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Tax system
The ideology of taxation is broadly based on 3 basic considerations:
Raja Chelliah in “Fiscal Policy in Under – developed Countries’ has stated that an effective tax structure should identify the surplus income of each entity and should make the entity contribute this unused capacity towards economic development. Chelliah’s norms for tax structure are based on the dual principles;
According to Raja Chelliah, the three criteria on which a sound and practicable system should be based are equity, economic efficiency and administrative ease. Not only administrative ease but also equity would require a simple and transparent tax system because equity must also be seen to exist. The criterion of economic efficiency requires that the tax system should not distort economic decisions, needlessly other choices, or escalate 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 as many departures from neutrality not only lead to a complicated structure, but also to political pressure for further intervention.
Thus, normative principle for a sound tax system are :
It is better not to assign the task of achieving progress in primarily to just one tax but should be spread over at least a few taxes.
Direct taxes are more effective and efficient instruments for achieving progress than commodity taxes.
In countries like ours, where only a small proportion of earners are subject to direct taxes, the progressivity of the tax system as a whole depends mainly on the proportion of total tax revenues collected from the small percentage of relatively well-to-do population. Broadening the base, inducing better compliance and curbing evasion through stricter enforcement are needed for achieving progressivity.
IMPORTANT TAXES
In a direct tax, the burden of taxation as well as the responsibility of its deposition lays with the single entity i.e. the tax payer. For ex-Income tax, Corporation tax.
But in case of indirect tax the tax payer though has the burden to pay tax, its collection and eventual deposition is done by someone else. For ex- Sales tax, Service tax.
Also, while direct taxes are based on the tax paying capability of the individual, indirect taxes are levied equally upon taxpayers no matter what their income.
Personal Income Tax is levied on the income of individuals, Hindu families, unregistered firms and other associations of people. Income tax is s 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 two major functions; Raise revenue needed by the Government, Regulate foreign trade of the country (more particularly the imports as export duties are less important) ,Offer protection to local industries by imposing tariffs.
Excise duty an indirect tax, 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.
An Important aspect of reforms of direct taxation since 1991 has been the concept of Presumptive taxation which has been introduced to broaden the direct tax base. A presumptive tax is a tax imposed/sought to be imposed on the presumption that an individual/company earns enough to pay tax and yet the tax is evaded or avoided. The following presumptive taxes have been introduced.
(i) Tonnage tax under which the notional income arising from the operation of a ship is determined on the basis of the tonnage carried by the ship. The notional income is taxed at the normal corporate tax rate applicable for the year. Tax is payable even if there is a loss in a year. Imposition of Tonnage tax on Indian shipping companies meets their longstanding demand for such a regime, as similar practice exists in most nations. This is expected a attract FDI in the industry as well as make Indian Shipping industry more competitive, as the effective tax rate is likely to come down substantially.
(ii) Securities Transaction Tax (STT): This tax, also called turnover, tax was introduced in 2004 at the rate of 0.015 per cent on the total value of delivery based equity transactions in the stock market. This means that for every transaction involving sale/purchase of shares, say, worth Rs. 1,000, the buyer and seller will have to pay 75 paise each. STT is applicable at different rates depending upon the security (whether equity or derivative) and the transaction (whether purchase or sell). It is meant to make up revenue loss from the abolition of long term capital gains tax.
(iii)Minimum Alternate Tax (MAT)-Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the Income Tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. There were large number of companies who show book profits as per their profit and loss account (according to the Companies Act) but do not pay any tax by showing no taxable income as per provisions of the Income Tax act. Although the companies show book profits and may even declare dividends to the shareholders, they do not pay any income tax. These companies are popularly known as Zero Tax companies. In order to bring such companies. Under the income tax act net, MAT was introduced in 1996.
Book profit is Profit which is notional made but not yet realized through a transaction, such as a stock which has risen in value but is still being held. It is also called unrealized gain or unrealized profit or paper gain or paper profit.
