TAX

Important Source of Revenue of the

Government.
Compulsory contribution from a person to

the expenses incurred by the state in common interest of all without reference to specific benefits conferred on any individual.

TYPES OF TAXES IN INDIA

DIRECT TAXES
Income tax Wealth tax Property tax etc.

INDIRECT TAXES
Sales tax Vat Excise duty Custom duty etc.

Cont.
Direct Taxes are the Taxes which are not shifted

i.e.the Incidence of which falls on Persons who pay them to the Government. For Example, Income Tax and Wealth Tax.
Indirect Taxes are the Taxes in which the burden of

paying Tax is shifted through a Change in Price. For Example, Custom Duty, Excise Duty, etc.

Merits of Direct Taxes

Imposed according to the Ability of the Person

to pay. (Termed as Progressive Taxation). Revenue is Income elastic as Progressive Character revenue increases faster than the increase in Income. Create better Civic Consciousness. Serves the purpose of Transference of Income from the Rich to the Poor.

Demerits of Direct Taxes:

The Ability to Pay is difficult to determine; only a rough

idea can be formed.

Because of Undeclared Sources of Income or Evasion,

the actual payment may not be strictly according to Pay. the Tax Payers may not be able to do. Assistance.

Necessitate Proper Maintenance of Accounts which some of

Cumbersome Assessment Procedure requiring Expert

Merits of Indirect Taxes:

Convenience in Assessment & relative

Difficulty in Evasion. Inclusion of Tax in the Price. May not be Regressive if levied on ad valorem basis. Difficult to Evade.
Taxes on drinks, narcotics, & tobacco, serve as

Social purpose by discouraging their consumption.

Demerits of Indirect Taxes:

Regressive Character. Do not create Social Consciousness as Payment of

Tax is not felt by the Payer. Government is not certain about the Proceeds of these Taxes. Burden of Indirect Taxes can be shifted Forward or Backward as such Consumers have to bear the ultimate burden of Tax. Can be Evaded by methods as Smuggling, Falsification of Accounts, etc.

Income Tax:

Income Tax is a Tax on the Income of an

Individual or an Entity.
Introduced in India in the year 1860. Revenue from the income tax in the year 2009-10

was Rs 112850cr

Personal Income Tax.

Incomes from all the Sources are added. Whole Income is divided into Different Slabs

and Taxed on the basis of Slab into which it Falls

Progressive Income Taxation i.e., as Income Increases,

the Rate of Tax also Increases.

INDIVIDUAL INCOME TAX RATES

Basic Slab for Normal Citizens

INCOME(in Rs)

UP TO Rs 1,60,000
1,60,001 to 300000 300001 to 500000

NIL
10% 20%

Above 500000

30%

Cont..
Basic Slab for Women

UP TO 190000
190001 to 300000 300001 to 500000 Above 500000

NIL
10% 20% 30%

Basic slab for Senior citizen(above 65yrs)

UP TO 240000
240001 to 300000 300001 to 500000 Above 500000

NIL
10% 20% 30%

Corporate Income Tax:

Rationale for the corporation tax is that a Joint Stock

Company has a separate entity & thus should be taxed separately.

Until 1960 61, Corporations were taxed in a Partial sene A Corporation was required to Pay Income Tax on

behalf of Shareholders on Dividends paid to them, & each Shareholder got a Credit to this effect. Revenue from this tax was Rs 256725cr.

Contd
Since 1960-61, Corporations are being treated as

Independent Entities & Shareholders are not given any Credit.

Corporations are Taxed at a Flat Rate, but certain

Rebates & Exemptions are also provided.

Tax Rates are different for Indian Companies &

Foreign Companies.

Taxes on Wealth - Estate Duty:

Taxes which are levied on Wealth & Capital are mainly

Estate Duty, Annual Tax on Wealth & Gift Tax.

Estate Duty was First Introduced in the year 1953.

Estate Duty is levied on the Total Property passing to

the heirs on the Death of a Person.

Estate Duty was abolished in the year 1985.

Annual Tax on Wealth.

Annual Tax on Wealth was introduced in 1957 Annual Tax was levied on the Wealth such as Land, Bonds,

Shares, etc. of the People.

Certain Types of Properties such as Agricultural Land & funds

in Provident Account were exempt.

Wealth Tax was abolished in 1993 on all assets except certain

specified assets such as Resident Houses, Farm Houses, Urban Land, Jewellery, Bullion, Motor Car, etc.

Gift Tax:
Gift Tax was introduced in 1958. Gift Tax was leviableon all Donations to

Recognized Charitable Institutions, Gifts to Women Dependents & Gifts to Wife.

Gift Tax was abolished in 1998.

