Taxes are levied by governments on their citizens to generate income for undertaking projects to boost the economy of the country and to raise the standard of living of its citizens.
The authority of the government to levy tax in India is derived from the Constitution of India, which allocates the power to levy taxes to the Central and State governments.
All taxes levied within India need to be backed by an accompanying law passed by the Parliament or the State Legislature. Taxes are the largest source of income for the government.
Difference between tax and fee
- A tax is a compulsory payment levied on the persons or companies, to meet the expenditure incurred on conferring common benefits upon the people of a country.
- Fee is also a compulsory payment made by a person, who receives in return, a particular benefit or service from the government.
Tax Base
A tax base is a total amount of assets or income that can be taxed by a taxing authority, usually by the government. The aggregate value of the financial streams or assets on which tax can be imposed. In the case of income tax, for instance, the tax base is determined by what the tax authorities state as the minimum amount of annual income that can be taxed (taxable income).
If this minimum amount (tax threshold) is lowered, this will automatically increase (widen) the tax base; if it is raised, the tax base will be narrowed.
Tax Incidence
It shows the entity or person on whom the tax is imposed.
Tax Burden
It means who actually pay taxes or from whom tax is collected.
Tax Incidence vs Tax Burden: Suppose if government increases service tax on restaurants, restaurants may absorb it if competition is intense or pass it on to consumers. Here incidence is on restaurants. If they absorb it and pays it then the burden is also on the restaurants. Or if the restaurants pass that additional tax burden on to consumers then the burden is the consumers.
Tax Expenditure
Tax Expenditures, as the word might indicate, does not relate to the expenditures incurred by the Government in the collection of taxes.
Rather it refers to the opportunity cost of taxing at concessional rates, or the opportunity cost of giving exemptions, deductions, rebates, deferrals credits etc. to the tax payers.
Tax expenditures indicate how much more revenue could have been collected by the Government if not for such measures. In other words, it shows the extent of indirect subsidy enjoyed by the tax payers in the country.
Tax Elasticity
It refers to changes in tax revenue in response to changes in tax rate. For example, how tax revenue changes if the government reduces corporate income tax from 30 per cent to 25 per cent indicate tax elasticity.
Tax Buoyancy
It explains this relationship between the changes in government’s tax revenue growth and the changes in GDP. It refers to the responsiveness of tax revenue growth to changes in GDP. When a tax is buoyant, its revenue increases without increasing the tax rate.
Tax Deduction at Source(TDS)
TDS stands for ‘Tax Deducted at Source’. It was introduced to collect tax at the source from where an individual’s income is generated. The government uses TDS as a tool to collect tax in order to minimise tax evasion by taxing the income (partially or wholly) at the time it is generated rather than at a later date.
TDS is applicable on the various incomes such as salaries, interest received, commission received etc. TDS is not applicable to all incomes and persons for all transactions. TDS works on the concept that every person making specified type of payments to any person shall deduct tax at the rates prescribed in the Income Tax Act at source and deposit the same into the government’s account.
The person who is making the payment is responsible for deducting the tax and depositing the same with government. This person is known as ‘deductor. On the other hand, the person who receives the payment after the tax deduction is called ‘deductee’.
Cess and Surcharge
A Cess imposed by the central government is a tax on tax, levied by the government for a specific purpose. Generally, cess is expected to be levied till the time the government gets enough money for that purpose.
It is different from the usual taxes like excise duty and personal income tax as it is imposed as an additional tax besides the existing tax (tax on tax).
For example, the education cess of 3% on personal income tax of 30% is imposed as a tax on the prevailing 30%. As a result, the total tax rate goes up to 30.9% (30% basic rate + 3% (cess) of the 30%).
Another difference between cess and the usual tax is the way in which tax revenue from cess is kept. Revenue from main taxes like Personal Income taxes are kept at Consolidated Fund of India (CFI). The government can use it for any purposes.
But the tax revenue from Cess are first credited to the CFI and the Central Government may, after due appropriation made by Parliament, utilise the money for the specified purposes.
For example, the proceeds are kept as Central Road Fund (CRF) in the case of fuel cess (on petrol and diesel). The revenue collected is initially credited to the CFI and after adjusting for the cost of collection, Parliament through its appropriation bill, credits such proceeds to the Central Road fund.