Dumping is said to occur when the goods are exported by a country to another country at a price lower than its normal value. Anti dumping is a measure to rectify the situation arising out of the dumping of goods and its trade distortive effect and is permitted by the WTO. It provides relief to the domestic industry against the injury caused by dumping.
Although anti dumping duty is levied and collected by the Customs Authorities, it is entirely different from the Customs duties not only in concept and substance, but also in purpose and operation. The following are the main differences between the two: -
Thus, there are basic conceptual and operational differences between the customs duty and the anti dumping duty. The anti dumping duty is levied over and above the normal customs duty chargeable on the import of goods in question.
The following are essential for initiating an anti dumping investigation: -
Broadly, injury may be analysed in terms of the volume effect and price effect of the dumped imports.
The anti dumping duty shall remain in force for a period of five years from the date of imposition of duty. However, such duty can be reviewed by the Designated Authority[1]anytime before the expiry of the said period.
India is currently in the process of phasing out its quantitative restrictions regime in relation to imports. With removal of licensing restrictions on imports, there has been a tendency on the part of several trading partners of India to resort to dumping of their goods of different kinds into India, thereby creating a situation of unfair competition in the domestic market whereby the domestic industry has suffered injury.
MODVAT was introduced in India in 1986 on the recommendation of the Jha Committee with the objective of rationalizing the Excise duty structure and reducing the cascading effect of excise duties. It is technically called MODVAT (Modified Value added tax).
Under MODVAT, the manufacturers get complete reimbursement of excise only duty paid by them on inputs like components and raw materials. In simple words, the manufacturer pays excise duty on the entire value of his final product but gets back refund of those excise duties that he pays on the inputs used by him for manufacturing the output. E.g. let us say that a manufacturer manufactures garments as a final product worth Rs. 5 lakhs and pays a duty of say, Rs. 5,000/-. Having paid the duty, he gets refund (of those excise duties that he had paid on the cloth he used for manufacturing garments. If this is Rs. 2,000/- this means effectively his excise burden is Rs. 3000/- only (Rs. 5,000/- Rs. 2,000/-). Thus, MODVAT prevents payment of duties on earlier duties paid up to the manufacturing stage.
VAT on the other hand is a much more comprehensive tax which includes in its purview taxes like excise duties, sales tax, wholesale tax and turnover tax.
A full-fledged VAT is an advalorem tax on domestic final consumption levied and collected at all stages between production and the point of final sale. At each stage, the tax is confined to value addition, which means market value of sales - purchases. Thus, it achieves the objective of taxing sales at every stage of production and distribution but allowing full deduction of taxes paid on purchases. The producer therefore pays the Government only the amount of the tax on value added.
1 MODVAT is confined to production stage only while VAT extends up to the final consumer stage.
2 MODVAT rationalizes only Excise duties while VAT rationalizes excise duty, sales tax, turnover tax and wholesale tax.
3 Under MODVAT, value of the final output is taxed and credit is given for duties paid on inputs while under VAT, tax is imposed only on value added and hence, no question of giving any credit arises.
4 VAT is much more comprehensive and leaves very little scope for evasion particularly when invoices method is used whereas MODVAT leaves same for evasion.
1 Leaves very little scope for tax evasion because if the due tax has not been charged on any of the purchased inputs there would be no invoice for it and a deduction would be unavailable. The missed tax could therefore be recaptured.
2 It provides efficiency since a firm is not exempted from it even if it runs into a loss.
3 It avoids cascading effect.
4 It is easier to assess tax liability of a firm under VAT.
1 It needs an honest and efficient government machinery to do cross checking.
2 Unless the rules of VAT are extraordinarily high, the State would end up with smaller tax revenue as against the collection from Sales Tax.
3 In India, particularly, it is administratively difficult to implement because of a massive unorganized retail sector as well as problem of sharing revenues be.
In India presently there exists a Dual system of VAT with states and centre individually applying tax at manufacturing and wholesale level respectively.
