Taxation in India: Systems, Evolution and Impact

Taxation in India: Systems, Evolution and Impact #

Taxation in India: A Tool for Governance and Income Redistribution #

Taxation is a term for when an authority, mostly a government, imposes an involuntary financial obligation on its citizens/ residents/corporations/companies etc.
It is a way of Income Redistribution.
Swaran Singh Committee recommended Duty to Pay taxes to be added in the Fundamental Duty–Article 51A. However, this was not included. So, Duty to Pay taxes is not a Fundamental Duty.

Taxation in India: Adam Smith’s Canons for Equity and Efficiency #

EQUALITY	ECONOMY	CERTAINITY	CONVENIENCE
Tax should be equal and proportionate to income.	Raising taxes while incurring least amount of expenses.	Dates, slabs, percentages should be definite and told in advance.	In terms of understanding the tax structure, computing, filing and paying of taxes.

How does the Tax-to-GDP ratio influence Taxation in India’s Fiscal Health and Economic Resilience? #

The size of a country’s tax resources in relation to its GDP.

HIGH TAX TO GDP	LOW TAX TO GDP
Financial position of the country is good. It reduces a government’s dependence on borrowings Tax buoyancy is strong	Constrains the government to spend and puts pressure on the government to meet its fiscal deficit targets.

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Taxation in India: Tax Incidence, Impact, Shifting and Base #

Tax Incidence	It is the one who actually pays tax. True burden of a tax is given by incidence and not impact.
Tax Impact	It is the entity on whom tax is imposed. The entity has the legal responsibility to pay taxes.
Tax Shifting	When incidence of a tax differs from the impact of the tax, it is tax shifting.
Tax base	Volume of goods and services on which tax is imposed

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Chronicles of Taxation in Independent India #

YEAR	COMMITEE	IMPACT
1991-1993	Chelliah Committee	The tax reforms began with Chelliah committee recommendations for reforming India’s tax system
1986	JHA Committee	VAT introduced. Recommended the transforming of Union excise duties into a modified value added tax (MODVAT)
2002	Vijay Kelkar Committee	Abolition of wealth tax. Abolish Minimum Alternative Task,
2003	Kelkar Task Force	Fiscal Responsibility and Budget Management (FRBM) recommends GST
2006		launch of GST was announced from 2010
2015	Asim Das Committee	State Level VAT was introduced
2014-16		Introduces 122nd Constitutional Amendment Bill 2014 in 16th Lok Sabha. Ultimately, it was passed became 101st Constitutional Amendment Act, 2016

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Essential Elements of Effective Taxation in India #

FAIRNESS– both in terms of Horizontal equity and Vertical equity. Individuals in identical or similar situations paying identical or similar taxes is known as horizontal equity. When people in higher tax brackets pay more taxes, it is known as vertical equity.
EFFICIENCY- should be able to raise resources via taxes with least amount of difficulty to the taxpayers.
SIMPLICITY– in terms of understanding the tax structure, computing, filing and paying of taxes. This will increase Tax compliance among the masses and in turn increase the revenue resource of the government.
FLEXIBLE-should be able to change according to the needs of the time.
TRANSPARENT– The individual assessment of taxes, the total collection, the amount spent on public goods using those resources etc should be in a transparent manner.

Taxation Methods in India #

PROGRESSIVE TAX– As Income increases the tax increases. E.g.-Income Tax.
REGRESSIVE TAX-The tax rate decreases as the amount subject to taxation increases. It is applied uniformly so it takes a larger percentage of income from low-income earners than from high-income earners and hence is considered regressive in nature. e.g.- Sales Tax
PROPORTIONAL TAX– where the same percentage tax is levied on everyone regardless of income.
RETROSPECTIVE TAXATION– It allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from time behind the date on which the law is passed. Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes.

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Central Taxes	State Taxes
Central Excise duty Additional duties of excise Excise duty levied under Medicinal & Toilet Preparation Act Additional duties of customs (CVD & SAD) Service Tax Surcharges & Cesses	State VAT / Sales Tax Central Sales Tax Purchase Tax Entertainment Tax (other than those levied by local bodies) Luxury Tax Entry Tax (A11 forms) Taxes on lottery, betting & gambling Surcharges Access

Types of Taxation in India: Direct and Indirect Tax Systems #

DIRECT TAX	Direct tax is a type of tax where the incidence and impact of taxation fall on the same entity. Incidence = Impact. e.g.- Income Tax, Corporation Tax.
INDIRECT TAX	where the incidence and impact of taxation does not fall on the same entity. Taxes that can be shifted from one individual to another like sales tax, entertainment tax, excise duty. Incidence ≠ Impact.