‘Surcharge’ is an additional charge or tax levied on an existing tax. Unlike a cess, which is meant to raise revenue for a temporary need, surcharge is usually permanent in nature. It is levied as a percentage on the income tax payable as per normal rates.
Currently, wealthy individuals and companies are liable to pay a surcharge on their tax outgo. Individuals earning a taxable income of over 1 crore have to shell out a surcharge amounting to 15 per cent of their tax outgo. So, if your taxable income is 1.2 crore, your income tax payable works out to 34.25 lakh. The 15 per cent surcharge will be computed on this amount, at 5.13 lakh. Thus, the total tax payable is 39.38 lakh without including cess.
Some Examples of Cess and Surcharge:
Education Cess:
Education cess is a tax in India primarily introduced to help cover the cost of government-sponsored educational programs. This cess is collected independently of other taxes and is applicable to all Indian citizens, corporations, and other people living in the country. income.
Swachh Bharat Cess: This is a cess imposed by the government of India and was started from 15 November 2015. It is collected to the Consolidate Fund of India and will be used to funding and promoting any government campaigns concerning the Swachh Bharat initiatives.
Krishi Kalyan Cess: This is yet another cess brought about by the government of India since the June of 2016. It is basically introduced in order to extend welfare to all the farmers and to the improvement of agricultural facilities in the country.
Infrastructure Cess: Infrastructure cess is another tax brought into effect from the 1st of June 2016. Under this tax, a cess of 1% is applicable on petrol/LPG/CNG-driven motor vehicles which are 4 meters or less in length and 1200cc or less in engine capacity.
SHE Cess: SHE Cess means Secondary and Higher Education Cess . The cess is levied in two parts, the first being the Primary Education Cess and the second being the Secondary and Higher Education Cess. This cess is a part of income tax and is governed by the IT Act. The rate of the education cess is announced by the government when the budget is announced for the year.
The rate at which education cess is calculated is actually a combination of the two types of cess applied on the taxable income. For the education cess the rate is 2% of the tax payable and for the Secondary and Higher Education Cess the rate is 1% of the tax payable. Together they form the education cess rate of 3% of the tax payable.
Finance Commission
Finance Commission is a constitutional body for the purpose of allocation of certain revenue resources between the Union and the State Governments. It was established under Article 280 of the Indian Constitution by the Indian President. It was created to define the financial relations between the Centre and the states. It was formed in 1951.
Article 280 of the Indian Constitution
- President after two years of the commencement of Indian Constitution and thereafter every 5 years, has to constitute a Finance Commission of India.
- It shall be the duty of the Commission to make recommendations to the President in relation to the:
- The distribution between the Union and the States of the net proceeds of taxes which are to be, or maybe, divided between them and the allocation between the States of the respective shares of such proceeds;
- The principles which should govern the grants in aid of the revenues of the States out of the Consolidated Fund of India;
- Any other matter referred to the Commission by the President in the interests of sound finance
- The Commission shall determine their procedure and shall have such powers in the performance of their functions as Parliament may by law confer on them
Note: President can also constitute Finance Commission before the expiry of five years as he considers necessary.
Devolution of Taxes
Article 280 of the Constitution mandates that each FC make recommendations about the distribution of net proceeds of taxes between the Union and states (called vertical devolution) and also among states (called horizontal devolution). The FC has wide powers under the Constitution to (re)define financial relations between and among the Union and states.
The 15th Finance Commission report for 2020-21 was tabled in Parliament on February 1. Every finance commission decides the vertical distribution of divisible pool of taxes between GoI and state governments, and the horizontal distribution of the share between states.
For the latter, we are now used to the idea of a formula. For instance, the 2020-21 report gives 15% weight for population, 15% for geographical area, 10% for forest and ecology, 45% for income distance, 12.5% for demographic performance and 2.5% for tax effort. Population, area, and forest and ecology are described as being need-based, income distance as equity-based, and demographic performance and tax effort as performance-based.
Classification of Taxes
(a) Direct taxes and
(b) Indirect Taxes.
This distinction between taxes depends on
(1) The liability of payment of tax to government and
(2) The actual burden of tax.