CenVAT involving Single rate of 16% introduced in the Budget 2000-2001 replacing three ad-valorem rates of basic excise duty, viz., 8%, 16% and 24%. The step was aimed at providing long-term stability, remove uncertainties in the mind of industry, and eliminate disputes of classification.
Since 2008 all the states have adopted state VAT for rationalization of all indirect taxes within their respective territories. Generally the rate of state VAT varies from 4% to 12.5% depending on the nature of goods[2].
Also the states have excluded certain items like Liquour and Petroleum from the purview of VAT as taxes on these items form major source of revenue for state governments.
BASIC FEATURES OF INDIA’s TAX STRUCTURE
The Tax Base Is Narrow For Both Direct And Indirect Taxes. In 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 or 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 tax payers compares very unfavorably with advanced countries like U.S.A. where around 45% of the people pay income tax and in 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 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.
Gross Tax Revenue (Rs. Lakh Crore)
2011-12
2012-13
2013-14
2014-15
2015-16
CT
3.23
3.56
3.95
4.29
4.71
IT
1.64
1.97
2.38
2.58
3.21
CD
1.49
1.65
1.72
1.88
2.08
UED
1.45
1.76
1.69
1.89
2.29
ST
0.98
1.33
1.55
1.68
2.10
GTR
8.89
10.36
11.39
12.45
14.49
Notes: GTR=gross tax revenue CT= corporation tax IT= income tax UED= union excise duty CD=custom duty ST= service tax
Source: Budget documents and CGA.
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.
Tax reforms in India
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.
Goods and Service Tax
In 2003, the Kelkar Task Force on indirect tax had suggested a comprehensive Goods and Services Tax (GST) based on VAT principle. The fiscal powers between the Centre and the States are clearly demarcated in the Constitution with almost no overlap between the respective domains. The Centre had the powers to levy tax on the manufacture of goods (except alcoholic liquor for human consumption, opium, narcotics etc.) while the States had the powers to levy tax on sale of goods. In case of inter-State sales, the Centre had the power to levy a tax (the Central Sales Tax) but, the tax was collected and retained entirely by the originating States. As for services, it was the Centre alone that was empowered to levy service tax.
Since the States are not empowered to levy any tax on the sale or purchase of goods in the course of their importation into or exportation from India, the Centre levies and collects this tax as additional duties of customs, which is in addition to the Basic Customs Duty. This additional duty of customs (commonly known as CVD and SAD) counter balances excise duties, sales tax, State VAT and other taxes levied on the like domestic product. Introduction of GST would therefore require amendments in the Constitution so as to concurrently empower the Centre and the States to levy and collect the GST.
The assignment of concurrent jurisdiction to the Centre and the States for the levy of GST required a unique institutional mechanism that would ensure that decisions about the structure, design and operation of GST are taken jointly by the two. For it to be effective, such a mechanism also needed to have Constitutional force.
To address all these and other issues, the Constitution (122nd Amendment) Bill was introduced in the 16th Lok Sabha on 19.12.2014. The Bill provides for a levy of GST on supply of all goods or services except for Alcohol for human consumption. The tax shall be levied as Dual GST separately but concurrently by the Union (central tax - CGST) and the States (including Union Territories with legislatures) (State tax - SGST) / Union territories without legislatures (Union territory tax- UTGST). The Parliament would have exclusive power to levy GST (integrated tax - IGST) on inter-State trade or commerce (including imports) in goods or services. The Central Government will have the power to levy excise duty in addition to the GST on tobacco and tobacco products. The tax on supply of five specified petroleum products namely crude, high speed diesel, petrol, ATF and natural gas would be levied from a later date on the recommendation of GST Council.