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Proposed Direct Tax Code (DTC) in India #

The Task Force, initially headed by former CBDT Member (Legislation) Arbind Modi and later on by Akhilesh Ranjan,was constituted in November 2017 in order to review the Income-tax Act and to draft a new Direct Tax Law.
The proposals in the draft code are aimed at bringing more certainty to taxation of personal and corporate income and capital gains, and at bringing the gist of numerous judicial pronouncements made since 1961, when the current tax law came into force, in one place for easy reference.

Direct Taxation in India: Types and Implications #

DIRECT TAXES	UNION GOVT.	STATE GOVT.
On Income	Corporation Tax (6.81 in RS lakh crores) Minimum Alternative Tax (MAT) Dividend Distribution tax, Capital Gains tax.	Agriculture tax, Professional tax
On Assets	Securities Transaction Tax, Commodities Transaction Tax	Land Revenue, Stamp/Registration duty. Property tax in urban areas.
On Expenditure	Fringe Benefit Tax, Gift Tax

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Share of taxes in descending order according to Budget 2020: GST > Corporation Tax > Income Tax > Union Excise Duty, Customs Duty

MAT: MAT is calculated at 18.5% on the book profit (the profit shown in the profit and loss account) or at the usual corporate rates, and whichever is higher is payable as tax. All companies in India, whether domestic or foreign, fall under this provision. MAT was later extended to cover non-corporate entities as well.

Corporate Taxation in India #

Google Tax/ Equalisation Levy/ GAFA Tax	To tax India revenue of foreign firms with no permanent establishments in India. With the intention of taxing the digital transactions -the income accruing to foreign e-commerce companies from India. GAFA TAX – France has taxed major companies – Google, Amazon, Facebook, Apple.
Minimum Alternative Tax	To facilitate the taxation of ‘zero tax companies’-the companies which show zero or negligible income to avoid tax, despite showing hefty book profits. They are liable to pay a certain % of their book profit. All companies in India, whether domestic or foreign, fall under this.
Angel Tax	It is the income tax payable by start-ups on capital raised via the issue of shares. To make sure that the money coming in was genuine and to minimise fraud.
Dividend Distribution Tax	It is a tax levied on dividends that a company pays to its shareholders out of its profits.

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Taxation on Financial Transactions in India #

Securities Transaction Tax	Tax levied at the time of purchase and sale of securities listed on stock exchanges.
Capital Gains Tax (CGT)	Any profit or gain that arises from the sale of a ‘capital asset’ is a Capital Gain and tax has to be paid on that, called the Capital Gains Tax. It can be short-term or long-term.
Commodities Transaction Tax	Applicable for those dealing in trading of commodities.
Tobin Tax/Robinhood Tax	Taxing short term currency market transactions to combat market volatility.

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Types of Indirect Taxation in India #

Ad Valorem Tax	It is based on the value of the transaction or the property. E.g. VAT.
VAT	VAT is an indirect tax having a multi-point tax collection- imposed and collected at different points of value addition chain. It has a cascading effect.
Excise Tax	On goods produced or manufactured in the country.
Customs Duty	On goods imported and exported out of the country.

The total indirect tax collections are estimated to be Rs 10,96,520 crore in 2020-21. Of this, the government has estimated to raise Rs 6,90,500 crore from GST.

Goods and Services Tax (GST) in India: Features, Implementation and Taxation Structure #

Established by the 101st Constitutional Amendment Act, on the lines of “One Nation One Tax”.
The Parliament and the state legislatures have concurrent powers to implement GST
It is a destination-based single tax.
Tax slabs are 0%, 5%, 12%, 18%, 28%
3 taxes are applicable within GST:

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Centre levies the CENTRAL GST (CGST)
State levies STATE GST (SGST)
Centre levies INTEGRATED GST (IGST) on transactions

Parliament will compensate for any loss faced by the state.
Lottery, Gambling and Betting are also taxable under the Goods and Services Tax (GST) Act, 2017.