In case of direct taxes, the liability of payment and the burden of the tax falls on the same person. For example, income tax is a direct tax because the person who is liable to pay it also bears the burden of the tax; The burden of the tax cannot be shifted on others.
Example of Direct Taxes
- Income tax: The tax on incomes of individuals
- Corporation tax: The tax on corporate profit
- Wealth tax: The tax on wealth of individuals
- Gift tax: The tax on gifts given
But this does not happen in case of indirect taxes. For example, in case of GST, although the liability to pay tax lies with the seller of a good, the actual burden of tax falls on the buyer.
The buyer and not the seller is the one who finally pays the sales tax. The seller only collects the tax from the buyer by increasing the price and pays it to the government. Thus, we find that in case of sales tax, the burden of tax is shifted from the seller to the buyer. All taxes on production are indirect taxes because producers recover these taxes from buyers by increasing the price of the product.
Example of Indirect Taxes
- Value added tax
- Excise duty: The tax on goods manufactured in factories
- Customs duty: The tax on imports and exports
- Service tax: The tax on the services provided
- Goods and Service Tax (GST)
Types of Taxation
Progressive Tax
In progressive taxation, the tax liability increases with individual or entity income. This is based on principle of “ability to pay”. Under this system, lowest income people are generally exempted while highest income people pay highest taxes.
Example: Income Tax
Regressive Tax
A regressive tax is the one in which tax rate decreases as the amount subject to taxation increases, and the tax rate progresses from high to low. The lowest amount is subject to higher taxation and this leads to individuals with low income bear the highest burden of regressive taxes. Such tax does not take into account the ability to pay.
Proportional Tax
In this system, a flat tax is levied regardless of income of wealth.
Example: Corporation tax in India whereby government charges a flat rate of 25% on the income earned by the companies in India.
Specific Duty
Specific duty is a duty imposed on each unit of a commodity imported or exported. It is easy to calculate and administer as it can simply be calculated by multiplying the rate of duty with number of units imported or exported. It is levied on such goods whose quantification in terms of number of units is possible.
For example, number of T. V. sets and meters of cloth. In spite of advantages over advalorem duty, specific duty is not very popular as most of the countries use advalorem duties. In this case value of commodity is not taken into consideration.
Advalorem Duty
Advalorem duty is a duty imposed on the total value of commodity imported or exported. It is difficult to calculate as it requires a proper assessment of the value of goods imported or exported. It is levied on such goods whose quantification in terms of number of units is not possible. For example,’ rare Pantene’s and statues. Generally most of the countries charge duties on the basis of value of goods imported or exported, i.e., advalorem duties. In this case physical units of commodity are not taken into consideration.
Important Taxes
Income Tax
- The income, which this tax applies, can come from any source like a business, owning a house or property, gains received from investments and salaries, etc. It is the tax that is levied on your earning in a financial year. There are many facets to income tax, such as the tax slabs, taxable income, tax deducted at source (TDS), reduction of taxable income, etc. The tax is applicable to both individuals and companies.
Note: Tax on Agricultural income is levied by state government’s but as of now it’s zero percent across India.
Wealth Tax
Wealth Tax was another tax levied by the government, which was charged based on the net wealth of the assessee. Wealth tax is chargeable with respect to the net wealth of a property. Net wealth is equal to all the assets an individual owns minus the cost of acquiring them (any loan taken to acquire them). Wealth tax is no longer operational as it was abolished during the Union Budget of 2015.
The wealth tax, governed by the Wealth Tax Act, allows the government to impose a tax on the net wealth of a person, an HUF or a company. This tax is set to be abolished in 2016 but until then the tax levied on the net wealth is about 1% of the wealth that exceeds Rs. 30 lakhs. There are exceptions to this tax which are organisations that don’t have to pay wealth tax. These organisations could be trusts, partnership firms, social clubs, political parties, etc.
Estate & Inheritance Tax
Estate tax is a tax that is based on the net value of the property owned by the deceased. When the assets are transferred to the beneficiary, estate tax comes into play. This tax has nothing to do with the person who inherits the assets. Inheritance tax, on the other hand, is imposed by state governments and the tax rate depends on the person receiving the property, and in some jurisdictions, how much they receive.