A Goods and Services Tax Council (GSTC) shall be constituted comprising the Union Finance Minister, the Minister of State (Revenue) and the State Finance Ministers to recommend on the GST rate, exemption and thresholds, taxes to be subsumed and other features. This mechanism would ensure some degree of harmonization on different aspects of GST between the Centre and the States as well as across States. One half of the total number of members of GSTC would form quorum in meetings of GSTC. Decision in GSTC would be taken by a majority of not less than three-fourth of weighted votes cast. Centre and minimum of 20 States would be required for majority because Centre would have one-third weightage of the total votes cast and all the States taken together would have two-third of weightage of the total votes cast. Further the bill had been ratified by required number of States and received assent of the President on 8th September, 2016 and has since been enacted as Constitution (101stAmendment) Act, 2016 w.e.f. 16th September, 2016.
This is a new article inserted in the constitution. It says that (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State. (2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
Notable Points from Article 246A
Both Union and States in India now have “concurrent powers” to make law with respect to goods & services
The intra-state trade now comes under the jurisdiction of both centre and state; while inter-state trade and commerce is “exclusively” under central government jurisdiction.
This is a new article which reads as follows:
269A. (1) Goods and services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.
Explanation.—For the purposes of this clause, supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or of services, or both in the course of inter-State trade or commerce.
(2) The amount apportioned to a State under clause (1) shall not form part of the Consolidated Fund of India.
(3) Where an amount collected as tax levied under clause (1) has been used for
payment of the tax levied by a State under article 246A, such amount shall not form part of the Consolidated Fund of India.
(4) Where an amount collected as tax levied by a State under article 246A has been used for payment of the tax levied under clause (1), such amount shall not form part of the Consolidated Fund of the State.
(5) Parliament may, by law, formulate the principles for determining the place of
supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.’
This article provides for constitution of a GST council by president within sixty days from this act coming into force. The GST council will constitute the following members:
The GST council will be empowered to take decisions on the following:
This amendment has made following changes in 7th schedule of the constitution:
Further, the amendment also provided that Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years. This resulted into the Compensation Cess Bill.
__________________________________________
The GSTC has been notified with effect from 12th September, 2016. GSTC is being assisted by a Secretariat. Fifteen meetings of the GSTC have been held so far. The following major decisions have been taken by the GSTC:
(i) The threshold exemption limit would be Rs. 20 lakh. For special category States enumerated in article 279A of the Constitution, threshold exemption limit has been fixed at Rs. 10 lakh.
(ii) Composition threshold shall be Rs. 1.5 Crore. Composition scheme shall not be available to inter-State suppliers, service providers (except restaurant service) and specified category of manufacturers.
(iii) Existing tax incentive schemes of Central or State governments may be continued by respective government by way of reimbursement through budgetary route. The schemes, in the present form, would not continue in GST.
(iv) There would be four tax rates namely 5%, 12%, 18% and 28%. The tax rates for different goods and services have been finalized.
(v) The five laws namely CGST Law, UTGST Law, IGST Law, SGST Law and GST Compensation Law have been recommended.
GST would be applicable on “supply” of goods or services as against the present concept of tax on the manufacture of goods or on sale of goods or on provision of services. GST would be based on the principle of destination based consumption taxation as against the present principle of origin based taxation
It would be a dual GST with the Centre and the States simultaneously levying it on a common base. The GST to be levied by the Centre would be called Central GST (CGST) and that to be levied by the States [including Union territories with legislature] would be called State GST (SGST). Union territories without legislature would levy Union territory GST (UTGST).
An Integrated GST (IGST) would be levied on inter-State supply (including stock transfers) of goods or services. This would be collected by the Centre so that the credit chain is not disrupted.
Import of goods would be treated as inter-State supplies and would be subject to IGST in addition to the applicable customs duties. Import of services would be treated as inter-State supplies and would be subject to IGST.
GST would replace the following taxes currently levied and collected by the Centre:
a) Central Excise Duty;
b) Duties of Excise (Medicinal and Toilet Preparations);
c) Additional Duties of Excise (Goods of Special Importance);
d) Additional Duties of Excise (Textiles and Textile Products);
e) Additional Duties of Customs (commonly known as CVD);
f) Special Additional Duty of Customs (SAD);
g) Service Tax;
h) Cesses and surcharges insofar as they relate to supply of goods or services.
