What is Tax?
Taxes are the compulsory contribution by the citizens of a country for meeting different government expenditures. There are three stages in the imposition of tax by the government. The first step is the declaration of the liability by the Government i.e. what are all the incomes chargeable to tax, the second one is the assessment and tax payment by persons and the last one is the method of recovery of tax if tax was not paid on time.
Table of Contents
- 1 What is Tax?
- 2 Indian Tax Structure
- 2.1 Scientific Division of Tax Powers
- 2.2 Multiplicity of Tax Structure
- 2.3 Larger share of Indirect Taxes
- 2.4 Insufficient Tax Revenue
- 2.5 Greater Importance to Sate Government in Federal Fiscal System
- 2.6 Incidence of Taxation
- 2.7 Progressiveness in Tax Structure
- 2.8 Narrow Base
- 2.9 Complexity of Indian Tax Laws
- 2.10 Integration between Centre and Sate Revenue
- 3 Objectives of Taxation
- 4 Types of Taxes in India
Tax planning and management focus on the efficient administration of tax procedures and the minimization of tax liability through eligible schemes. Through this chapter, we can discuss the basic concepts of Tax Planning, Tax Management, Tax Evasion and Tax Avoidance.
Indian Tax Structure
Following are the features of the Indian tax structure explained briefly:
- Scientific Division of Tax Powers
- Multiplicity of Tax Structure
- Larger share of Indirect Taxes
- Insufficient Tax Revenue
- Greater Importance to Sate Government in Federal Fiscal System
- Incidence of Taxation
- Progressiveness in Tax Structure
- Narrow Base
- Complexity of Indian Tax Laws
- Integration between Centre and Sate Revenue
Scientific Division of Tax Powers
India being a federation, there is the existence of a multi-level finance system. The constitution of India forms the basis of division of powers into (a) Union (b) State and(c) Concurrent. Based on this the constitution has also made a provision for the division of tax powers between the centre and the states.
The area and sphere of taxation of centre and state are clearly demarcated as per constitutional provision. Tax is in the purview of 50 percent of its revenue the central government. Some taxes are again levied by the Central government and the proceeds of such taxes are divided between the centre and the state governments.
Multiplicity of Tax Structure
India is having a broad-based and extensive tax structure. Its main feature is the existence of a multiplicity of taxes. There are both union government taxes and state government taxes. The tax structure includes both dried and indirect taxes. In the case of states, indirect taxes play a dominant role, in the composition of tax revenue.
Among the direct taxes imposed in India, the most important is the income tax. Other prominent taxes are wealth tax capital gains tax, gift tax etc. The indirect taxes in India Consists of various taxes like excise duties, customs duties, etc. The most important taxes levied by the union government are income tax, corporation tax, central excise duties, wealth tax, gift tax, custom duties etc.
The state governments main taxes are land revenue, sale tax, state excise duties entertainment tax, stamp and registration duties etc. The gross tax revenue of the Central Government grew by 17.6 percent and 19.9 percent in 2003-04 and 2004 05, respectively.
In India, in the total tax revenue there is the domination of indirect taxes over direct taxes. Indirect taxes shared 63% in 1950 51 where it increased to 77% in 2001-02. If shows that because of the undeveloped character of the economy and glaring inequality in income, the scope of direct taxes is limited.
Insufficient Tax Revenue
In spite of the rising trend in tax revenue, the total revenue remained small when compared to developed countries. The tax GDP ratio generally remained in the range of 8 percent to 9 percent in India ( E.Survey. 2005-06) whereas it is very high in countries like Sweden, France, West Germany, UK, USA, etc. where the share ranges between 30 to 40 percent.
Greater Importance to Sate Government in Federal Fiscal System
In Indian fiscal federalism, much importance is assigned to state governments. The field within which tax revenue, are raised and spend regularly is very wide in India when compared to many federal governments. This reflects the importance of state government in our federal system. This is because of the growing responsibilities of the state government in the discharge of developmental activities.
Incidence of Taxation
In India the incidence of taxation is much higher in urban areas than in rural areas this is because of the predominance of agriculture in the rural areas and the low income of rural households. The urban population depends more on the service and business sector and enjoys comparatively higher income and taxpaying capacity.
Progressiveness in Tax Structure
The Indian tax structure is framed in such a way that all indices of ability to pay is taxed. The direct tax is framed in such a way that as the tax base increases, the tax rate also rises sharply. Excise duties are levied and collected discriminately, depending on the type of commodity and the class of consumers.
Fiscal experts opine that the tax base is very narrow in India in the case of both direct and indirect taxes. A planning commission estimate shows that only one percent of the working population comes under the preview of direct tax. In 2000 01, total income tax on the corporate income was only 2.6 percent GDP. Out of a population of more than 100 crores, around 10 million are coming under the Income tax belt.
The indirect tax to GDP ratio is only 5.4 percent in 2003- 04. The service sector, though contributing the largest share in GDP was not subject to tax till 1993-94. Service tax was introduced in the year 1994-95. The service sector, even though accounts for more than 50 percent of GDP, contributed Rs. 14200/- Crores as tax in 2004- 05. This is a small share when compared to the vast potential from this sector.