Gift Tax
Amount exceeding Rs. 50000 received without consideration by an individual from any person is subjected to gift tax as income under “other sources”. There are exemptions like money received from relatives is not taxable. Marriage gifts and money received through inheritance are also exempt from gift tax. Inheritance tax was earlier in practice but has been repealed by the government.
Capital Gains Tax
This is a tax that is payable whenever you receive a sizable amount of money. It could be from an investment or from the sale of a property.
It is usually of two types, short term capital gains from investments held for less than 24 months and long term capital gains from investments held for longer than 24 months. The tax applicable for each is also very different since the tax on short term gains is calculated based in the income bracket that you fall in and the tax on long term gains is 20%.
Stamp Duty, Registration Fees, Transfer Tax:
Stamp duty, registration fees, and transfer taxes are collect as a supplement of property tax. For instance, when an individual purchases a property, they also have to pay for the cost of stamps (stamp duty), registration fees (fee charged by local registrar to legalize a property transaction), and transfer tax (tax paid to transfer the ownership of a commodity.
Perquisite Tax
Perquisites are all the perks or privileges that employers may extend to employees. These privileges may include a house provided by the company or a car for your use, given to you by the company. These perks are not just limited to big compensation like cars and houses, they can even include things like compensation for fuel or phone bills.
Fringe Benefit Tax
Fringe Benefit Tax, or FBT, was a tax which applied to almost every fringe benefit an employer provided to their employees. In this tax, a number of aspects were covered. Some of them include:
- Employer’s expense on travel (LTA), employee welfare, accommodation, and entertainment.
- Any regular commute or commute related expense provided by an employer. Employer’s contribution to a certified retirement fund.
- Employer Stock Option Plans (ESOPs).
FBT was started under the Indian government’s stewardship from April 1, 2005. However, the tax was later scrapped in 2009 by the-then Finance Minister Pranab Mukherjee during the 2009 Union Budget session.
Professional Tax
Professional Tax, or employment tax, is another form of tax levied only by state governments in India. According to professional tax norms, individuals earning income or practicing a profession such as a doctor, lawyer, chartered accountant, or company secretary etc. are required to pay this tax. However, not all states levy professional tax and the rate differs across all the states that levy the tax.
Corporate Tax
Corporate tax is the income tax that is paid by companies from the revenue they earn. This tax also comes with a slab of its own that decides how much tax the company has to pay.
Dividend Distribution Tax
Dividend Distribution Tax was introduced after the end of 2007’s Union Budget. It is basically a tax levied on companies based on the dividend they pay to their investors. This tax is applicable on the gross or net income an investor receives from their investment.
In the since FY 2018, Dividend is taxable in the hands of the shareholder.
Minimum Alternative Tax
Minimum Alternative Tax, or MAT, is basically a way for the Income Tax Department to get companies to pay a minimum tax, which currently stands at 18.5%. This form of tax was brought into effect through the introduction of Section 115JA of the Income Tax Act. However, companies involved in infrastructure and power sectors are exempt from paying MAT. Once a company pays the MAT, it can carry the payment forward and setoff (adjust) against regular tax payable during the subsequent five-year period subject to certain conditions.
Alternate Minimum Tax
Alternative Minimum Tax was designed to prevent taxpayers from escaping their fair share of tax liability through tax breaks. It is a supplemental income tax required in addition to baseline income tax for certain individuals, corporations, etc that have special circumstances that allow them for lower payments of standard income tax.
Alternate Minimum Tax means the amount of tax computed on the adjusted total income. AMT is a way to collect the minimum tax from the zero tax payers. Under it, the assessee is liable to pay tax at rate of 18.5%. It is not an additional tax levied on the taxpayers.
Pigouvian Tax
Pigouvian Tax is a tax on economic activities that generate negative externalities, which create costs that are borne by unrelated third parties. The costs arising from negative externalities are not reflected in the final cost of a product or service. Therefore, the market becomes inefficient. The main purpose of Pigouvian taxes is to oppose market inefficiencies by increasing the marginal private cost by the amount generated by the negative externality. In such a case, the final cost (original cost plus tax) will reflect the full social cost of the economic activity. Subsequently, the negative externality will be internalized. Pigouvian taxes can be imposed to challenge the following activities: Environmental pollution, Harmful substances (tobacco and alcohol), Congestion etc.,
Tobin Tax
An excise tax assessed on currency conversions. The tax is imposed to help stabilize currency and interest rates by penalizing currency speculation. Revenues from this tax are intended to be used for global priorities such as environmental and basic human needs. The tax is named after its proponent, Nobel laureate economist James Tobin. It is designed to deter only speculative flows of hot money—money that moves regularly between financial markets in search of high short-term interest rates. It is not meant to impact long-term investments. The shorter the investment cycle (i.e., the time between buying and selling a currency), the higher the effective rate of tax—thus providing market-based incentives for lengthening the term structure of investments.