State taxes that would be subsumed within the GST are:
a) State VAT;
b) Central Sales Tax;
c) Purchase Tax;
d) Luxury Tax;
e) Entry Tax (All forms);
f) Entertainment Tax (except those levied by the local bodies);
g) Taxes on advertisements;
h) Taxes on lotteries, betting and gambling;
i) State cesses and surcharges insofar as they relate to supply of goods or services.
Note: GST would apply to all goods and services except Alcohol for human consumption. Thus existing central and state taxes will continue for it.
A common threshold exemption would apply to both CGST and SGST. Taxpayers with an annual turnover of Rs. 20 lakh (Rs. 10 lakh for special category States as specified in article 279A of the Constitution) would be exempt from GST. A compounding option (i.e. to pay tax at a flat rate without credits) would be available to small taxpayers (including to specified category of manufacturers and service providers) having an annual turnover of up to Rs. 50 lakh. The threshold exemption and compounding scheme would be optional.
Input tax credit means at the time of paying tax on output one can deduct the tax already paid on input.
Credit of CGST paid on inputs may be used only for paying CGST on the output and the credit of SGST/UTGST paid on inputs may be used only for paying SGST/UTGST.
In other words, the two streams of input tax credit (ITC) cannot be cross utilized, except in specified circumstances of inter-State supplies for payment of IGST. The credit would be permitted to be utilized in the following manner:
a) ITC of CGST allowed for payment of CGST & IGST in that order;
b) ITC of SGST allowed for payment of SGST & IGST in that order;
c) ITC of UTGST allowed for payment of UTGST & IGST in that order;
d) ITC of IGST allowed for payment of IGST, CGST & SGST/UTGST in that order.
ITC of CGST cannot be used for payment of SGST/UTGST and vice versa. The transfer of funds would be carried out on the basis of information contained in the returns filed by the taxpayers. Input Tax Credit (ITC) to be broad based by making it available in respect of taxes paid on any supply of goods or services or both used or intended to be used in the course or furtherance of business. An audit of registered persons is to be conducted in order to verify compliance with the provisions of Act.
Make in India
(i) Will help to create a unified common national market for India, giving a boost to Foreign investment and “Make in India” campaign;
(ii) Will prevent cascading of taxes as Input Tax Credit will be available across goods and services at every stage of supply;
(iii) Harmonization of laws, procedures and rates of tax;
(iv) It will boost export and manufacturing activity, generate more employment and thus increase GDP with gainful employment leading to substantive economic growth;
(v) Ultimately it will help in poverty eradication by generating more employment and more financial resources;
(vi) More efficient neutralization of taxes especially for exports thereby making our products more competitive in the international market and give boost to Indian Exports;
(vii) Improve the overall investment climate in the country which will naturally benefit the development in the states;
(viii) Uniform SGST and IGST rates will reduce the incentive for evasion by eliminating rate arbitrage between neighboring States and that between intra and inter-State sales;
(ix) Average tax burden on companies is likely to come down which is expected to reduce prices and lower prices mean more consumption, which in turn means more production thereby helping in the growth of the industries . This will create India as a “Manufacturing hub”.
Ease of Doing Business
(i) Simpler tax regime with fewer exemptions;
(ii) Reductions in the multiplicity of taxes that are at present governing our indirect tax system leading to simplification and uniformity;
(iii) Reduction in compliance costs - No multiple record keeping for a variety of taxes- so lesser investment of resources and manpower in maintaining records;
(iv) Simplified and automated procedures for various processes such as registration, returns, refunds, tax payments, etc;
(v) All interaction to be through the common GSTN portal- so less public interface between the taxpayer and the tax administration;
(vi) Will improve environment of compliance as all returns to be filed online, input credits to be verified online, encouraging more paper trail of transactions;
(vii) Common procedures for registration of taxpayers, refund of taxes, uniform formats of tax return, common tax base, common system of classification of goods and services will lend greater certainty to taxation system;
(viii) Timelines to be provided for important activities like obtaining registration, refunds, etc;
(ix) Electronic matching of input tax credits all-across India thus making the process more transparent and accountable.
