Taxation
➢ Tax is a compulsory levy that the state imposes on the citizens. The tax is a
binding force which connects the two important pillars of the democracy i.e.
state/government with citizens. Each citizen enjoys certain entitlements from
government and in return has to contribute to the government in the form of tax
payments. If the citizen doesn’t pay the tax, either he becomes a free rider
(consumes services of the government but doesn’t pay tax) or exits (doesn’t
consume the services of the government). In either case, the accountability
factor on the government reduces. So it could be said that tax is an agreement
between the state and the citizen wherein the government promises to provide
certain entitlements to the citizen and in return the citizen makes the tax
payments.
➢ Types of Taxation Systems
Progressive Regressive
As the income goes up, taxes also go up As the income goes up, taxes go down
Income inequality is reduced Income inequality is increased
Eg-Income Tax
Direct Indirect
Incidence and impact are on the same person
Incidence on one person and impact is someone else
Contribution is greater than 50% Contribution is relatively lesser
Major contributors are corporate and income taxes
Major contributors are excise (cenvat), customs and services
Ex-income tax, wealth tax, corporate tax
Ex- Cenvat, sales tax, service tax etc
o Surcharge- is a charge imposed whenever the income crosses certain level
Cess- a tax imposed to achieve a certain objective
o Countervailing duty- imposed so as to bring the prices of imports on par
with domestic prices
Anti dumping duty- imposed by the government whenever a country
exports the goods at a lower prices
➢ Features of Indian Taxation System
o Progressive-most of the taxation imposed by the government are in the
form of progressive taxes eg-Corporate tax, Income tax etc
o Complex- even though the various reforms have been implemented over a
period of time in India the taxation structure is considered to be complex
with respect to exemptions, filing etc
o Loopholes- there are various loopholes using which tax evasion is followed
o No tax on income from agriculture
➢ Some of the taxes
o Service Tax
▪ Introduced in 1994-95 with 3 services
▪ Levied by central government
▪ Gradually the list was expanded and covered more than 100
services
▪ From 2012 shifted to negative list approach
▪ 2015 it was increased to 14% (inclusive of 3% education cess)
▪ Present rate is 15%
Advalorem Specific
Imposed on the basis value of the commodity
Imposed based on the specific attributes of the commodities
Chelliah committee recommended more of these taxes
Ex- sales tax, VAT etc Ex- stamp duty, Excise duty etc
o Value Added Tax
▪ VAT is a multi-point tax collection wherein the
producer/intermediary will pay certain tax based on the value
addition
▪ VAT-central VAT (CENVAT) and state VAT (Sales Tax)
▪ The offsetting is allowed in case of movement of goods either is in
the stage of value addition or in the process of being sold from one
distributor to another distributor
▪ The VAT was introduced in order to reduce the cascading effect
➢ CESS-
o Imposed as per the article 270
o Recent Cesses-Swachh Bharat Cess, Krishi Kalyan Cess
➢ Presumptive Taxation
o Refers to imposition of tax on the presumption that a certain
individual/entity/company earns/enjoys profits enough to be able to pay
tax, yet they avoid taxes. The government imposes taxes in such scenario
referred to as Presumptive taxation
o MAT
▪ MAT is a tax levied on profit-making entities that don’t pay
corporate income tax because of exemptions and incentives
▪ Tax levied on book profits
▪ FPIs completely exempted
▪ Justice A P Shah Committee recommended that FPIs cannot be
levied MAT
o GAAR (General Anti-Avoidance Rules)
▪ These are a set of provisions which try and check tax avoidance.
GAAR would come into implementation from 1st April
▪ Observations of Parliamentary Standing Committee
• GAAR gives arbitrary powers to tax authorities to challenge
complex deals
• Onus lies on the taxpayer
• Created uncertainty and ambiguity amongst investors
▪ Parthasarathi Shome Committee
• No retrospective application
• Deferred till 2016-17
• Not applicable on Singapore and Mauritius
• Not on intra-group transactions
• No short-term capital gains tax
• Rate of STT must be increased
➢ Problems with Indian Taxation System
o The income tax exemption limit has been periodically increased which has
led to more income tax payers being exempted. The last time it was raised
from Rs 1,50,000 in 2012-13, as a result of this exemption government had
to forego Rs 31500 crore
o Problems with coverage
▪ Only 5.5% of the income earners pay tax
▪ The ratio of tax payers to population in voting age comes around to
4%, which should be more than 23%
o Government provides a large tax exemptions to the corporate sector
which is a revenue foregone
o Indian Government under-taxes as well as under spends compared to the
developed countries
o As a result of presence of unorganized sector, more than 85% of the
economy is not covered under taxation
GST
The GST will be a revolutionary tax reform which will streamline the indirect tax
structure in India. Before India implements GST, throughout the world more than 140
countries have shifted to GST (Malaysia implemented it in 2015).