Banking Cash Transaction Tax
Banking Cash Transaction Tax is yet another form of tax that has been abandoned by the Indian government. This form of taxation was operation from 2005-2009 until the then FM Pranab Mukherjee nullified the tax. This tax suggested that every bank transaction (debit or credit) would be taxed at a rate of 0.1%.
Security Transaction Tax (STT)
STT is levied on transactions (sale/purchase) done through the stock exchanges. STT is applicable on purchase or sale of various financial products like stocks, derivatives, mutual funds etc.
Entry Tax
Entry tax is a tax levied in select states across the country like Uttarakhand, Madhya Pradesh, Gujarat, Assam, and Delhi. Under this, all items entering the state ordered via e-commerce establishments are taxed. The rate for this tax varies between 5.5% to 10%.
In last 10-15 years, Indian taxation system has undergone tremendous reforms. The tax rates have been rationalised and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. The process of rationalisation of tax administration is ongoing in India.
Toll Tax & Road Tax
Toll tax is a tax you often pay to use any form of infrastructure developed by the government, example roads and bridges. The tax amount levied is rather negligible which is used for maintenance and basic upkeep of a particular project.
Property Tax - Municipal Tax:
Also known as Property Tax or Real Estate Tax, this is one of the taxes levied by local municipal bodies of every city. These taxes are levied in order to provide and maintain the for basic civic services. All owners of residential or commercial properties are subject to Municipal Tax.
Entertainment Tax
Entertainment Tax is yet another type of tax commonly seen in India. It is levied by the government on feature films, television series, exhibitions, amusement, and recreational parlours. This tax is collected taking into account a business entity’s gross collection collected from earnings based on commercial shows, film festival earnings, and audience participation.
Sales Tax
As the name suggests, sales tax is a tax that is levied on the sale of a product. This product can be something that was produced in India or imported and can even cover services rendered. This tax is levied on the seller of the product who then transfers it onto the person who buys said product with the sales tax added to the price of the product. The limitation of this tax is that it can be levied only ones for a particular product, which means that if the product is sold a second time, sales tax cannot be applied to it.
Service Tax
Like sales tax is added to the price of goods sold in India, so is service tax added to services provided in India. It is not applicable on goods but on companies that provide services and is collected every month or once every quarter based on how the services are provided. If the establishment is an individual service provider then the service tax is paid only once the customer pays the bills however, for companies the service tax is payable the moment the invoice is raised, irrespective of the customer paying the bill.
An important thing to remember is that since the service at a restaurant is a combination of the food, the waiter and the premises themselves, it is difficult to pin point what qualifies for service tax. To remove any ambiguity, in this regard, it has been announced that the service tax in restaurants will be levied only on 40% of the total bill.
Custom duty
When you purchase anything that needs to be imported from another country, a charge is applied on it and that is the customs duty. It applies to all the products that come in via land, sea or air. Even if you bring in products bought in another country to India, a customs duty can be levied on it. The purpose of the customs duty is to ensure that all the goods entering the country are taxed and paid for.
Octroi: If tax is levied by the municipal corporation or Grama panchayat on the goods bought from other parts of the country by traders for sale into their jurisdiction limits, then it is known as octroi.
Excise Duty
This is a tax that is levied on all the goods manufactured or produced in India. It is different from customs duty because it is applicable only on things produced in India and is also known as the Central Value Added Tax or CENVAT. This tax is collected by the government from the manufacturer of the goods. It can also be collected from those entities that receive manufactured goods and employ people to transport the goods from the manufacturer to themselves.