Benefit to Consumers
(i) Final price of goods is expected to be lower due to seamless flow of input tax credit between the manufacturer, retailer and service supplier;
(ii) It is expected that a relatively large segment of small retailers will be either exempted from tax or will suffer very low tax rates under a compounding scheme- purchases from such entities will cost less for the consumers;
(iii) Average tax burden on companies is likely to come down which is expected to reduce prices and lower prices mean more consumption.
For the implementation of GST in the country, the Central and State Governments have jointly registered Goods and Services Tax Network (GSTN) as a not-for-profit, non-Government Company to provide shared IT infrastructure and services to Central and State Governments, tax payers and other stakeholders. The key objectives of GSTN are to provide a standard and uniform interface to the taxpayers, and shared infrastructure and services to Central and State/UT governments.
Goods and Services Tax Network (GSTN) has been set up by the Government as a private company under erstwhile Section 25 of the Companies Act, 1956. GSTN would provide three front end services to the taxpayers namely registration, payment and return.
Besides providing these services to the taxpayers, GSTN would be developing back-end IT modules for 27 States who have opted for the same. The migration of existing taxpayers has already started from November, 2016. The Revenue department of both Centre and States are pursuing the presently registered taxpayers to complete the necessary formalities on the IT system operated by GSTN for successful migration. About 80 percent of existing registrants have already migrated to the GST systems.
GSTN has selected 34 IT, ITeS and financial technology companies, to be called GST Suvidha Providers (GSPs). GSPs would develop applications to be used by taxpayers for interacting with the GSTN.
Project SAKSHAM
Introduction of GST will result in a several-fold increase in the number of taxpayers and resultant document load on the system. CBEC's current IT system was set up in 2008. It cannot cater to the increased load under GST without an immediate upgrade of its IT Infrastructure. Further, CBEC has implemented the Indian Customs Single Window Interface for Facilitating Trade (SWIFT) and is integrating other partner agencies involved in Customs clearance in order to make the process simple and fast. The Customs EDI system which is currently operational at about 140 locations in India has to be extended to many more locations with improved response time and better service delivery. Taxpayers have to be given a facility for Upload of Digitally Signed Scanned Documents in order to reduce the physical interface with tax authorities and to increase the speed of clearance. CBEC also aims to introduce mobile services for taxpayers and departmental users to increase the outreach of its services. The Project SAKSHAM will help in:
Integration of CBEC IT systems with the Goods and Services Tax Network (GSTN).
Extension of Indian Customs Single Window Interface for Facilitating Trade (SWIFT)
Other taxpayer-friendly initiatives under Digital India and Ease of Doing Business of CBEC.
PROJECT INSIGHT
The Project Insight is an ambitious project of the Income-Tax (IT) Department to effectively utilize the vast amount of information at its disposal more effectively to track tax evaders. This integrated platform would play a key role in widening of tax base and data mining to track tax evaders. The new technical infrastructure will also be leveraged for implementation of Foreign Account Tax Compliance Act, Inter Governmental Agreement IGA) and for Common Reporting Standard (CRS).
Project Insight, through implementation of reporting compliance management system, will ensure that third party reporting by entities like banks and other financial institutions, is timely and accurate. It will also set up a streamlined data exchange mechanism for other government departments
Clients' understanding of GST provisions and its impact on their business is still at a nascent stage, and many are still identifying the locations and places they need to be registered in. These businesses are also assessing the mandated GST-compliance their relevant functional departments need to adhere to, including their Supply Chain, IT Systems, and Legal. This is necessary for identifying their new Working Capital, Cash Flow, and Fund Flow needs. To be on the right side of the GST anti-profiteering clause, businesses are also assessing their cost sheets while performing Comparable Analysis of the pricing of goods and services, pre-and post GST.
