- Incidence of Tax : The point where tax looks as being imposed is known as the incidence of tax—the event of tax imposition.
- Impact of Tax : The point where tax makes its effect felt is known as the impact of tax—the after effect of tax imposition.
- Direct Tax : The tax which has incidence and impact both at the same point is the indirect tax —the person who is hit, the same person bleeds. As for example income tax, interest tax, etc.
- Indirect Tax : The tax which has incidence and impact at the different points is the indirect tax—the person who is hit does not bleed someone else's blood. As, for example, excise, sales tax, etc., are imposed on either the producers or the traders, but it is the general consumers who bear the burden of tax.
METHODS OF TAXATION
- Progressive Taxation : This method has increasing rates of tax for increasing value or volume on which the tax is being imposed. Indian income tax is a typical example of it. The idea here is less tax on the people who earn less and higher tax on the people who earn more—classifying income earners into different slabs.
- Regressive Taxation : This is just opposite to the progressive method having decreasing rates of tax for increasing value or volume on which the tax is being imposed. There are not any permanent or specific sectors for such taxes. As a provision of promotion, some sectors might be imposed with regressive taxes.
- Proportional Taxation : In such a taxation method, there is neither progression nor regression from the point of view rate of taxes point of view. Such taxes have fixed rates for every level of income or production, they are neutral from the poor or rich point view or from the point of view of the levels of production.
A GOOD TAX SYSTEM
There is a broad consensus on five principles of a good tax system, among
economists and the policymakers :
- Fairness Though : fairness (i.e., the first criteria of a good tax system) is not always easy to define, economists suggest inclusion of two elements in the tax system to make it fair namely, horizontal equity and vertical equity. Individuals in identical or similar situations paying identical or similar taxes is known as horizontal equity. When 'better off' people pay more taxes it is known as vertical equity.
- Efficiency : Efficiency of a tax system is its potential to affect or interfere the efficiency of the economy. A good tax system raises revenue with the least cost on the taxpayers and least interference on the allocation of resources in the economy.
- Administrative Simplicity : This is the third criterion which includes factors like computation, filing, collection, etc. of the taxes that all should be as simple as possible. Simplicity checks tax evasion too. Tax reform in India has simplification of tax as its major plank—also recommended by the Chelliah Committee.
- Flexibility : A good tax system has the scope of desirable modifications in it if there is any such need.
- Transparency : How much tax taxpayers are actually paying and what are they getting against it in the form of the public services should be ascertainable, i.e., the transparency factor.
METHODS OF EXPENDITURE
- Similar to the methods of taxation the modes of government expenditure are also of three types —progressive, Regressive and Proportional.
- At first instance it seems that as a country achieves better levels of development, sectoral and the item-wise expenditure of the economy must have decreasing trends.
- But practical experience shows that the level of expenditure needs enhancement everyday and economy always needs more and more revenues to fulfil the rising expenditures. That is why for economies the best form of government expenditure is the progressive expenditure.
- The best way of taxation is progressive and the best way of government expenditure is also progressive and they suit each other beautifully.
- Most of the economies around the world are having progressive taxation with progressive expenditure.
VALUE ADDED TAX
- The value added tax (VAT) is a method of tax collection as well as name of a state level tax (at present) in India. A tax collected at every stage of value addition, i.e., either by production or distribution is known as value added tax.
- Production of goods or services is nothing but stages of value additions where production of goods is done by the industrialists or manufacturers. But these goods require value addition by different service providers/ producers (the agents, the wholesalers and the retailers) before they reach the consumers.
- VAT method of tax collection is different from the non-VAT method in the sense that it is imposed and collected at different points of value addition chain, i.e., multi-point tax collection.
Need of VAT in India :
- Due to single point tax collection, Indian indirect tax collection system was price increasing (having cascading effect on the price) which was highly detrimental to the poor masses. Implementation of VAT will improve the purchasing capacity and so living standard of the poor people.
- India is having a federal political system where side by side the central government, states have also been given power to impose taxes and collect them. At the central level, there had been uniformity of taxes for the economy.
- With the process of economic reforms, India moved towards the market economy. And for this, firstly India needed to have a single market. Without uniformity at the state level taxes (uniform VAT) this was riot possible.
- India has been a country of high level tax evasion. By implementing VAT method of indirect tax collection, it becomes almost impossible to go for large scale tax evasion. To prove one's level of value addition, the purchase invoice/receipt is a must which ultimately makes it cross-check the level of production and sale in the economy.
