Transcript Tax Structure in India

Tax Structure in India
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RTI Jammu
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Session Overview
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Purpose of Taxes;
Raising revenues for administration of the
nation states;
To provide basic public and semi-public
goods (like roads, etc.) to the citizens; and
To maintain internal security and provide
justice to its citizens.
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Session Overview
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In times of war and in times of natural calamities,
additional taxes were imposed on the citizens to
cover the cost of war or to provide succor to people
affected by the natural calamities or to rebuild
infrastructure damaged by war or by natural
calamities.
Taxes have been the main source of revenue for
nations to raise public finances.
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Vale Added Tax
Session Overview
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Based on the administration of tax system and the
system of collection of taxes, the taxes can be
broadly classified into two types;
Direct Taxes are those taxes which are demanded
from the very person who it is intended or desired
should pay it.
Indirect Taxes are those taxes which are demanded
from one person in the expectation and intention that
he shall indemnify himself at the expense of another.
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Session Overview
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Taxes are unilateral payments by citizens to
its Government for which there is no quid pro
quo. In modern day nation-states, taxes are
imposed on the basis of a rule of equity and
that the rule may be the principle of ability to
pay taxes. The best method to to determine
the principle of ‘ability to pay’ is the income
and consumption of a citizen.
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Session overview
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During this session we will cover:
Tax structure;
Characteristics of good tax structure;
Distribution of taxation powers between the
Union and States in India;
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Learning objective
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At the end of this session the trainees will be
able to define a tax structure and various
types of taxes, the characteristics of good tax
structure, and Constitutional provisions
regarding taxation in India.
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Tax structure
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Taxes are levied on income of citizens and
on consumption of citizens.
Taxes levied on the income of citizens are
‘Direct Taxes’ as the incidence of tax and
tax payer is the same person. Income Tax,
Wealth Tax, Corporation Tax are some of the
examples of direct taxes.
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Tax structure
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Taxes on commodities, is essentially a tax on
consumption. It is a form of ‘Indirect Tax’ as
the tax payer (producer or trader) and the
ultimate bearer of tax (consumer) are two
different persons. Excise Duty, Import Duty,
Sales Tax etc. are the examples of indirect
taxes.
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Tax Structure
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Taxes are compulsory payments for which there is
no quid pro quo.
The obligation to pay taxes tends to alter the affected
individual’s economic behaviour.
All economic agents (producers of goods and
services) have to make certain major decisions,
namely, what to produce or what employment to
seek, where to produce and how to produce (what
factors of production to use and in what proportion to
combine them) and taxes affect their decisions.
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Tax Structure
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Taxes also affect economic incentives;
willingness to work and earn, willingness to
save, willingness to take risk, etc. Very high
rates of personal income tax can alter the
choice between work and leisure, between
savings and consumption and between risky
and safe investments or occupations.
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Tax Structure
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Taxes on commodities are intended to be
taxes on consumption, because the ultimate
aim is to reach the consumption of
individuals. Commodity taxes can be divided
on domestically produced goods and
services and those on imports.
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Tax Structure
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Commodity taxes on domestically produced
goods take the form of ‘Excise Duty’.
Another commonly levied indirect tax on
commodities is the ‘Sales Tax’. It is a tax
levied at any stage in the chain of
transactions through which commodities may
pass, i.e. from production to retail.
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Indirect Taxes
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An ‘Origin Based’ tax is one which is levied
and/or collected and retained by the
jurisdiction of production, a ‘Destination
Based Tax’, on the other hand is levied
and/or collected and retained by the
importing jurisdiction.
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Indirect Taxes
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A ‘Cascading Tax’ is one which effectively falls on
inputs at every stage and thereby increases the cost
of production. For example if a cascading sales tax
regime is in place where the tax is levied at each and
every stage of transaction without factoring the tax
paid at earlier stages of transaction.
Such a tax tends to create distortions through
altering the degree of vertical integration.
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Indirect Taxes
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A ‘Non-cascading Tax’ on the other hand
takes care of and factors in the taxes paid on
the inputs at various stages of production. It
is more transparent and the consumer or the
ultimate user is sure bout the tax element
included in the sales price.
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Characteristics of good tax structure
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To mention only the major characteristics,
the tax system should be fair or equitable;
it should cause the least possible harmful
effects on the economy and to the extent
possible promote its growth;
it should be simple both for administration
and compliance; and
it should be income elastic.
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Tax jurisdiction in India
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Constitution of India (Article 1(1) describes
that ‘India shall be a Union of States’.
India is also a Union of States.
The existence of States within the Union and
existence of Panchayati Raj Institutions
within the States give India a ‘Quasi Federal
Character’.
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Tax jurisdiction in India
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For efficient governance with least overlap
and least friction between the Union and the
States and between the States themselves,
the Constitution of India has prescribed, in
detail, the manner of allocation of revenue
resources between the Centre and the
States.