Various provisions of GST are still ambiguous. Categorisation of goods and services in various cases is still unclear. Provisions for antiprofiteering, as well as the now-deferred e-way bill(till 1stfeb 2018), which tracks consignments across states, are unclear. The new tax regime requires transporters to generate e-way bills on the GST portals which includes incurring substantial costs to install radio frequency identification devices (RFIDs). Currently there is no clarity on who will bear the bill for the infrastructure. The government has also made the rules related to assessment and audit public, but the absence of actual forms in the public domain challenges the effectiveness of the rule.
Businesses will need to file multiple returns, a minimum of 37 in most cases for assessees, and this can increase multifold in accordance with business models. Clients will need to ensure timely compliance by registered suppliers to ensure there is no loss of input credit. This will necessitate correct data and reports to fill accurate GST returns.
Various businesses are yet to map the accounting software and IT systems in line with the new tax provisions, to create GST invoices, and extract required reports. Tax and accounting professionals jointly need to ensure that their clients' current systems are compatible with their GST Service Provider (GSP). With GST demanding compliance, only days after guidelines were issued in their entirety, India Inc is rushed for time to modify the entire IT framework. Seamless implementation will require six million micro, small, and medium enterprises (MSMEs) to adapt their invoicing approaches for which they do not have adequate IT support and systems.
With GST rates and their complexities only recently becoming a part of our policy framework, skilled staff with updated GST subject knowledge and training are not easily available. This has placed an additional work load on personnel across industries, and created an urgent need for additional GST-skilled resources to ensure swift implementation.
While GST aims to streamline business and protect consumer interests, the legislation should not allow a sense of apprehension to impact industrial interests. GST is both a challenge and an opportunity for tax and accounting professionals, and a knowledge of cloud, big data, analytics, and business applications along with financial knowledge is the need of the hour.
GST and VAT: are they similar or different?
The full expression of the tax is Value Added on Goods and Services Tax. So it can be called VAT or GST, for short. So, both are same when both include service tax. But if service tax is not included, then it is only VAT.
What is an e-way bill?
E-way bill is an electronic way bill for movement of goods which can be generated on the GSTN (common portal). A ‘movement’ of goods of more than Rs 50,000 in value cannot be made by a registered person without an e-way bill. E-way bill will also be allowed to be generated or cancelled through SMS. When an e-way bill is generated a unique e-way bill number (EBN) is allocated and is available to supplier, recipient, and the transporter.
When should an e-way bill be generated?
E-way bill will be generated when there is movement of goods –
What is a ‘supply’ in case of e-way bill?
A supply may be –
Basically supply means –
Therefore, e-way bills must be generated on the common portal for all types of movements.
Who can generate e-way bill?
How will be Inter-State Transactions of Goods and Services be taxed under GST in terms of IGST method?
In case of inter-State transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supplies of goods and services under Article 269A (1) of the Constitution. The IGST would roughly be equal to CGST plus SGST. The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another. The inter-State seller would pay IGST on the sale of his goods to the Central Government after adjusting credit of IGST, CGST and SGST on his purchases (in that order). The exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The importing dealer will claim credit of IGST while discharging his output tax liability (both CGST and SGST) in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.Since GST is a destination-based tax, all SGST on the final product will ordinarily accrue to the consuming State.
A diagrammatic representation of the working of the IGST model for inter-State transactions is shown in the following Figure:
NEW DIRECT TAXES CODE
During the Rajaswa Gyan Sangam held on 1st and 2nd September, 2017, the Prime Minister Shri Narendra Modi had observed that the Income-tax Act, 1961 (the Act) was drafted more than 50 years ago and it needs to be re-drafted. Accordingly, in order to review the Act and to draft a new Direct Tax Law in consonance with economic needs of the country, the Government has constituted a Task Force with the following Members:
(i) Shri Arbind Modi, Member (Legislation), CBDT - Convener
(ii) Shri Girish Ahuja, practicing Chartered Accountant and non-official Director, State Bank of India;
(iii) Shri Rajiv Memani, Chairman & Regional Managing Partner of E&Y;
(iv) Shri Mukesh Patel, Practicing Tax Advocate, Ahmedabad;
(v) Ms. Mansi Kedia, Consultant, ICRIER, New Delhi;
(vi) Shri G.C. Srivastava, Retd. IRS (1971 Batch) and Advocate.