CUSTOM DUTIES
Custom Duties are levied on Exports &

Imports. From the point of View of Revenue, Importance of Export Duty is Limited. Import Duties are levied on the basis of Ad valorem. In India, Custom Duties are Levied on the Goods And at The Rates Specified in the Schedules to the Custom Tariff Act, 1975

Cont
Since 1991, the Custom Duty Structure was

pruned. Maximum Rate of Custom Duty is 10% now. Revenue from the Custom duty was Rs 98000cr.

EXCISE DUTIES
An Excise Duty is levied on Production & has

absolutely on Connection with its Actual Sales.

These are levied by the Central Government in a

number of forms.
Taxation on Inputs, such as Raw Materials,

Components has a number of Limitations.

To remove these, Government introduced

Modified Value Added Tax (MODVAT) in 1986-87.

Cont
Value Added is the difference between a Firms

Revenues & its Payments to other Firms i.e., it is the Value Difference between Sales & Purchased Item.
Under MODVAT, a Manufacturer can take Credit

of Excise Duty paid on Raw Materials and Components used by him in his Manufacture.

Cont
Since it amounts to Excise Duty only on

Additions in Value by each Manufacturer at each stage, it is called Value-Added-Tax (VAT).

MODVAT differs from VAT. VAT covers the entire value of Inputs where as

under MODVAT Duty paid Inputs only.

Cont

To Overcome the Limitations of MODVAT, the

Budget 2000-01 introduced the Central ValueAdded Tax [CENVAT].

CENVAT is applicable on the Excisable Goods

made in India.
Basic Excise Duty is 16% & some Special Excise

Duties which are levied in addition to CENVAT.

WHAT IS SALES TAX?

Sales tax is a tax on the

supply of goods and certain services ,it is charged at the time of sale and then deposited in the Government treasury.

Sales Tax:
Sales Tax is a Tax on Business Transactions. In India, many Commodities are not covered by

Sales Tax.
Sales Tax is more in case of Luxury Items & Less

or almost nil in case of Necessities.

Registered Trading Concerns are required to pay

the Sales Tax to the Government who shift the Burden to the Customers.

Contd
Problems: Cascading Effect, Lack of Transp

arency, Narrow Base, different Procedures followed by different States, etc.

WHAT TYPES OF BUSINESS ARE NOT LIABLE FOR SALES TAX?

Agricultural Products
Most Of Pharmaceutical Products Educational & Scientific Materials

Equipment For Fighting AIDS & CANCER

Value Added Tax (VAT)

VAT is a multistage Sales Tax with credit for

Taxes paid on Business purchases. VAT is non-cascading. Tax is levied on Value Addition at each stage of Transaction in the Production/Distribution Chain. VAT was introduced in 1999 & Implemented in April, 2005 in some States.

Cont

Set off will be given for Input Tax as well as

Tax paid on Previous Purchases.

Other Taxes such as Turnover Tax,

Surcharge, etc. will be abolished.

Overall Tax Burden will be Rationalized.

Service Tax:
Service Tax is a form of Indirect Tax imposed

on Specified Services called Taxable Services.

It was introduced in the year 1994-95. Service Tax Network has expanded to cover

many Services over the Years. Revenue from this tax was Rs 65000cr.

Features of Tax Structure in India

Tax Revenues (on account of the Centre, State

& Union Territories) form about 20% of the Total National Income of India (2005-06). Tax Revenue collected by the Central & State Governments has increased from Rs.460 cr in 1951-51 to Rs.6,89,000 cr in 2006-07. The Ratio of Direct to Indirect Taxes has declin ed from 40:60 in 1950-51 to 20:80 in 1990-91.

Contd
Share of Direct Taxes in the Gross Tax Revenue

was 35% in 2005-06 & Indirect Taxes was 65%. Among the Working Population of 40%, only 2.5% is liable to pay Income Tax in India. As such, Indian Tax Structure relies on a very Narrow Population Base. Total Tax Revenue is highly Insufficient to meet the Expenditure requirements of the Economy. Direct Taxes are Progressive, Indirect Taxes are Differential in Nature.

Evaluation of Indian Tax System:

The system of Taxation does not conform to

Canon of Equity. Service Sector which accounts for more than 50% of GDP contributes just 7.8% towards Tax Revenues & 0.8% towards GDP. The Booth Lingam Committee & Chelliah Committee recommended Simplification & rationalization of Tax System in India.

Contd
The Cost of Tax Collection has increased from

Rs.543 cr in 1990-91 to more than Rs.3,663 crores in 2006-07. Evasion & Tax Avoidance are reported to be very high. Black Money is generated at the Rate of 50% of the countrys GDP.

Contd
Indian Tax System is also accused of

a) Discouraging Employment.
b) Distorting Prices. c) Adversely Affecting Savings.

Reference:
Indian Economy by Misra.Puri Indian Economics by C. Ramani Nair N.Iravathi Macro Economics by P.G.Apte www.taxation in india.com