Taxation

The term “Tax” finds its origins in the Latin words “Taxare” or “Taxo,” which means “to identify the worth of something,” signifying the assessment of the value of something. Taxation stands as a pivotal means of generating revenue for the government, representing the compulsory acquisition of funds imposed by governmental authorities. The collected tax funds play a vital role in funding diverse welfare schemes and contributing to the overall development of the state. It is a financial commitment that citizens make to support the functioning and growth of the government, ensuring the provision of essential services and benefits to the public. The intricate web of taxation encompasses various forms, such as income tax, sales tax, and property tax, each serving as a crucial component in sustaining the economic machinery of a nation.

HISTORY OF TAX SYSTEM IN INDIA

The roots of India’s tax system trace back to the British colonial period, with its formal introduction in 1850 by Sir James Willson. This initiation occurred during the first union budget session conducted by the British. The driving force behind the introduction of the tax system was the need to recover losses incurred during the significant revolt of 1857, also known as the Sepoy Mutiny.

1860 - Introduction of Income Tax Act:

1886 - Revisions and Expansions

1918 and 1922 - Subsequent Amendments

Post-Independence Changes

Five categories of income were identified for taxation:

Significance of the Income Tax Act of 1961

The historical evolution of India’s tax system reflects a journey marked by adaptation, expansion, and refinement. The Income Tax Act of 1961 stands as a testament to the enduring significance of taxation in India’s fiscal policies, contributing to the nation’s economic development.

OBJECTIVES OF TAXATION IN INDIA

Taxation in India serves as a multifaceted tool with overarching objectives, primarily aimed at financing crucial government initiatives spanning sectors like education, health, research, defence, and public welfare. Beyond mere revenue generation, the tax system in India aligns with several key objectives, ensuring a holistic approach to economic development and societal well-being.

Economic Development

Capital Formation: Taxation emerges as a cornerstone for economic development, fostering capital formation essential for various national growth initiatives.

Resource Allocation: It plays a pivotal role in allocating resources effectively, channelling funds towards infrastructure, innovation, and other developmental avenues.

Price Stability and Inflation Control

Market Regulation: The tax system contributes to maintaining price stability by regulating markets and curbing inflationary pressures on products and services.

Redistribution of Income

Social Justice: The taxation structure embraces the principle of social justice by redistributing income. It levies higher taxes on affluent individuals while easing the tax burden on those with lower incomes, fostering a more equitable society.

Employment Generation

Industrial Promotion: Tax revenues are strategically utilised for government industrial schemes, promoting job creation and curbing unemployment. This proactive approach aids in fostering economic growth.

Regional Development and Disparity Reduction

Tax Exemptions: The government strategically employs tax exemptions to incentivize industrial activities in less developed regions, contributing to regional development.

Economic Activity: By encouraging economic activity in remote areas, taxation helps bridge regional disparities and fosters an inclusive growth trajectory.

Taxation in India transcends its traditional revenue-generating role, embodying a comprehensive strategy for national progress. From fuelling economic development and ensuring price stability to fostering social justice and regional harmony, the objectives of taxation form a critical framework that resonates with the broader aspirations of the nation.

TYPES OF TAXES IN INDIA:

The diverse array of direct and indirect taxes in India contributes to the nation’s revenue streams, addressing both individual and corporate financial contributions while driving economic growth and funding essential public services.

1. DIRECT TAX

Direct tax is a form of taxation directly imposed on individuals and entities, targeting their income and wealth. This category of taxes places the burden of payment directly on the taxpayer.

Key Characteristics:

Targeted Entities

Direct taxes are levied on both individuals and entities, encompassing a broad spectrum of taxpayers.

Focal Point

The core focus of direct taxes is on the earnings and accumulated wealth of the taxpayer. This includes various streams of income, assets, and financial holdings.

Nature of Burden

As the name suggests, the burden of paying direct taxes falls directly on the taxpayer, distinguishing it from indirect taxes that can be shifted to end consumers.

Collection Mechanism:

Tax Return Filing

Taxpayers are typically required to file annual tax returns, providing a detailed account of their income, deductions, and overall financial standing.

Progressive Taxation

The concept of progressive taxation ensures that higher-income individuals contribute a higher percentage of their earnings in taxes.