Legislation enabling GST implementation in India #

Central GST Act, 2017
Integrated GST Act,2017
GST (Compensation to States) Act, 2017
Union Territory GST Act, 2017
GST Constitutional 101 Amendment Act, 2016

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COMMODITIES OUTSIDE GST

Alcohol for human consumption,
Petroleum products,
Electricity, The supply of goods to the SEZ,
Supply of goods that come under zero rate
Fresh vegetables, fresh milk, cereal, meat etc.
Raw materials.

Benefits of GST in India #

For the Government	For the overall economy	For the State
Increase tax Compliance Create a unified common market Discourage Tax evasion Taxation Streamlining	Reduce corruption Bring about certainty Poverty Reduction Boost secondary sector	Expansion of the tax base. Increase Compliance. Enhance Investment Improve the Investment Scenario.

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How does the GST Council influence Taxation in India? (Art. 279A): #

It is a Constitutional body under Article 279A.
Decision – majority of 3/4th members.
Quorum is 1/2 of the total number of members of the council

Union Representations	Chairperson- Union Finance Minister. Minister of State for Revenue (Central Government) will be a member 1/3rd voting share
State Representations	The Minister of Finance from each State or Minister nominated by the States will be its member including Delhi and Puducherry. 2/3rd voting share Members of the Council from the states have to choose 1 amongst themselves to be the Vice chairperson of the council. They can also decide his term

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How does the GST Composition Scheme Simplify Taxation for Small Businesses in India? #

It is an option available to a registered taxpayer.
Small taxpayers can get rid of tedious GST formalities and pay GST at a fixed rate of turnover.
This scheme can be opted by any taxpayer whose turnover is less than Rs. 1.5 crore. In case of North-Eastern states and Himachal Pradesh, the limit is now Rs 75 lakh.

ADAVNTAGES	DISADVANTAGES
Lesser compliance (returns, maintaining books of record, issuance of invoices).	A limited territory of business.
Limited tax liability.	No Input Tax Credit available to composition dealers
High liquidity as taxes are at a lower rate.	The taxpayer will not be eligible to supply non-taxable goods under GST such as alcohol and goods through an e-commerce portal.

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Key Organizations Driving GST Implementation in India #

National Anti Profiteering Authority (NAPA)	Under Central Goods and Services Tax Act, 2017. It is the institutional mechanism to check the unfair profit-making activities by the trading community and to ensure that the benefits of the GST are passed on to the consumers. NAPA is headed by a senior officer of the level of a Secretary to the Government of India and shall have four technical members from the Centre and/or the States.
GSTN Network	It is a non-profit, government organization. It will manage the entire IT system of the GST portal 100% shares are owned by the Centre and State government. It will establish a uniform interface for the taxpayer and also create a common and shared IT infrastructure between the Centre and States. The GSTN will handle: Invoices + Various returns + Registrations + Payments & Refunds.

Input Tax Credit Mechanism in India’s GST System #

It is a mechanism to avoid cascading of taxes.
Input credit means at the time of paying tax on output, one can reduce the tax one has already paid on inputs and just pay the balance amount.
Cross utilisation of input tax credit is available

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Reverse Charge Mechanism in India’s Taxation System #

The receiver becomes liable to pay the tax, i.e., the chargeability gets reversed.
Self-invoicing is to be done when you have purchased from an unregistered supplier and such purchase of goods or services falls under reverse charge.

Impact of the GST Compensation Cess on the Indian Tax System’s State Assistance #

It was introduced as relief for States for the loss of revenues arising from the implementation of GST.
As per the GST Act, states are guaranteed compensation for any revenue shortfall below 14% growth (base year 2015-16) for the first five years ending 2022.
GST compensation is paid using funds specifically collected as compensation cess- is levied on products considered to be sin or luxury goods.

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E-Way Bill System in India’s Taxation Framework #

It is an electronic way bill for movement of goods which can be generated on the e-Way Bill Portal
It was launched to:
Facilitate faster movement of goods.
Improve the turnaround time of vehicles.
It helps track intra-state as well as inter-state movements of goods of value exceeding Rs 50,000, for sales beyond 10 km in the Goods and Services Tax (GST) regime.