GST bill was introduced (through 115th CAB) during UPA II, as the Lok Sabha was
dissolved the bill lapsed and the new NDA government has re-introduced it as 122nd
CAB. The features of the bill are
• It will be subsuming all the indirect taxes (some exemptions have been provided
as of now)
• It will streamlining the taxation procedures (only indirect taxes)
• It will be a dual GST-central and state GST
• It will lead to creation of GST council
o Set up by the president
o Union Finance Minister + state Finance ministers
o Functions-model GST laws, taxes/surcharge/cess to be levied by the centre
and state, exemptions to be given etc
o GST council to decide regarding resolution of disputes
• It provides for the input credit across segments
• It further reduces the cascading effect
• The states loosing revenues will be provided compensation
• It will lead to formation of national market
GST vs. Old method
Old taxation method GST
Goods and services were taxed separately No differentiation between Goods and services
Different states different tax rates Uniform tax rates across the country
National market not possible National market can be established
Tax on production (origin based taxation) Tax on consumption (target based taxation)
Cascading effect No cascading effect
Many indirect taxes Only one
Setting off in some cases not allowed Setting off is allowed
Advantages of GST
• Overall o It will lead to a unified national market by bringing in uniform indirect tax
rates, and bringing in certainty. GST would make doing business in India tax neutral, irrespective of the choice of place of doing business
o It will be remove the cascading effect thereby removing the hidden cost of doing business. This reduction in costs is expected to increase the competitiveness.
• For companies o GST will have a robust IT framework which will compliances such as filing
of registrations, returns, payments etc much more easy and transparent
• For Central and State Governments o The multiplicity of taxes is being replaced by a single robust system with
end-to-end IT framework. This will make it easier and simpler to administer the taxes
o Will lead to better compliance and increased revenues and also lower the cost of collection of taxes (will lead to revenue efficiency)
• For the consumer o Because of removal of cascading effect and efficient method of imposing
and collecting taxes, the tax burden will come down on the common man
Concerns of the states
• The compensation to be paid – the states want a mechanism to be laid down
regarding the payment of compensation (full) to be paid to them for the next 5
years
• The rate of GST
• Dispute Resolution Mechanism – in the original Bill there was a proposal to set up
an Independent Tax Dispute Settlement Authority but was watered down in the
bill of the present BJP government under which the GST council will have the
power to set up Dispute Resolution Mechanism on case-to-case basis. Some of
the states agree to this and some are not comfortable.
Subramanian committee
• The design of the tax must be correct hence it must simplify tax administration,
protect revenues and encourage compliance
• Three rates-Standard rate (17% to 18%),Lower rate (12%),Sin rate/demerit rate
(40%) . over a period India must impose a single tax that would increase the
simplification and compliance
• The exemption of the goods and services under GST will lead to market
distortions and increased standard rate, hence the exemption list must be very
narrow and consist of the goods and services consumed by the poor. Hence
alcohol, real estate etc must be brought under GST
• The tax base of the central government must be the same as that of the state
government (as central government exempts around 300 goods whereas the
state governments exempt only 90 goods)
• 1% Interstate GST should not be implemented as it will prohibit formation of
national market
• The shift to new tax regime may not lead to huge losses of the states, hence fair
and timely compensation must be provided by the centre to reinforce trust
between centre and states
• GST implementation must be evaluated every 1 or 2 years
Hurdles in implementing GST in India
• Deciding the tax rate (there is a huge debate going on regarding this and the FM
has said it would be decided by the GST council)
• Inflationary pressures
• Promoting the adoption amongst the small companies
• Training tax collectors (as per one of the estimates there is a need to train 60000
tax collectors), IT backbone, bringing the companies up to speed
• Deciding the threshold (annual turnover of the company beyond which the GST
will be applicable-Centre and some states are vying for Rs 25 lakh whereas others
want it to be Rs 10 lakh)
• GSTN (GST Network)- it’s a SPV formed by the government wherein the central
government and the state governments hold 24.5% stake each and remaining
51% is held by the private companies HDFC Bank, HDFC Ltd, ICICI Bank, NSE
Strategic Investment Corporation and LIC Housing Finance (some of them have a
significant of foreign holding). The argument is that the tax information is very
sensitive and should completely come under the control of the government. The
GSTN provides the IT framework/backbone for the implementation of the GST.
