasion and corruption at virtually all points of the elaborate tax chain and at different levels of tax administration. From all accounts, the amount of incomes not disclosed to tax authorities is large, and the amount of taxes (particularly income taxes) which are liable to be paid but are not paid are at least as large as the taxes that are actually paid.
An important fact about the evaluation of India’s fiscal situation, which is often overlooked in the public debate, is that India’s record in mobilizing tax revenues is not bad. For the Centre and States, taken together, the tax to GDP ratio rose from 6% in 1950-51 to about 16.67% in 2014-15 and it is comparable with most of the economies at similar levels of per capita income. However, the tax structure, as it has developed over the years, suffers from several anomalies, which have significant adverse effects on equity, efficiency and allocative efficiency.
The philosophy of tax reform has undergone significant changes over the years in keeping with the changing perception of the role of the state. With the change in the development strategy in favour of market determined resource allocation, the traditional approach of raising revenues to finance a large public sector without much regard to economic effects has been given up.
The recent approaches to reform lay emphasis on minimizing distortions in tax policy to keep the economy competitive. Minimizing distortions implies reducing the marginal rates of both direct and indirect taxes. This also calls for reducing differentiation in tax rates to reduce unintended distortions in relative prices. To achieve this, the approach suggests broadening of the tax bases. Thus, over the years, emphasis has shifted from vertical equity in which both direct and indirect taxes are subject to high marginal rates with minute differentiation in rates, to horizontal equity in which, the taxes are broad-based, simple and transparent, and subject to low and less differentiated rates. Equity in general, is taken to mean improving the living conditions of the poor. This has to be achieved mainly through expenditure policy and human resource development rather than reducing the incomes of the rich as was envisaged in the 1950s and 1960s.
Modern tax reform was really launched in India by Mr. V P Singh during his brief two years as finance minister in 1985-87. For a start, he and his team took a holistic view of the tax system, both direct and indirect.
Dr. Manmohan Singh, starting in 1991 introduced far reaching changes in his five full budgets between 1991 and 1996, especially in 1992-93 and 1994-95,
The momentum of Manmohan Singh's tax reforms was largely sustained by Mr. Chidambaram and Yashwant Sinha in the remainder of the 1990s,
To Yashwant Sinha must go the credit for the major break through in reforming excise rates, when he conflated eleven excise rates to three (in 1999-2000) and then, finally, to the single CENVAT rate of 16 per cent in 2000-01 (buttressed by a couple of additional special excises on a few consumer luxuries).
All three finance ministers of the nineties extended central government support to the reform and harmonization of state sales taxes, culminating in the current transition to state VATs.
Minimum Alternate Tax: Generous deductions for depreciations, reinvestment and contributions to a wide variety of social purposes have eroded the corporate tax base. MAT- Minimum Alternate Tax has been introduced essentially to bring those zero-tax companies under the net which albeit has a high profit as calculated under the Company Act.
Indirect Taxation Enquiry Committee, 1978 laid the foundation of the Modvat reforms. A prominent member of that committee was Professor Raja Chelliah, who later came to be widely respected as India's leading public finance authority.
Tax Reforms Committee of 1991-92. Its three volumes were widely (and rightly) acclaimed as the most comprehensive and analytical treatment of Indian tax policy and reform issues since Independence.
On direct taxes set up on 9th September 2002, submitted its report in year 2003.
Tax evasion is not only revenue and a moral problem but as the potential and propensity for tax evasion vary across sectors, it has pervasive economic effects on demand and supply of various kinds of goods and services, savings and investment. Off market and unrecorded transactions, outside the legal framework of contracts and regulations become much more attractive.
Savings and investment tend to flow to sectors where evasion is easier and where potential for evaded incomes is high. Similarly, skilled personnel are likely to gravitate towards the occupations and professions where the ratio of incomes that do not have to be declared, legally or otherwise, to taxable incomes is high. All these effects of a distorted tax system are visible in India. There is no shortage, for example, of supply response. The supply of highly trained doctors or teachers or public hospitals or universities is limited, but there is no shortage of doctors in private practice or teaches in private tuition. In fact, similar examples can be found in virtually all sectors of the economy. Another effect of the distorted tax system has been to generate a strong and socially acceptable justification for tax evasion. Since virtually no one who is in a position to avoid taxes has to pay his or her share of them, evasion becomes a socially respectable way of life and all those who are in a position to legitimize exemptions and tax loopholes, or shift the burden of personal expenditure to other entities, are likely to do so. Those who are not in a privileged position then find it necessary to evade taxes in order to maintain their relative incomes. Thus, for example, the real post tax consumption expenditure of salaried employees in the organized sector (including powerful groups like government servants, public representative in legislatures and parliament, and members of the press) often exceeds their nominal incomes because of so-called ‘perks’ (including housing, transport and entertainment). As a result, the effective legal burden of taxation is low, and if a self-employed person in a profession or a business wishes to enjoy the same effective rate of tax, he will need to find illegal means of reducing his taxable income.
Until about 1985, the response of the government to widespread tax evasion was to tighten laws, increase their severity, and give more discretionary power to tax administrators to adjudicate cases. This significantly increased the potential for harassment of taxpayers, while at the same time increasing the incentives for and returns to administrative corruption. Further, in view of rising expenditure and budget deficits, the statutory rates of taxation were increased. Increase in tax rates, however, had the perverse effect of further eroding the degree of tax compliance. In 1985, rates for personal and corporate taxpayers were reduced substantially, and the fiscal policy of the government shifted in favor of reasonable and stable tax rates.