Enforcement

Direct taxes are enforced by government tax authorities, ensuring compliance through audits, penalties, and legal measures.

Types of Direct Taxes

Income Tax

Income tax is a direct tax levied on an individual's earnings, acting as a significant contributor to government revenue.

Progressive Taxation: Imposes a higher percentage on higher income brackets.

Credits and Deductions: Government offers incentives through credits and deductions, reducing tax liabilities.

Transfer Taxes

Estate Tax: Levied on the taxable portion of a deceased individual's property, including trusts and financial accounts.

Gift Tax: Applied when transferring properties to another individual, with a specified amount collected.

Entitlement Tax

Financing Social Programs: Funds programs like Medicare, Medicaid, and Social Security.

Payroll Deductions: Collected through payroll deductions, collectively known as the Federal Insurance Contributions Act (FICA).

Property Tax

Funding Public Services: Charged on properties like land and buildings.

Utilisation: Supports public services such as police and fire departments, schools, libraries, and road maintenance.

Capital Gains Tax

Asset Sales: Charged when an individual sells assets like stocks, real estate, or a business.

Calculation: Computed based on the difference between acquisition and selling amounts.

Corporation Tax

Federal Obligation: Corporations and businesses incorporated in India or operating within its jurisdiction pay a direct tax on their income.

Surcharge: Additional tax based on corporate earnings.

2. INDIRECT TAX

Indirect taxes are imposed on goods and services, allowing the burden of payment to shift from the taxpayer to the consumer. In India, Goods and Services Tax (GST) stands out as a significant example of an indirect tax. Before the introduction of GST, various indirect taxes were prevalent.

1. Pre-GST Indirect Taxes:

In the pre-GST era, a multitude of indirect taxes existed, contributing to the complexity of the tax landscape. Some of these included:

Central Sales Tax
Purchase Tax
Luxury Tax
Entertainment Tax
Entry Tax
Central Excise Duty
Taxes on advertisements
Duties of Excise
State Value-Added Tax
Cess
Special Additional Duty of Customs
Taxes on Lotteries, Betting, and Gambling
Additional Duties of Excise
Additional Duties of Customs

2. Post-GST Scenario:

With the implementation of GST, a transformative change occurred. Central GST (CGST), State GST (SGST), and Integrated GST (IGST) replaced the myriad of pre-existing indirect taxes. However, certain taxes, such as the concessional GST rate of 2% on inter-state purchases with the issuance of Form C, continue to be applicable, ensuring a more streamlined and comprehensive indirect tax system in India.

3. GOODS AND SERVICE TAX (GST)

Unified Tax Structure

Replaced Various Indirect Taxes: GST marks a paradigm shift by replacing a multitude of indirect taxes, ushering in a comprehensive and uniform taxation structure.

Components of GST

Central GST (CGST), State GST (SGST), Integrated GST (IGST), Union Territory GST (UTGST): The GST framework is composed of these key components, ensuring a more streamlined and efficient tax administration.

Benefits of GST

Elimination of Cascading Effects: GST aims to eliminate the cascading effect of taxes, ensuring that taxes are not levied on taxes, which promotes efficiency and reduces the tax burden on consumers.
Simplified Tax Structure: The complex tax structure is simplified, making it more accessible for businesses and taxpayers.
Unified Taxation Regime: By creating a unified taxation regime across the country, GST fosters economic integration and ease of doing business.

Implementation Process

122nd Amendment Bill 2014: The implementation of GST was set in motion with the passage of the 122nd Amendment Bill in 2014.
Subsumed Taxes: GST subsumed various taxes, including Excise duty, Additional Excise duty, Service Tax, Countervailing or additional Custom duty, as well as state-level taxes like VAT, Entertainment Tax, Luxury Tax, Octroi, Entry Tax.

National and State-Level GST

Central GST (CGST): Replacing Central Excise duty, additional Excise duties, and other central levies, CGST operates at the national level.
State GST (SGST): Operating at the state level, SGST replaces State VAT, CST, and Purchase Tax, providing a more cohesive tax structure.
Union Territory GST (UTGST): UTGST is akin to SGST but is applicable to the Union Territories of India. Collected by the respective Union Territory Governments. Utilised for meeting the financial requirements and developmental needs of the Union Territories.
Integrated GST (IGST): IGST is applicable to inter-state supplies of goods and services, ensuring a seamless flow of credits between states. Collected by the Central Government, and then shared with the destination state. Facilitates a fair distribution of revenue between the exporting and importing states.