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Tax jurisdiction in India
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According to the Constitution, the functions and
financial powers of the government have been
divided into Central and State spheres, together with
concurrent areas.
Keeping in view the importance of uniform
development of the country and for making India into
a vast single market with a single tax structure and
tax rate so that inter-regional tax distortions are
avoided, the framers of Constitution gave most of the
financial powers and major taxation powers to the
Union Government.
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Tax jurisdiction in India
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In order that States are not starved of funds for
development and governance of their states, the
Constitution also provides for taxation jurisdiction of
States and sharing of tax revenues between the
Centre and the States in various forms and provides
for a system of grants-in-aid from Centre to the
States. The Centre has been given those resources
which have national or inter-state base and the same
has been the constitutional approach for the division
of the functions between Centre and the States.
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Tax jurisdiction in India
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The ‘Seventh Schedule of the Constitution
of India’ lays down the respective functions
and financial resources for the Centre and
the States in the country. It consists of three
lists:
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The Union List
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Consists of 97 entries and contains the following
sources of tax revenue for the Central Government:
Taxes on Income other than agricultural income;
Corporation Tax;
Customs Duties;
Excise Duties except on alcoholic liquors for human
consumption and opium and other narcotics;
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The Union List
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Taxes on capital value of assets;
Estate Duty other than on agricultural land;
Stamp Duty in respect of certain financial
documents;
Taxes other than stamp duty on transactions
in stock exchanges and futures market;
Taxes on inter-state sale of goods;
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The Union List
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Taxes on sale and purchase of newspapers
and on advertisements published in them;
Taxes on goods and passengers carried by
railways sea or air, taxes on railway fare and
freight;
Taxes not specifically enumerated in the
State list and the concurrent list.
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The State List
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Consists of 66 entries and contains the
following sources of tax revenue for the State
Government:
Land Revenue;
Taxes on agricultural income;
Duties in respect of succession to agricultural
land;
Estate Duty in respect of agricultural land;
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The State List
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Taxes on lands and buildings;
Taxes on mineral rights subject to any limitation
imposed by Parliament by law relating to mineral
development;
Excise Duty on alcoholic liquors and narcotics;
Taxes on entry of goods into local area;
Taxes on consumption and sale of electricity;
Taxes on sale or purchase of goods other than
newspapers;
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The State List
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Taxes on advertisements other than those
inserted in newspapers;
Taxes on goods and passengers carried by
road on inland water transport;
Taxes on vehicles;
Taxes on animals and boats;
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The State List
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Tolls;
Taxes on professions, trade , calling and
employment;
Taxes on luxuries, including entertainment,
betting and gambling;
Stamp Duty on documents, other than those
which are subject to duty by Central
Government;
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Concurrent List
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This list consists of concurrent powers of
States and the Centre in certain areas of
governance. No major source of tax revenue
is included in this list.
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Powers of States
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Article 286 of the Constitution forbids the
levying of any tax by States on:
Imports into and exports from the territory of
India;
Inter-state trade; and
Sale of goods declared by Parliament by law
to be essential for the life of the community.
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Distribution of Tax Revenues
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Constitution mentions about such duties
which are levied by the Union Government
but are collected and appropriated by the
States. These include the stamp duties and
excise duties on medicinal preparations
containing alcohol or narcotics.
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Distribution of Tax Revenues
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Article 269 of the Constitution provides for a
second group of taxes which are levied and
collected by the Central Government but are
assigned to the States within which they are
leviable in accordance with such principles of
distribution as may be laid down by the
Parliament. These comprise of succession
and estate duties in respect of property other
than agricultural land, etc.
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Distribution of Tax Revenues
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Thirdly there is an important category of
taxes on income (other than agricultural
income) which under Article 270 of the
Constitution are levied and collected by the
Central Government but are distributed
between the Union and the States in a
prescribed manner.
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Distribution of Tax Revenues
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Fourthly there is a class of taxes comprising
of Union Excise Duties which are levied and
collected by the Union Government but may
be distributed between the Union and the
States.
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Distribution of Tax Revenues
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Finally there is a fine balancing element in
the whole scheme of financial relationship
between the Union and the States.
Constitution under Article 275 provides for
the payment of grants-in-aid by the Central
Government to the State Governments.
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Distribution of Tax Revenues
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Local Bodies, like the Panchayati Raj Institutions,
have not been given constitutional powers to levy
taxes.
Their taxation powers are those that have been
delegated by the State Government to them and, in
most cases, include Octroi on entry of commodities
into their local area and taxes on property.
They are also given grants-in-aid by the Central
Government and/or by the State Government to
enable them to meet the expenditure obligations on
responsibilities devolved upon them.
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