In the Central budgets for 1991-92 and subsequent years, the government has introduced several measures for reform of the tax system which are designed to rectify many long-standing anomalies. As a result of the simplifications on the personal and corporate tax systems, and substantial lowering of rates ad minimizing the number of slabs, the proportion of revenue from direct taxes has been rising has proved to be right in India’s case.
Higher import duty on the raw materials than on the finished product are called inverted duty structure .It puts the domestic manufacturer at a disadvantage making them uncompetitive. For instance, compact fluorescent lamps (CFLs), where the import duty on raw materials for manufacturing CFLs is 9.7 per cent more than on finished bulbs. This skewed duty structure makes domestic CFL manufacturer uncompetitive.
It shows the entity on whom tax is imposed. It is different from the tax burden as shown below: if govemment increases tax on petrol, oil companies may absorb it if competition is intense or they may pass it on to private motorists. Tax incidence here, is on companies and the burden may be on the consumer.
It means those who actually pay taxes i.e.from whom tax is collected. Depending on the market forces involved, a tax can be absorbed by the seller or by the buyer (in the form of higher prices), or by a third party like sellers' employees in the form of lower wages.
The value of goods, services and incomes on which tax is imposed. When economists speak of the tax base being broadened, they mean a wider range of goods, services, income, etc. has been made subject to a tax. In the case of income tax, the tax base is taxable income. Some kinds of income are excluded from the definition of taxable income, such as savings. For sales tax, the tax base is the value/volume of items that are subject to tax; essential goods, for example, are not part of the tax base.
Any technique which allows one to legally reduce or avoid tax liabilities. It is a way in which the taxpayer can invest his income in a particular kind of investment that gives tax concessions.
There are provisions in the law that allows one to save and invest in a manner that leads to reduction in taxable income. If these provisions are used for the benefït, it is called tax avoidance. It is lawful to take avail available tax deductions. Tax evasion, on the other hand, is a punishable offence. Tax evasion typically involves failing to report income, or improperly claiming deductions that are not authorized.
A tax haven is a country or territory where certain taxes are levied at a low rate or not at all. Individuals and/or corporate entities can find it attractive to move themselves to areas with reduced or nil taxation levels. This creates a situation of tax competition among govemments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies. For example, income tax, wealth tax or corporate tax etc.Switzerland, Singapore, the Cayman Islands, Monaco, Luxembourg and Hong Kong are among 45 territories blacklisted by the Organisation for Economic Co-operation and Development and threatened with punitive financial retaliation for their banking secrecy. Among the sanctions being considered by the G20 are the scrapping of tax treaty arrangements, imposing additional taxes on companies that operate in non-compliant countries and tougher disclosure requirements for individuals and businesses that use shelters.
Hidden taxes are taxes that are concealed in the price of articles that one buys. Hidden taxes are also referred to as implicit taxes. The most well-known form of the hidden tax is the indirect tax. Examples of hidden taxes are import duties.
Subsidy is a negative income tax. It is a taxation system where income subsidies are given to persons or families that are below the poverty line. The government will send financial aid to a person who files an income tax return reporting an income below a certain level.
The Pigovian tax is imposed on bodies that have a negative externality. For example, pollution. Externality means impact of one person's actions on the well being of an outsider (bystander or third party). For example, the seller and consumer of cigarettes together will harm the third person with pollution. Example of negative externality is exhaust fumes from automobiles. Positive externality refers to a good effect on the third party. For example, restoration of historic buildings, research into new technologies. Carbon tax is one example in the context of the need to discourage fossil fuels and encourage renewable sources due to climate change threat.
James Tobin, an economist, proposed a worldwide tax on all foreign exchange transactions- when foreign capital enters a country and when it leaves. The aim is to check speculative flows. Long term investment - generally FDI, will not suffer as it does not invest for speculative (short term) reasons like FIIs. The south East Asian currency crisis (1997) is attributed to the 'dynamics of hot money’(portfolio investments or FII flows). India does not prefer it as we need foreign inflows as we are a CAD country and don’t have a surplus.
It means no frequent changes and continuity of policy in a predictable and transparent manner. Although revenue from different taxes varies from year to year, revenue stability is desirable because it makes it easier for a government to build a credible spending and borrowing plan for the year ahead. Taxes whose revenue is relatively stable contribute to overall revenue stability. Market players also can plan better.
Tax inversion, or corporate inversion, is the practice of relocating a corporation's legal domicile to a lower-tax nation, or tax haven, usually while retaining its material operations in its higher-tax country of origin
Base erosion and profit shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. The international tax landscape has changed dramatically in recent years. With political support of G20 Leaders, the international community has taken joint action to increase transparency and exchange of information in tax matters, and to address weaknesses of the international tax system that create opportunities for BEPS. The internationally agreed standards of transparency and exchange of information in the tax area have put an end to the era of bank secrecy. With over 130 countries and jurisdictions currently participating, the Global Forum on Transparency and Exchange of Information for Tax Purposes has ensured consistent and effective implementation of international transparency standards since its establishment in 2009. At the same time, the financial crisis and aggressive tax planning by multinational enterprises (MNEs) have put BEPS high on the political agenda. With a conservatively estimated annual revenue loss of USD 100 to 240 billion, the stakes are high for governments around the world. The impact of BEPS on developing countries, as a percentage of tax revenues, is estimated to be even higher than in developed countries.
Therefore, in September 2013, the G20 Leaders endorsed the ambitious and comprehensive BEPS Action Plan, developed with OECD members. On the basis of this Action Plan, the OECD and G20 countries developed and agreed upon a comprehensive package of measures in just two years. These measures were designed to be implemented domestically and through tax treaty provisions in a co-ordinated manner, supported by targeted monitoring and strengthened transparency.
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