GOODS AND SERVICES TAX
After implementing the state VAT, the Gol wanted to go for the proposed GST (Goods and Services Tax). This is aimed at integrating the indirect taxes of Centre and states into a single national tax—popularly known as the Single VAT of India. By creating a single market at the pan-India basis it will help the business and industry in a big way. The tax has potential to increase GDP up to 2%.
Implementation Process :
- The Government in 2006 decided to introduce the new tax since the financial year 2010-11. Lack of consensus between the centre and states kept the process delayed—to sort out the contentious issues, one after another, two independent expert committees submitted their advices to the Government.
- Finally, the Constitution (101st Amendment) Bill, 2016 was cleared by the Parliament by early August 2016—paving the way for its implementation. By late September 2016, the GST Council (GSTC) was created by the Government.
- The Council has been entrusted with the power to make recommendations to the Union and the States on various issues—rates, floor rates, exemption, etc.—related to GST.
- Finally, the new federal indirect tax GST was enforced by the Government on July 1, 2017.
Collection Performance :
- Despite rationalisation of rates, the Gross GST monthly collections crossed ₹1 lakh crore mark, for a total of 5 times during first 9 months of 2019-20 (including the consecutive months of November and December).
- Gross GST collections (centre and states taken together) totalled ₹8.05 lakh crore in the first 8 months of the financial year—showing a growth of 3.7 per cent over the corresponding period last year.
- Centre's GST collections for the same period registered a growth of 4.1 per cent over the corresponding period last year.
- Notably, the indirect tax receipts of Centre registered a negative growth of 0.9 per cent during this period over the corresponding period of last year.
Inducing Voluntary Compliance : To enhance voluntary compliance, Government took several behavioural initiatives (based on taxpayer's behaviour) in recent times, incorporating factors such as — deterrence; developing social and personal norms; reducing complexity; and enhancing fairness; and trust.
GST & Understanding of Economy :
- A large increase in the number of indirect taxpayers has been noticed; many have voluntarily chosen to be part of the GST, especially small enterprises that buy from large enterprises and want to avail themselves of input tax credits.
- The distribution of the GST base among the states is closely linked to their Gross State Domestic Product (GSDP), allaying fears of major producing states that the shift to the new system would undermine their tax collections.
- New data on the international exports of states suggests a strong co-relation between export performance and states' standard of living.
- India's exports are unusual in that the largest firms account for a much smaller share than in other comparable countries.
- Internal trade is about 60 per cent of GDP (even greater than estimated by the Economic Survey 2016-17) and compares very favourably with other large countries.
- India's formal sector non-farm payroll is substantially greater than currently believed. Formality defined in terms of being part of the GST net suggests a formal sector payroll of 53 per cent of the non-agricultural work force. However, it stands only at 31 per cent in terms of social security provisions.
- Similarly, the size of the formal sector (defined here as being either in the social security or GST net) is 13 per cent of total firms in the private non-agriculture sector but 93 per cent of their total turnover.
COMMODITIES TRANSACTION TAX
- The Commodities Transaction Tax (CTT), however, only for non-agricultural commodity futures at the rate of 0.01%.
- CTT aims at discouraging excessive speculation, which is detrimental to the market and to bring parity between securities market and commodities market such that there is no tax/regulatory arbitrage.
- The proposal of CTT also appears to have stemmed from the general policy of the government to widen the tax base.
- Commodities Transaction Tax (CTT) is a tax similar to Securities Transaction Tax (STT), proposed to be levied in India, on transactions done on the domestic commodity derivatives exchanges.
- Commodities Transaction Tax (CTT) is a tax similar to Securities Transaction Tax (STT), proposed to be levied in India, on transactions done on the domestic commodity derivatives exchanges. Globally, commodity derivatives are also considered as financial contracts. Hence CTT can also be considered as a type of 'financial transaction tax'.
SECURITIES TRANSACTION TAX
- The Securities Transaction Tax (STT) is a type of 'financial transaction tax' levied in India on transactions done on the domestic stock exchanges. The rates of STT are prescribed by the central government through its budget from time to time.
- In tax parlance, this is categorised as a direct tax. The tax came into effect from 1 October, 2004. In India, STT is collected for the Government of India by the stock exchanges. With charging of STT, long-term capital gains tax was made zero and short-term capital gains tax was reduced to 10%.
- The STT framework was subsequently reviewed by the central government in the year 2005, 2006, 2008, 2012 and 2013. The STT rates were revised upwards in the year 2005 and 2006 while it was reduced for certain segments in 2012 and 2013.