Value Added Tax
VAT, also known as commercial tax is not applicable on commodities that are zero rated (eg. food and essential drugs) or those that fall under exports. This tax is levied at all the stages of the supply chain, right from the manufacturers, dealers and distributors to the end user.
The value added tax is a tax that is levied at the discretion of the state government and not all states implemented it when it was first announced. The tax is levied on various goods sold in the state and the amount of the tax is decided by the state itself.
Problems in Indian Taxation structure
Multiplicity of taxes: Taxes by Union Government, State Governments and the local governments have resulted in difficulties and harassment to the tax payer.
Dominance of Indirect taxes: Central government revenues from indirect and direct taxes were in the ratio of 65:35 respectively in 2015-16. It is well known that indirect taxes cause more pain to the poor than the wealthy.
Adhocism: Several taxes are imposed on ‘adhoc’ basis to meet deficits and they are withdrawn later on. Some taxes are introduced and withdrawn later for political reasons.
Bias in incidence of taxes: As per the indirect taxation enquiry committee, “The burden of the urban households was distinctly higher than the rural households in the corresponding expenditure class”. Urban population is taxed far higher than the rural rich.
Complexity and corruption: A provoking feature of the Indian tax system is its complexity. Both direct and indirect tax laws are complex. This provides enough scope for avoiding and evading taxes. So when the system is complex, there will be good amount of discretion to the tax authority, which ultimately resulted in corruption.
Imbalance in tax system: Excessive emphasis on indirect taxes has resulted in the glaring imbalances of nearly 100% citizens affected by indirect taxes but hardly 1% of the population coming under the purview of direct taxation.
Lack of built-in elasticity: Income from taxation does not increase automatically in India in proportion to increase in National income. Hence, the government is compelled to increase taxes sometimes to maintain a constant tax income ratio.
Prior to the liberalization of Economy, India’s tax regime suffered numerous problems. These problems which were in vogue in 1960s and 1970s were as follows:
- There was a high degree of progressiveness (rich needed to pay exorbitant taxes). On the other hand, tax collection efficiency was very low (rich were smart enough to evade tax).
- There was large number of exemptions, which eroded the already narrow tax base in the country.
- In terms of corporation tax, there were numerous discriminations between different kinds of the companies that discouraged the investments. Double taxation of dividends was also common in those days.
- In terms of Indirect taxes, the high rates of custom / excise duties were prevalent. There was no VAT; there was no service sector within the purview of tax.
The efforts to reform India’s tax system began in mid 1980s when the government announced a Long Term Fiscal Policy, 1985. This policy recognized that the fiscal position of the country is going downhill and there was a need to make changes in the taxation system. In that decade, a technical group to review and rationalize the central excise duties was established and this led to introduction of Modified System of Value-Added Tax (MODVAT) in 1986. To rationalize the custom duties, the harmonized system (HS) of the classification of goods was introduced.
Raja Chelliah Committee
The Government appointed a Tax Reforms Committee under Prof Raja Chelliah to lay out agenda for reforming India’s tax system. This TRC came up with three reports in 1991, 1992 and 1993 with several measures, which can be summarized in these points:
- Reforming the personal taxation system by reducing the marginal tax rates.
- Reduction in the corporate tax rates.
- Reducing the cost of imported inputs
- By lowering the customs duties.
- Reduction in the number of Customs tariff rates and its rationalization.
- Simplifying the excise duties and its integration with a Value-Added Tax (VAT) system.
- Bringing the services sector in the tax net within a VAT system.
- Broadening of the tax base.
- Building a tax information and computerization.
- Improving the quality of tax administration.
The tax reforms that began with the Chelliah Committee recommendations are still going on. Later on, government appointed the Vijay Kelkar Committee in 2002 which further provided direction to the tax reforms in the country.
Vijay Kelkar Committee
The latest Impetus to direct tax reforms in India came with the recommendations of the Task Force on Direct & Indirect Taxes under the chairmanship of Vijay Kelkar in 2002. The main recommendations of this task force related to the direct taxes related to increasing the income tax exemption limit, rationalization of exemptions, abolition of long term capital gains tax, abolition of wealth tax etc. Its key recommendations were as follows:
Administration of Direct Tax
- The taxpayer services should be extended both in quality and quantity and taxpayers should get easy access through internet and email.