Tax Contribution in the Recommendations of the 15th Finance Commission in India #

Chairman – N K Singh.
Tax contribution/effort is added in this 15 finance commission
Key recommendations in the first report (2020-21 period) include:
The share of states in the centre’s taxes is recommended to be decreased from 42% during the 2015-20 period to 41% for 2020-21.
The 1% decrease is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the central government.

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INCOME DISTANCE

TAX EFFORT

DEMOGRAPHIC PERFORMANCE

It is the distance of the state’s income from the state with the highest income. States with lower per capita income would be given a higher share to maintain equity among states.

To reward states with higher tax collection efficiency.

Population data of 2011, to reward efforts made by states in controlling their population. States with a lower fertility ratio will be scored higher on this criterion.

Cascading Effect	It is a tax on tax. It makes the tax rate much higher than the original rate.
Tax Buoyancy	It measures the responsiveness of tax mobilisation to economic growth/GDP.
Tax Elasticity	% change in adjusted tax revenue ÷ % change in income.
Tax Expenditure/ Revenue Forgone	It is the opportunity cost of taxing at concessional rates like giving exemptions, deductions, rebates, etc. to the taxpayers.
Laffer’s Curve	Relationship between Government tax revenue and tax rates.
Pigouvian Tax	It is the tax on companies that create negative externalities and adverse effects on the society. e.g.- carbon emissions tax or a tax on plastic bags.
Tax Mitigation/ Tax Planning	It refers to financial planning for tax efficiency. It is not illegal or unethical. It is Financial Prudence.
Tax Avoidance	It is the use of legal methods to minimize the amount of income tax owed by an individual or a business by claiming as many deductions and credits as are allowable.
Tax Evasion	It is an illegal activity in which a person/entity deliberately avoids paying a true tax liability.
Tax Inversion	Form of tax avoidance where a firm bases its headquarters in a low tax country while keeping its material operations in the high tax countries.
Black Money	Funds earned through illegal activity or the income concealed from the tax authorities.
Money Laundering	It is an illegal process of making large amounts of money generated by a criminal activity, such as drug trafficking or terrorist funding, appear to have come from a legitimate source.
Tax Haven	It is an offshore country that offers little or no tax liability. Eg- Cayman-islands, Singapore etc.
Hawala	It is an informal way of money transfer. “money transfer without money movement.
Tax Terrorism	Undue exercise of power by tax authorities to levy taxes using legal or extra-legal means.
Advance Pricing Agreements	It is an agreement between a taxpayer and the tax authority determining the Transfer Pricing methodology for future years.
Transfer Pricing	Is the setting of the price for goods and services sold between controlled/ related legal entities to be situated in different countries within an enterprise.
Cess	It is imposed over and above the tax for a specific predetermined purpose like Swachh Bharat Cess. The revenue from cess is not kept under the Consolidated Fund of India. Cess is not to be shared with States Cess is resorted to only when there is a need to meet the particular expenditure for public welfare. Cess is not a permanent source of revenue for the government, and it is discontinued when the purpose of levying it is fulfilled. It can be levied on both indirect and direct taxes.
Surcharge	It is an additional charge on tax. The revenue from the surcharge is kept under the Consolidated Fund of India. Surcharge is not to be shared with states It is added to an existing tax and is not included in the stated price of the good or service. It is levied for extra services or to defray the cost of increased commodity pricing.
Project Saksham	It is a New Indirect Tax Network of the Central Board of Excise and Customs (CBEC). Helps in: Implementation of Goods and Services Tax. Extension of the Indian Customs Single Window Interface for Facilitating Trade (SWIFT).
Double Taxation Avoidance Agreement (DTAA)	DTAA is a tax treaty between any two/multiple countries. So that taxpayers can avoid paying double taxes in the source and resident country. India has DTAA with countries like Australia, Canada, Germany, Mauritius, Singapore, UAE, the UK and US.
Base Erosion And Profit Shifting	Companies shift their profits to other tax jurisdictions having lower tax rates, thereby eroding the tax base in India.
Multilateral Convention To Implement Measures To Prevent BEPS	It is an outcome of the OECD / G20 BEPS Project. INDIA has ratified BEPS- MULTILATERAL CONVENTION.
Prevention Of Money Laundering Act,2002	To combat money laundering in India. Under this, the Enforcement Directorate is empowered to conduct a Money Laundering investigation.
Vivaad Se Vishwas Scheme,2020	It is an amnesty scheme that offers a complete waiver on interest and penalty to the taxpayers who pay their pending taxes by March 31.
Sabka Vishwas Scheme,2019	Sabka Vishwas is a legacy dispute resolution scheme to free the large number of small taxpayers of their pending disputes with the tax administration.
Round Tripping	Money that leaves the country through various channels and makes its way back into the country often as foreign investment. This mostly involves black money and is allegedly often used for stock price manipulation.
Shell companies	These are typically corporate entities which do not have any active business operations or significant assets in their possession. The government views them with suspicion as some of them could be used for money laundering, tax evasion and other illegal activities.
Advanced Pricing Agreement	It is an agreement between the tax authority and MNC on the appropriate transfer pricing methodology for a certain period of time. Under this, the transfer price is fixed based on the “Arm’s length principle”. This principle states that the transfer price must be closer to the price at which goods and services are transacted between two unrelated entities.
Tax Compliance	Tax Compliance is the degree to which a taxpayer complies (or fails to comply) with the tax rules of his or her country, for example by declaring income, filing a return, and paying the tax due in a timely manner.
Grandfather Clause	A grandfather clause (or grandfather policy or grandfathering) is a provision in which an old rule continues to apply to some existing situations while a new rule will apply to all future cases. Those exempt from the new rule are said to have grandfather rights or acquired rights, or to have been grandfathered in.
Fiscal Drag	Fiscal drag is a concept where inflation and earnings growth may push more taxpayers into higher tax brackets. Therefore, fiscal drag has the effect of raising government tax revenue without explicitly raising tax rates.
Fiscal Cliff	The point at which tax cuts would expire, and spending cuts would be triggered.