- The STT provisions were altered in the year 2008 such that for professional traders (brokers), STT came to be treated as an expense which can be deducted from the income instead of treating the same as an advance tax paid.
CAPITAL GAINS TAX
This is a direct tax and applies on the sales of all 'assets' if a profit (gain) has been made by the owner of the asset—a tax on the 'gains' one gets by selling assets.
- Short Term Capital Gain (STCG) : It applies 'if the Asset has been sold within 36 months of owning it'. In this case the 'rate' of this tax is similar to the normal income tax slab. But the period becomes '12 months' in cases of shares, mutual funds, units of the UTI and 'zero coupon bond'—in this case the 'rate' of this tax is 15 per cent.
- Long Term Capital Gain (LTCG) : It applies 'if the asset has been sold after 36 months of owning it'. In this case the 'rate' of this tax is 20 per cent. In cases of shares, mutual funds, units of the UTI and 'zero coupon bond' there was 'exemption' (zero tax) though, recently, a LTCCL of 10 per cent (above ₹1 lakh of capital gains) was introduced on them by the Government.
MINIMUM ALTERNATE TAX
- The Minimum Alternate Tax (MAT) is a direct tax imposed on the 'zero tax' companies at the rate of 18.5 per cent on their book profit. This was first imposed in 1997-98.
- Income tax is paid as per the provisions of the Income Tax Act (IT Act), but companies calculate their profit (through profit and loss account) as per the provisions of the Companies Act. The IT Act allows several kinds of exemptions and other incentives from total income together with deductions on the gross income.
- Again, the rates of 'depreciation' under the Companies Act is higher than the IT Act. As a result of these exemptions, deductions and other incentives under IT Act together with higher depreciation under the Companies Act, companies show their taxable income either 'nil' or 'negative', and this way, the 'zero tax' companies emerge.
CORPORATE TAX REFORM
The joint stock companies (more popular as 'companies' and 'corporate' sector in India) pay a direct tax known as corporate income tax (popular as 'corporate tax') on their annual profits. The existing rates used to be 30% for the domestic and 35 per cent for the foreign companies, operating in the country.
Logic behind the reform : In recent times, the corporate tax was cut by many countries across the world to attract investment and create jobs. India's move was an immediate response to rate cuts initiated by Asian developing countries, which compete with India in the global export markets. After the reform move, the corporate tax rate in India (for new manufacturing companies in particular), is lower than most of the ASEAN countries.
DIVIDEND DISTRIBUTION TAX
- The ownership of joint stock companies (i.e. the Ltd. firms) rests in the hands of their shareholders. Thus, such companies pay dividend (i.e. a part of profit) to their shareholders once they book operating profits.
- The dividend paid (distributed) by the companies to the shareholders used to attract a direct tax in India known as the dividend distribution tax (DDT). It means, before dividend to get paid to the shareholders, the DDT was to be paid to the tax department.
- The DDT resulted in increasing the tax burden for investors who already pay an income tax (i.e. corporate income tax) on their annual profits. This used to pinch those investors who are liable to pay tax less than the rate of DDT if the dividend income is included in their personal income—as personal income tax has various slabs.
- There has been a divergence between the official tax rate and effective tax rate in India—defined as the ratio of total tax collected to the aggregate tax base. The divergence occurs mainly on account of tax exemptions.
- Tax expenditure is also known as revenue forgone. But such forgone taxes does not necessarily mean that they have been waived off by the government. Better, it should be interpreted as incentives given by the government to promote certain sectors, in absence of which they may not have come up.
- Collection rate is the ratio of total customs revenue and the total value of imports for a year. This is an indicator of overall incidence of customs including countervailing duties (CVD) and special additional duties (SAD) on imports.
- Several exemptions are offered by the Gol in customs duty on a variety of imports. This is the reason why India's customs collection does not increase as much its import increase.
LEGITIMACY AND TAXATION
- India commenced with a broad-based tax reforms programme in 1991 as an important part of the economic reforms process.
- Simplifying tax structure, cutting rate of taxes, enhancing tax compliance and broadening the tax base are the major contours of this reform programme.
- But even today, India has not fully translated its democratic vigour into commensurately strong fiscal capacity. The tax base of India is still not adequate.
- To build fiscal capacity it is essential to create legitimacy in the state. In this regard the Economic Survey 2015-16 presented a very timely and suitable piece of analysis.
- The document adds that to build fiscal capacity the government needs to put in place a better tax regime which is only possible once the government is able to enhance its legitimacy among the citizens.