GSTN will be set up as a section 25 company and its functions will involve
o Common IT infrastructure to central & state governments, tax payers and
other stakeholders
o Back end services to be provided to the state/central tax department
Global Experience of GST implementation
• The rationalization of tax rates has been the biggest hurdle in various countries.
The only country which has successfully implemented dual GST with rationalized
rates is Canada which varied the tax rates many a times even after the
implementation.
• In some of the cases it has been observed that the implementation of GST has led
to inflationary spikes (in 1994, when GST was introduced in Singapore, it led to
inflation)
• Difficult to make the businesses comply with new tax regime. It was observed in
Malaysia that there was a huge resentment from the business community to
adapt a new tax regime even after giving more than 1.5 years. With very less time
remaining in India (to be implemented from 1st April 2017) it makes the task
more challenging (in Malaysia, sector specific papers regarding practices were
published which provided a smooth passage)
• The infrastructure, training etc. if not implemented well enough could lead to
problems with small, medium enterprises, delay input credits etc.
• Has been regressive in some instances i.e. it has more impact on the poor rather
than rich
Recent Initiatives
➢ TPRU and TPC
The Tax Administration Reforms Council (TARC) which was headed by
Parthasarathi Shome has made the following observations
o In the present scenario there are multiple bodies which give
recommendations-CBDT, CBEC
o The revenue secretary is not a tax expert but takes the call regarding these
taxes
o There is a lack of co-operation between CBDT and CBEC; and the selection
of members is based on seniority not on expertise
o India has one of the highest number of disputes and lowest rate of
recovery of tax arrears
o There’s absence of research based policy and impact assessment studies;
and ICT benefits have not been reaped
Hence the TARC has given the following recommendations
o The Pre-filing of tax returns must be made available to all the individuals
o CBDT and CBEC must be integrated in the next 10 years
o Post of Revenue Secretary must be abolished and the functions must be
allocated to two boards
Governing Council – to oversee the functioning of the two boards
Tax Council – to suggest policy and legislation
o There should be focus on specialization
o Retrospective legislation should be avoided
o Both the boards must start a drive to liquidate the current the current
cases
The Ministry of Finance announced the formation of the Tax Policy Research Unit
(TPRU) and the Tax Policy Council (TPC) on February 2, 2016
TPRU – Tax Policy Research Unit
o Functions
• Conduct studies on issues of fiscal and tax policies referred to it by CBDT and CBEC and will provide independent analysis of such issues
• Will prepare and disseminate policy papers and background papers on various tax policy issues
• To assist Tax Policy Council chaired by FM in taking appropriate tax policy decisions
• To co-operate with State Commercial Tax Departments. Tax Policy Council
o The Tax Policy Council will look at all the research findings coming from Tax Policy Research (TPRU) Unit and suggest broad policy measures for taxation.
o The Council will be advisory in nature, which will help the Government in identifying key policy decisions for taxation.
o Tax Policy Council under the Union Finance Minister with 9 other members will be constituted
POINTS TO BE COVERED
Taxation-concept
Types of taxation systems
Some concepts-GST, Capital gains tax, cess etc
Problems with Indian Taxation System
Progressive & Regressive
Direct & Indirect
Advalorem & Specific
Tax avoidance and Tax evasion
Surcharge & Cess
Countervailing & Antidumping
Types of Taxation Systems
GST-CASCADING EFFECT
A B CSelling
Price=₹ 100Selling
Price=₹ 130
Tax @ 10%
Will buy it
at ₹ 110 &
adds profit
of ₹ 20Tax @ 10%
Will buy it
at ₹ 143
GST-INPUT TAX CREDIT
A
Tax paid is ₹ 100
B
Tax paid is ₹ 120
C
Tax paid is ₹ 130
Tax to be paid
is ₹ 400
INPUTS
OUTPUT
Tax Paid to
the
government
is ₹ 50
WHY GST?