GST not only represents a transformative step in taxation but also signifies a move towards a more integrated and cooperative federalism. The National and State GSTs aim to create a harmonised tax environment, facilitating economic growth and development. Therefore, the implementation of GST brings about a monumental change in India’s taxation system, promoting transparency, reducing complexities, and fostering a more conducive environment for businesses and taxpayers.

STAGES OF THE GST

The Goods and Services Tax (GST) operates across three primary stages – Manufacturer, Wholesaler, and Retailer, ensuring a cascading effect on value addition at each step of the supply chain.

Stage No. 1: The Manufacturer

Transaction Overview: The manufacturer, purchasing raw materials and inputs worth Rs. 100, incurs a tax of Rs. 10 (10%). Upon adding a value of Rs. 30, the gross value becomes Rs. 130.
Tax Incidence: When transferring to the wholesaler, the tax incidence is Rs. 13, but the manufacturer is liable to pay only Rs. 3 after setting off the earlier paid tax of Rs. 10.

Stage No. 2: The Wholesaler

Transaction Overview: The wholesaler acquires the bag for Rs. 130 from the manufacturer, paying a tax of Rs. 13. Adding a value of Rs. 20, the gross value reaches Rs. 150.
Tax Incidence: On transferring to the retailer, the tax incidence is Rs. 15. However, after setting off the previous tax of Rs. 13, the wholesaler pays only Rs. 2 as GST.

Stage No. 3: The Retailer

Transaction Overview: Retailer purchases the bag for Rs. 150, adds a margin of 20%, resulting in a gross value of Rs. 180.

Tax Incidence: Though the tax incidence is Rs. 18, the retailer pays only Rs. 3 after setting off the earlier paid tax of Rs. 15.

Total Tax Revenue Generated:

Rs. 10 (Manufacturer) + Rs. 3 (Wholesaler) + Rs. 2 (Retailer) + Rs. 3 (Retailer after set off) = Rs. 18

GST Council:

Composition: Comprising the Union Finance Minister (Chairman), Minister of States in charge of Revenue, in charge of Finance and Taxation, and other nominated State Ministers.

Decision Making: Decisions made by a three-fourth majority, with the Centre holding one-third of the votes, and States together having two-thirds.

Integrated GST (IGST):

Central Power: The Centre has exclusive power to levy and
collect GST in inter-state trade or commerce and imports,
known as Integrated GST (IGST).
Revenue Sharing: The GST Council decides the manner in
which IGST is shared between the Centre and the States.

Salient Features of GST:

One Nation, One Tax

GST replaced multiple taxes by the Central and State Governments, bringing uniformity in the tax structure across India and eliminating tax cascading.

Dual Structure

Operates under a dual structure with CGST by the Central Government, SGST by State Governments, and IGST for Inter-state transactions.

Destination-based Tax

Applied at each stage of the supply chain, allowing seamless credit flow, and reducing the tax burden on the end consumer.

Input Tax Credit (ITC)

Businesses can claim credit for taxes paid on inputs, avoiding double taxation, and reducing overall tax liability.

Scope of GST

Applicable to all goods and services except alcohol for human consumption. Exports are zero-rated.

Threshold Exemption

Small businesses below a specified turnover threshold are exempt, reducing compliance burden.

Composition Scheme

Simplified tax payment for small taxpayers with a fixed percentage of turnover as GST and simplified compliance requirements

Online Compliance

Introduction of GSTN for online registration, return filing, and payment, streamlining processes for taxpayers.

Anti-Profiteering Measures

Establishment of the National Anti-Profiteering Authority (NAA) to prevent unfair pricing practices and profiteering.

Increased Compliance and Transparency

Aims to enhance tax compliance, bring more businesses into the formal economy, and increase transparency through digitization.

Sector-specific Exemptions

Certain sectors like healthcare, education, and essential goods have exemptions or reduced tax rates for affordability and accessibility.

Accounts Settlement

Periodic settlement between the Centre and States ensures the transfer of credit and funds based on taxpayer returns.

GST has revolutionized India's tax system, fostering a simplified, transparent, and unified approach to indirect taxation.

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