- PAN (Permanent Account Number) should be expanded and it should cover all citizens.
- Block assessment of search and seizure cases should be abolished.
- To clear the backlog, the department should outsource the data entry work.
- All returns and issue of refunds should be completed in a four month period.
- Dispatch of refunds should be outsourced.
- Government should establish a Tax Information Network to modernize, simplify and rationalize tax collection, particular TDS and TCS.
- Abolish the requirement of Tax Clearance Certificate on leaving the country. Empower CBDT with appropriate administrative and financial powers.
Personal income tax
- Increase in exemption limit to Rs.1 lakh for the general categories of tax payers and further exemption for senior citizens and widows.
- Rationalize income tax slabs, eliminate surcharge on personal income tax.
- Incentivise home loans by providing interest subsidy on home loans @2%.
- Increase deduction under Section 80C for contribution to pension
Corporation Tax
- Reduce the Corporate tax to 30% for domestic companies and 35% for foreign companies.
- The listed companies should be exempted from tax on dividends and capital gains
- Increase rate of depreciation for plant and machinery.
- Abolish Minimum Alternate Tax.
Wealth Tax
- Abolition of wealth tax.
The above recommendations were made 13 years ago. Today, we see that many of them have been implemented. The DTC and GST have been so far biggest reforms initiated by the Government in direct and indirect tax regime respectively. However, DTC has never arrived and government does not seem to go seriously after it because most of its provisions are already incorporated in the Income Tax Act. GST has come into force from July 1, 2017.
Indirect Tax Reforms
First Indirect Tax Reform occurred in India when the Modified Value Added Tax-(MODVAT) was introduced for selected commodities in 1986 to replace the Central Excise Duty. It was gradually extended to all commodities through Central Value Added Tax (CENVAT). The states also followed the suit and enacted the VAT acts to replace the sales tax with Value Added Tax. Following are the key indirect tax reforms done.
Reduction in Custom Duties
In 1990, the custom duty on non-agricultural products was around 128%.It was brought down gradually. Currently, the average custom duties are 11-12%, however, they range from 0 to 150%.
Central Excise
Central Excise duties were first replaced with MODVAT and now CENVAT is applicable. The number of different types of duties was cut down.
Service Tax
Tax Service tax was first introduced on some limited services in 1994-95 at 7%. The rate was gradually increased and so was the number of taxable services. Currently, we pay 14% service tax on around 100 services.
Keeping in focus the problems in taxation system, at least from the point of view of multiplicity of taxes and, complexity involved in understanding and complying with, reforms have been bringing in for the last couple years. And this process is still going on with the latest reform in Indirect tax structure in the name of Goods and Service Tax (GST). Of all the reforms proposed, if not implemented, two reforms worth discussion:
- Direct Tax Code (DTC)
- Goods and Service Tax (GST)
The Draft Direct Taxes Code Bill, 2009
The Direct Taxes Code Bill seeks to consolidate and amend the law relating to all direct taxes and will replace the Income Tax Act, 1961. The Bill removes tax exemptions, and lowers income, corporate, and wealth tax rates. The draft Bill was released for public discussion on August 12th, 2009 by the Finance Minister Shri Pranab Mukherjee. The Ministry released a revised discussion paper for feedback on June 15, 2010.
Highlights of the Bill:
- The Bill replaces the Income Tax Act, 1961.
- The Bill widens income tax slabs for individuals. Income between Rs 1.6 lakh to Rs 10 lakh will be taxed at 10%, between Rs 10 lakh and Rs 25 lakh at 20%, and that over Rs 25 lakh at 30%.
- The Bill removes several tax deductions currently allowed such as those on investments in life insurance or provident funds. Interest paid on housing loans shall no longer be tax deductible.
- Companies will be taxed at 25% of business income. The Bill also imposes a minimum alternate tax of 2% on the assets of companies and a dividend distribution tax of 15% on domestic companies. Foreign companies shall pay an additional branch profits tax of 15%.
- Unincorporated bodies are taxed at 30% of income while non profit organisations are taxed at 15% of any surplus of income over expenditure.
- The Bill raises the wealth tax exemption limit from Rs 15 lakh to Rs 50 crore and widens the ambit of wealth tax to include financial assets.
Goods And Services Tax