Cascading effect
Multiplicity of indirect taxes
Setting off not allowed/difficult in some case
The transportation costs will add to the costs
Lines between goods and services have blurred (eg-
IPR are considered goods for imposing sales tax and
as services for imposing service tax)
GST
Streamlining/subsuming all the indirect taxes-
one nation one indirect tax
First introduced in 2011 and again in December
2014
115th CAB and 122nd CAB
PROVISIONS OF GST BILL
The bill empowers both central and state governments
to take decisions/make laws regarding taxes
GST council
Set up by the president
Union Finance Minister + state Finance ministers
Functions-model GST laws, taxes/surcharge/cess to
be levied by the centre and state, exemptions to be
given etc
GST council to decide regarding resolution of disputes
PROVISIONS OF GST BILL
The additional Interstate GST will be levied by
central government (additional levy of 1%
withdrawn)
Exemption-alcoholic liquor for human
consumption, GST council to decide when to
impose taxes on crude petroleum, high speed
diesel, petrol, natural gas and Aviation Turbine
Fuel (ATF)
Compensation to be given for 5 years
OLD VS NEW
Old method GST
Goods and services were taxed
separately
No differentiation between Goods
and services
Different states different tax rates Uniform tax rates across the
country
National market not possible National market can be
established
Tax on production (origin based
taxation)
Tax on consumption (target/end
based taxation)
Cascading effect No cascading effect
Many indirect taxes Only one
Setting off in some cases not allowed Setting off is allowed
SUBRAMANIAN COMMITTEE
Simplify tax administration, protect revenues and encourage
compliance
Three rates-Standard rate (17% to 18%),Lower rate
(12%),Sin rate/demerit rate (40%)
Alcohol and real estate must be brought under GST
1% Interstate GST should not be implemented
Compensation to reinforce trust between centre and states
GST implementation must be evaluated every 1 or 2 years
GST - CONCERNS
Anti-Profiteering measures
Tax rate - multiple tax rates
Revenue protection
e-Way bill system
Inflation
Compliance amongst the small businesses
SOME OF THE PROBLEMS RELATED TO
INDIAN TAX SYSTEM
India under taxes and under spends compared to developed countries
The ratio of voters to tax payers is only 4% (it should be 23%)
The exemption limits have been increased from time to time (in case of Income Taxes)
Most of the economy is not covered under taxation. Only 5.5% of the income earners pay tax
Government provides tax exemptions to corporates
STEPS TO BE TAKEN BY GOI
To refrain from raising exemption thresholds
Reducing corruption
Subsidies for the well-off need to be scaled back
Property tax needs to be developed
SOME TAXATION REFORMS
GoI has announced that it will be phasing out tax
exemption given to corporates (tax incentives to the
corporates for 2015-16 were Rs 68711)
SOME TAXATION REFORMS
Recommendations of R V Easwar committee report to be implemented
Computerization of IT department work
The tax refunds must be provided faster and in case of delays the beneficiary has to be incentivized
Treat stock trading returns up to Rs 5 lakh as capital gains and not as business income
TDS rates for individuals must be reduced from 10% to 5%
GST reform
GAAR reform
QUESTIONS
Which one of the following is not a feature of “Value Added Tax”? (2011)
(a) It is a multi-point destination-based system of taxation
(b) It is a tax levied on value addition at each stage of transaction in the production-distribution chain
(c) It is a tax on the final consumption of goods or services and must ultimately be borne by the consumer
(d) It is basically a subject of the Central Government and the State Governments are only a facilitator for its successful implementation
QUESTIONS
The sales tax you pay while purchasing a
toothpaste is a
(a) tax imposed by the Central Government.
(b) tax imposed by the Central Government but
collected by the State Government
(c) tax imposed by the State Government but
collected by the Central Government
(d) tax imposed and collected by the State
Government
QUESTIONS
What is/are the most likely advantages of implementing
‘Goods and Services Tax (GST)’?
1) It will replace multiple taxes collected by multiple authorities
and will thus create a single market in India.
2) It will drastically reduce the ‘Current Account Deficit’ of India
and will enable it to increase its foreign exchange reserves.
3) It will enormously increase the growth and size of economy of
India and will enable it to overtake China in the near future
Select the correct answer using the code given below:
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
QUESTIONS
Consider the following statements
1. Tax revenue as a percent of GDP of India has steadily increased in the last decade
2. Fiscal deficit as a percent of GDP of India has steadily increased in the last decade
Which of the statements given above is/are correct ?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
QUESTIONS (200 WORDS)
Discuss the recommendations of Subramanian
Committee on GST
Discuss the recent initiatives of the Indian
government in the taxation segment
‘GST is not the panacea for all the ills of Indian
Economy’ –critically evaluate
GST regime represents an improvement in form as
well as substance compared to previous tax regime-
explain