Dr. Arvind Subramanian, Chief Economic Adviser (CEA) will be a permanent Special Invitee in the Task Force.
The Terms of Reference of the Task Force is to draft an appropriate Direct Tax Legislation keeping in view:
(i) The direct tax system prevalent in various countries,
(ii) The international best practices.
(iii) The economic needs of the country and
(iv) Any other matter connected thereto.
The Task Force shall set its own procedures for regulating its work and shall submit its report to the Government within six months.
Lower income tax rates, and more taxpayers—that’s the overall aim of the new direct taxes code being put in place by a panel appointed by the current government. It is unlikely individual taxpayers will get to celebrate anytime soon, although the official, who asked not to be identified, mentioned a timeline of 2019. The committee, set up in November, has been given six months to submit its report, but the understanding in the government is that it could take longer, a senior finance ministry official had said in November on condition of anonymity.
Still, it is significant that the government is thinking of lower tax rates because current tax rates and tax slabs are already more liberal than the ones suggested in an earlier draft direct taxes code prepared by a panel under the earlier United Progressive Alliance government.
The official also added that the aim is to get more people to pay direct taxes (currently only 4.5% of India’s 1.3 billion population does) and take the direct tax-to-GDP ratio to as close to 18% as possible, and explained the logic behind the 18% number. At present, about 20% of GDP is out of taxation on account of exemptions given to agricultural income, which will continue in the proposed new direct taxes code as well. Other tax exemptions, and varying slabs, account for another 20% of GDP from the direct tax base. A 30% tax on the remaining 60% of GDP should have brought in around 18% of GDP. The current direct tax-to-GDP ratio is 5.6%.
Still, it is likely the target is directional, and even a marginal improvement will help increase India’s overall tax-to-GDP ratio. Including direct taxes and indirect taxes, this is currently 10.8% of GDP (excluding state taxes) but likely to increase because of the unified goods and services tax introduced this year.
Important committees on tax reforms
L K Jha Committee: 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.
Chelliah Committee: 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.
Kelkar committee: On direct taxes set up on 9th September 2002, submitted its report in year 2003.
Tax evasion - analysis
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 (Laffer effect [3]has proved to be right in India’s case.
In order to create specialized judicial bodies to adjudicate matters related to taxation, the parliament passed the National Tax Tribunal Act in 2005. The act aims at creating Tax Tribunals and transfer all the tax related cases pending with High Courts to these tribunals comprising of judicial as well as technical members.
But in 2014, the Supreme Court declared the 2005 act as unconstitutional on two grounds-
The Act allows for executive secretaries to be appointed as members of the Tribunal thereby violating the constitutional principle of separation of powers.
Also, the court observed that substantial questions of law which relate to taxation would also involve many areas of civil and criminal law, for example Hindu joint family Law, partnership, sale of goods, contracts, Mohammedan Law, Company Law, law relating to Trusts and societies, transfer of property, law relating to intellectual property, interpretation of statutes and Sections dealing with prosecution for offences. It is therefore not correct to say that taxation, being a specialised subject, can be dealt with by a tribunal.
More concepts
Inverted duty structure
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.
Tax-incidence: 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.
Tax Burden: It means those who actually pay taxesi.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.
Tax Base: 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.
Tax Shelters: 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.
Difference between tax avoidance and tax evasion: 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.
Tax haven and G20
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.
Negative income tax: 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.
Pigovian tax
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.
Tobin tax
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.
Tax Buoyancy: 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: 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.
Tax Stability: 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.
Overview of the BEPS package
[1]Director General of Anti Dumping.
[2]Merit goods are generally zero rated (i.e. no tax) to boost consumption and demerit goods are taxed prohibitively to reduce consumption.
[3] The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.
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