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Angel Tax: Impact on Start-ups and Taxation in India #

Angel Tax is a tax that is levied on the funding received by start-ups from an external investor. However, this tax is levied when start-ups receive angel funding at a valuation higher than its ‘fair market value’. It is counted as income to the company and is taxed.
The entire investment is not taxed – only the amount that is considered above “fair value” valuations of the start-up, classified as ‘income from other sources’ in the Income Tax Act of India.

Long-Term Capital Gains Tax on Equity Investments in India’s Taxation System #

A capital gains tax is a tax levied on capital gains, profits an investor realizes when he sells a capital asset for a price that is higher than the purchase price.
Capital gains taxes are only triggered when an asset is realized, not while it is held by an investor.
Normally if an asset is held for less than 36 months, any gain arising from selling it is treated as a Short-Term Capital Gain (STCG) and taxed in your hands.
It becomes a ‘Long-Term’ Capital Gain (LTCG) if the asset is held for 36 months or more.
In case of shares and mutual funds, a holding period of 12 months or more qualifies as ‘long-term’.

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Key Institutions Shaping Taxation in India: Roles and Functions #

Organisation for Economic Cooperation and Development(OECD)	Established-1961. Aim- to stimulate economic progress and world trade. Most OECD members are high-income economies with a very high Human Development Index Headquarters: Paris, France; Total Members: 36. India is not a member, but a key economic partner. Reports and Indices by OECD- Government at a Glance 2017 report International Migration Outlook OECD Better Life Index
Enforcement Directorate	Has the task of enforcing– Foreign Exchange Management Act, 1999 (FEMA) and Prevention of Money Laundering Act, 2002 (PMLA). It also processes cases of fugitive/ fugitives from India under Fugitive Economic Offenders Act, 2018.
Financial Intelligence Unit	The central national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions, money laundering and related crimes FIU-IND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.
Central Board of Indirect Taxes and Customs and Central Board of Direct Taxes	Both are a part of the Department of Revenue under the Ministry of Finance created under the Central Boards of Revenue Act, 1963. The Central Board of Excise and Customs (CBEC) was renamed as the Central Board of Indirect Taxes and Customs (CBIC) in 2018 after the roll out of the Goods and Services Tax (GST). CBIC deals with the tasks of formulation of policy concerning levy and collection of Customs, Central Excise duties, Central Goods & Services Tax and Integrated GST, prevention of smuggling. CBDT provides inputs for policy and planning of direct taxes in India and is also responsible for the administration of direct tax laws through the Income Tax Department. Tax Administrative Reforms Commission (TARC)- Parthasarathi Shome- proposal to merge the Central Board of Direct Taxes (CBDT) and Central Board of Indirect Taxes and Customs (CBIC).

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