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Taxation in India

Taxes in India are levied by the three?tier government Central government, the State government and the Local government. The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the center and the state.

An important restriction on this power is Article 265 of the Constitution which states that "No tax shall be levied or collected except by the authority of law". Therefore each tax levied or collected has to be backed by an accompanying law, passed either by the parliament or the state legislature

Indian tax Structure:

Direct Taxation:

Personal Income Tax: Personal income tax is levied on the income of Individuals, Hindu families, unregistered firms and other associations of people. Like all other countries, India has a progressive income tax.

The main characteristics of the personal income tax in India are?

(i) It is levied on net income earned annually

(ii) Agricultural incomes are not taxable

(iii) Income of religious and charitable trusts are exempted

(iv) For calculating income tax a slab system is followed. Progressive taxation is introduced by taxing the successive slabs or slices of income at rising rates.

(v) The income tax in India has the feature of built in flexibility. It is elastic the sense that with the growth of income the tax revenue automatically increases.

Capital Gains Tax:

It is a tax on the gains from the sale, exchange or transfer of capital assets. It was introduced in 1947 and established in 1950.

·                     The capital gains tax are taxed at the rate of income tax payable for the total income, including there in only one third of capital gains. The capital gains are not liable to super tax.

Corporation. Tax:

·                     Corporation tax is levied on the incomes of registered companies and corporations.

·                     Zero tax companies require tough handling. This has been done by levying a Minimum Alternative Tax (MAT). The current base of MAT is book profits. This is easily manipulated by various companies to Generate zero tax.

Estate Duty:  It was levied on total property passing on the death of Person. The government abolished it in 1985.

Wealth Fax: It is levied on the excess of net wealth over exemption of Individuals, Joint Hindu families and companies for assessing the net value of wealth, net obligations are deducted from its market value.

Gift Tax: Gift tax was introduced in 1958 and was treated complementary to the estate duty and annual tax on wealth. It was loveable on all donation except the ones given by charitable.

·                     Chelliah Committee and Kelkar Committee related to tax reforms institutions, government companies and private companies.

·                     Certain exemptions were made. These include donations to recognized charitable institutions, gifts to women dependents at the time of marriage and gifts to wife. Gift tax was abolished in 1998.

Indirect Taxation: Indirect taxes levied in India are custom duties, excise duties, service tax, sales tax or VAT.

Custom Duties:

·               While exercising its constitutional powers, the central government levies its duties on both imports and exports. Imports duties are generally levied on ad-valorem basis, which implies that they are determined as a certain percentage of the prices of the commodity.

Import duties in India are levied with two objectives in mind

(a)   Protection and                        (b) Revenue.

But most of the import duties are raised to the protective level income from them has been declining.

·               As regards export duties, the recent trend is for their abolition or minimization. So as to encourage exports for improving India's balance of payment. Thus export duties are less productive for revenue accruing to the government

Excise Duty

·                  An excise tax is a tax levelled during the production stage of goods and has absolutely no connection with its actual sale. Excise duties on commodities other than alcoholic liquors and narcotics are levied by the Central government.

·                  Extension of MOD VAT to capital goods and petroleum products.

·                  Government evolved a new scheme MOD VAT (Modified Value Added Tax) under the regulation of the Central Excise Rules 2002, section 143 of the Finance Act. Under the MOD VAT scheme, a manufacturer can take credit of excise duty paid on raw materials and components used by him in his manufacturer. It amounts to excise duty only on additions in value by each manufacturer at each stage.

·                  Subsequently MODVAT scheme was restructured into CENVA (CENTRAL VALUE ADDED TAX) scheme. Under the CENVAT scheme a manufacturer of final product or provider of taxable service shall be allowed to take credit of duty of excise as well as of service tax paid on any input received in the factory or any input service received by manufacturer of final product.

Excise duties:

·                  Excise duties in India are levied basically for the following purposes

(a) To fetch revenue

(b) To restrict consumption of the articles taxed

(c) To encourage the production of certain varieties of commodities b restricting the production of others.

Proportional Taxes:

Taxes in which the rate of tax remains constant though the tax base changes are called proportional taxes. Here the tax base may be income, money value of property, wealth or goods etc.

·                     In a proportional tax system, taxes very in direct proportion to the change in income. If income is double, the tax amount is also doubled. Thus, proportional tax extracts a constant proportion of rising income.

Progressive Taxes:

Taxes in which the rate of tax increases are called progressive taxes. Thus, in a progressive tax, the amount of tax paid will increase at a higher rate than the increase in tax base or income, for the taxation amount is the product of multiplying the base by the rate and both these increase in a progressive tax.

·                     A progressive tax extracts an increasing proportion of rising income.

Regressive Taxes: When the rate of tax decreases as the tax base increases, the taxes are called regressive taxes. In regressive taxation, though the total amount of tax increases on a higher income in the absolute sense. In the relative sense, the tax rate declines on a higher income.

·                     Regressive taxation is unjust and inequitable. It does not comply with the canon of equity. It trends to accentuate inequalities of income in the community

Digressive Taxes:

Taxes which are mild progressive, hence not very steep, so that high income earners do not make a due sacrifice on the, basis of equity are called digressive

·                     In digressive taxation, the tax may be progressive up to a certain limit after that it may be charged at a flat rate. The tax payable increases only at a diminishing rate.

Tax Evasion and Tax Shifting:

Tax evasion and tax shifting are the methods of escaping taxes. In tax shifting, the burden of taxes is shifted through the vehicle of price. It is legal as sometimes even the government also intends so while imposing a tax. Further, under tax shifting though the incidence ultimately falls on somebody, the government receives its due revenue.

·                     In tax evasion, a person deliberately pretends that he is not liable to tax by showing himself not in possession of goods or services or income subject to tax. It is illegal as the evader cheats the government by concealing facts and the latter loses its due revenue.

Tax Capitalization:

A special type of tax shifting is called t capitalization'. The tax capitalization generally occurs at the time of selling process or exchange or transfer of land or other assets which generate a flow of income and during their lifetime. The net flow of regular income from such assets is reduced when the taxes are imposed upon them.

Service Tax:

·                     Service tax was introduced in 1994?95 on three services. These service are telephone service, general insurance and share brokering. Since then every year the tax net has been widened to include more and more services under the tax net.

Value Added Tax (VAT)

The empowered committee (EC) of state finance ministers, is in meeting in 2004, arrived at a broad consensus to introduce VAT from April 1,

2005. Vat has been introduced at the state level.

·                     Now all states have adopted the VAT system. The last state to join the bandwagon was U.P.

·                     The state level VAT being implemented presently has replaced the erstwhile sales tax system of the states.

Types of Tax:

Direct: Tax: property tax, gift; tax

Indirect Tax: sales tax, Excise duty, custom duty etc.

Tax imposed by the central government:

Income tax. Corporate tax. Property tax. Succession tax. Wealth tax. Gift tax. Custom duty. Tax on agricultural wealth etc.

Tax imposed by the state government:

Land revenue tax/ Agricultural income tax. Agricultural land revenue. State excise duty. Entertainment tax. Stamp duty. Road tax. Motor Vehicle tax etc.