Complexity of Indian Tax Laws
With the intension of broad based tax system, a plethora of changes have been introduced in the tax structure. However both direct and Indirect tax laws are highly complex, with a lot of loopholes which enable the people to avoid as well as to evade taxes.
In this context, Prof. Kaldore observe ”there are definitional defects in Indian tax systems. Which gives elaborate power to tax authorities to interpret tax laws according to their whims and fancies. This has generated wide spread corruption in tax department “.
Integration between Centre and Sate Revenue
After independence concrete efforts were made to organize the tax structure scientifically in tune with the requirements of a federal set of government. At present, there is well-organized machinery for the collection distribution and expenditure of the revenue. Now the tax system is well structured to generate sufficient revenue to meet the requirements of development objectives.
However, we can point out a number of shortcomings in the Indian tax structure. It is usually argued that the Indian tax system is unscientific because it doesn’t; provide any simulation for production investment and saving activities of the government.
Many tax laws are stringent and rigid which punishes prudence and virtue, but rewards corruption and evasion. This unscientific base of the tax system is pinpointed as a factor responsible for generating black money and encouraging tax evasion. Compared to developed countries like Japan, Australia USA etc.
Objectives of Taxation
Tax is the permanent instrument for collecting revenues. It is a major source of revenue in the developed world and has been appearing as an important source of revenue in the developing world as well. It has been an instrument of social and economic policy for the government.
The main objectives of tax are as follows:
- Raise More Revenue
- Prevent Concentration of Wealth in A Few Hands
- Redistribute Wealth for Common Good
- Boost up the Economy
- Reduce Unemployment
- Remove Regional Disparities
Raise More Revenue
The fundamental objective of taxation is to finance government expenditure. The government requires carrying out various development and welfare activities in the country. For this, it needs a huge amount of funds. The government collects funds by imposing taxes. So, raising more and more revenues has been an important objective of tax.
Prevent Concentration of Wealth in A Few Hands
Tax is imposed on persons according to their income level. High earners are imposed on high taxes through a progressive tax system. This prevents wealth from being concentrated in a few hands of the rich. So, narrowing the gap between rich and poor is another objective of tax.
Redistribute Wealth for Common Good
Tax collected by the government is expended for carrying out various welfare activities. In this way, the wealth of the rich is redistributed to the whole community.
Boost up the Economy
Tax serves as an instrument for promoting economic growth, stability and efficiency. The government controls or expands the economic activities of the country by providing various concessions, rebates and other facilities. An effective tax system can boost up the economy.
Similarly, taxes can correct for externalities and other forms of market failure (such as monopoly). Import taxes may control imports and therefore help the country’s international balance of payments and protect industries from overseas competition.
The government can reduce the unemployment problem in the country by promoting various employment generating activities. Industries established in remote parts or industries providing more employees are given more facilities. As a result, the unemployment problem can be reduced to a great extent through a liberal tax policy.
Remove Regional Disparities
The regional disparity has been a chronic problem for developing countries. Tax is one of the ways through which regional disparities can be minimized. The government provides tax exemptions or concessions for industries established or activities carried out in backward areas. This will help increase economic activities in those areas and ultimately regional disparity reduces to a minimum.
Types of Taxes in India
Taxes have been broadly categorized into direct tax and indirect taxes. Direct taxes include those taxes which are paid by the person on whom these are levied like income tax, wealth tax etc. On the other hand, indirect taxes are levied on one person, but paid by another e.g. sales tax and customs duty.
Two major categories of types of taxes in India are:
Those taxes whose burden cannot be shifted to others and the person who pays these to the government has to bear it are called direct taxes. In other words, a direct tax is imposed on an individual or a group of individuals, which affects them directly i.e, which they have to pay to the government directly. A direct tax can be of different types: Income Tax, Wealth Tax and Gift Tax.
An indirect tax is one in which the burden can be shifted to others. The taxpayer is not the tax bearer. The impact and incidence of indirect taxes are on different persons. An indirect tax is levied on and collected from a person who manages to pass it on to some other person or persons on whom the real burden of the tax falls. For e.g. commodity taxes or sales tax, excise duty, customs duties, etc. are indirect taxes.
Difference Between Direct and Indirect Taxes
|Direct Tax||Indirect Tax|
|Payer of tax and sufferer of tax one and same (i.e. impact and incidence on the same person).||The Payer of tax is not the sufferer of tax whereas the sufferer of tax is not paying directly to the Government (i.e. impact on one head and incidence on the other head).|
|Income-based taxes.||Income-based taxes.|
|The rate of taxes is different from person to person.||The rate of duties is not different from person to person.|
|Entire revenue goes to the Central Government of India.||Revenue source to Central Government of India as well as State Governments.|
|The Central Board of Direct Taxes (CBDT) is an important part of the Department of Revenue, Ministry of Finance (India). It plays a vital role in planning & implementing direct taxes policy in India. It also monitors direct taxes law followed by Income Tax Departments.||The Central Board of Excise and Customs (CBE&C) is an important part of the Department of Revenue, Ministry of Finance (India). It plays a vital role in planning & implementing indirect taxes policy in India. It also monitors indirect taxes law followed by Excise and Customs Departments.|