INCOME AND CONSUMPTION ANOMALY
India's tax to GDP ratio is very low, and the proportion of direct tax to indirect tax is not optimal from the view point of social justice. The data released by the Government indicate that India's direct tax collection is not commensurate with the income and consumption pattern of the people:
- Corporate tax : As against 5.6 crore informal sector (unorganised sector) individual enterprises and firms doing small business, of which 1.81 crore filed tax returns. Out of the 13.94 lakh companies registered in India, 5.97 lakh filed tax returns for 2016-17.
- Individual income tax : As against estimated 4.2 crore persons engaged in organised sector employment, the number of individuals filing return for salary income are only 1.74 crore. In 2015-16 (Assessment Year 2016-17), a total of 3.7 crore individuals filed income tax returns.
- Impact of Demonetization : As per the Economic Survey 2017-18, one of the aims of demonetization and the GST (Goods and Services Tax) was to increase the formalization of the economy and bring more people into the income tax net, which includes only about 59.3 million individual taxpayers (filers and those whose tax is deducted at source in 2015-16), equivalent to 24.7 per cent of the estimated non-agricultural workforce.
EASE OF PAYING TAXES
A comparative picture of ease of paying taxes in India and few other countries (especially, the peers like China, Brazil and Indonesia) are being summarised :
- India's rank in ease of paying taxes has however, improved from 156 in 2014 to 115 in 2019 but it has been much below expectations.
- India performs lowly in case of number of tax payments—while in India the number is 12 (from 59 of 2009), it is only 7 in China, 10 in Brazil and 26 in Indonesia.
- Hours taken per year in paying taxes are also comparatively higher in India— 250-254 hours in India, while only 138 in China, 1501 in Brazil (quite higher) and 191 in Indonesia.
- In New Zealand it takes only 140 hours per year in paying taxes. On this front, however, the situation has deteriorated in the country—time spent in paying taxes got just doubled in the last decade (2009-19).
- India trails in case of total tax payable (per cent of gross profits) in comparison to most of the peers also—while it is 49.7 for India, it is 59.2 for China, 65.1 for Brazil and 30.1 for Indonesia.
- In case of paying taxes, although Indonesia (26) has more than double the number of payments per year than India (10-12), its citizens spend far less time in paying them than India. Brazil seems to fare particularly poor in this segment.
SIMPLIFICATION OF DIRECT TAX SYSTEM
Moving towards direct tax reforms the Government has effected many fundamental changes in the tax administration—major reforms and their impact are as briefed :
- Significant increase in tax collections from ₹ 6.38 lakh crores in 2013-14 to almost ₹12 lakh crores in 2018-19
- Tax base growth rate of 80 per cent—with 6.85 crore tax returns filed in 2018-19 (in comparison to 3.79 crore of 2013-14).
- Tax department now functions online—the interface of tax payers with the tax department has become much simpler and largely faceless.
- Returns, assessments, refunds and queries all are now undertaken online— around 99.54 per cent of the income-tax returns were accepted as they were filed in 2017-18.
- By late 2018, Government approved a path breaking, technology intensive project to transform the tax department into a more assessee-friendly one under which all returns will be processed in 24 hours and refunds issued simultaneously.
- As per the proposal, by 2020-21, almost all verification and assessment of returns selected for scrutiny to be done electronically 'without any personal interface' between taxpayers and tax officers.
OUTLOOK FOR FUTURE
- The process of tax reforms has been slower especially in case of indirect taxes, its positive outcomes have encouraged the country to go for further reforms.
- Together with enhancing legitimacy in state, there is a need to making taxpayers aware about the need of filing their tax returns.
- Enhancing tax compliance is the need of hour, especially in case of the personal income tax. There needs a policy framework to be initiated to induce behavioural change in the taxpayers.
- The technical glitches related to the GST filing system should be corrected as soon as possible to lessen unnecessary harassment faced by the tax filers
- Enhancing ease of paying taxes is an essential part of good tax system. In this regard India should take lessons from the peers like China, Brazil and Indonesia other than New Zealand.
- Presence of the trust between taxpayers and the tax department is essential for encouraging voluntary compliance from the tax filers. For this to be done, Government should put in place an effective and transparent tax administration—reducing 'human interface' should be tried with increased pace.
- The presence of 'fear' and 'distrust' for the tax department in the minds of taxpayers dilutes tax filing and they need to be corrected in medium to longer term.
- Litigations and involved delays cause enormous damage to the exchequer besides harassing the taxpayers and wasting precious time of the appellate and various courts. All possible alternatives should be utilised to resolve them in speedier manner.