Taxation in India

Taxation in India

2020-04-28 13:58:40

• Taxation in India
  • Direct and Indirect Taxes
  • Methods of Taxation
  • Measure Taken for Tax Reforms
    • BEPS
    • Double Taxation Avoidance Agreement DTAA
    • General Anti Avoidance Rule GAAR
    • Transfer Pricing and Advanced Pricing Agreement APA
    • GST
      • Features of GST
      • Steps Taken to Enhance Voluntary compliance
    • Tax Related Terms

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• Compulsor payments collected from individuals or firms by govt
• Done to fulfil its important obligation on expenditure front.

Direct and Indirect Taxes

Direct tax : burden of tax fall on individual or coy paying and cannot be passed to anybody. It has incidence and impact both at the same point. The person who is hit and who bleeds are the same person. Ex income tax, interest tax.

• are an automatic stabilisers
• more growth more tax w/o gov intervention.

Indirect tax : real burden not borne by individual/firm but passed to the consumer. They can be passed to another entity. Taxes such as Excise, Customs, VAT etc are imposed on suppliers or manufacturers but who pass it to the final consumer.

• Indirect Taxes contribute to inflation and may dent savings and demands.
• From 2015-16 share of indirect has taken over direct.

Methods of Taxation

Progressive Taxation : increasing rate of tax as the value or volume on which tax is imposed increases.

• Indian tax is an example of this. It is believed to discourage more earnings by individual to support low growth and development unintentionally. Being poor is rewarded while richness in punished.
• Tax payers start evading taxes

Regressive Taxation : Opposite to progressive taxation. Some sectors might be imposed with regressive taxes ex to promote growth and dev of small scale industires.

• Criticised while appreciated for rewarding for the rich and punishing the poor.

Proportional Taxation : Taxes have fixed rates for every level of income or production. All taxes must be converted into proportional taxes after a certain level.

Characteristics of good taxation

1. Fairness : Economists suggest inclusion of 2 elements in tax system to amke it fair ie horizontal equity and vertical equity.
   • Individuals in identical or similar situations paying identical or similar taxes is called horizontal equity.
   • where better off people pay more taxes is called vertical equity
2. Efficiency : it is the potential to affect or interfere with the efficiency of the economy. Good tax system raises revenue with least cost on taxpayers and least interference on the allocation of resources in the economy.
   • Taxes on pollution or smoking serves gives revenue to the govt and serves the broader social purpose this is called double divident of taxation.
3. Administrative Simplicity : It includes factors like computation, filling, collection etc. that should be as simple as possible. Chellilah #committee was based on it.
4. Felxibility : to have scope of desirable modifications if there is any such need of it.
5. Transparency : How much tax payers are actually paying and what are they getting against it in the form of public services should be ascertainable.

Importance of Taxation

• provide public goods, defence, enforce law and order
• social welfare and infrastructure, economic infra etc

Taxation in India

• Excise Duties and Service tax have been integrated into GST
• States have residuary powers to levy VAT on goods like petroleum, liquor etc and Direct Taxes on agricultural income

Measure Taken for Tax Reforms

• [[#General Anti Avoidance Rule GAAR]], GST, e-administration,
• broadening of tax base, agreement to reduce BEPS etc
• India’s tax to GDP ratio was 11.6% in 17-18, developed countries have higher share due to more per capita income
• Demonetisation added 1.26 crore new tax payers has increased compliance.
• TDS is Tax Deduction at Source after which returns must be filed to get back money if it is below exemption limit. In 2017-18 India had 6.86 crore tax payers.
• Tax amnesty schemes included PMGKY and Income Declaration Scheme 2016. Such schemes demotivate those who regularly pay taxes.
• Capital Gains tax is made on buying and selling of assets viz land, shares etc. If it is taken over 3 years it is called Long Term Capital Gains tax.
• Cost Inflation Index is by CBDT where inflation cost is deducted from capital gains on transfer of equity shares and the rest of the gains is taxed.
• Inverted duty structure is where import taxes on raw materials are more than those on finished goods eg Rubber goods. FTAs could be a reason for this.

BEPS

• 2 types big companies like Amazon, Apple etc register themselves in tax havens to avoid taxes,
• it is legal and the other is through shell companies where money is invested it can be legal or illegal
• OECD has made rules to counter this
• India recently modified its DTAA with Mauritius for this.

Double Taxation Avoidance Agreement DTAA

• it is the collection of taxes by 2 or more countries on the same declared income
• has led to round tripping where Indian money goes out and comes back through DTAA routes to avoid taxes.
• Foreign companies who do this are called mailbox companies.
• Treaty shopping is when companies have the concession of choosing the type of DTAA they want.

General Anti Avoidance Rule GAAR

• is anti-tax avoidance rule under Do Revenue Mo Finance
• where a tax benefit can be denied if it is found that the deal does not have any commercial purpose other than tax avoidance.
• For claims more than Rs 3 crore
• Place of Effective management says that if a coy is registered in India its global income will be taxable here. Its aim is to target shell companies.
• Tax Information Exchange Agreement or TIEA is to promote cooperation among countries, they share information.
• Convention on Mutual Administrative Assistance in Tax matters dev by OECD and Council of Europe it facilitates tax coop b/w members.

Transfer Pricing and Advanced Pricing Agreement APA

• when a subsidiary company sells its goods to parent company called Transfer pricing
• done to show high prices in countries where tax rate is low and low profit where tax is high
• checked through Advanced Pricing Agreements APAs which are agreement b/w taxpayers and tax authorities on pricing of a transaction
• Tobin Tax or Robin Hood tax proposed on worldwide foreign exchange transactions coming in and leaving out discourages FDI, FPI’s etc thus India does not support it
• Pigovian Tax : is imposed on goods that have negative externalities/ harmful to the consumers. Eg Carbon Tax imposed by IN

GST

• GST removed many defects eg Multiplicity of taxes and duties, Cascading Effect (tax on tax), Steep inter-state variations, irrational exemptions, tax evasion etc
• GST is multi stage destination based tax levied on value addition, burden is borne by the consumer.
• GST aimed at integrating indirect taxes of Centre and states into a single national tax. This would have created a single market at pan India basis that will help business and industry.
• Revenue Neutral implies that new GST rate should be such that it brings same revenue as earlier.
• Fitment rate applies to each class of goods and services and Standard rate to most goods services.

Features of GST

• Total of 8 central taxes such as Central Excise, Duties of Excise, Additional Duties of Excise, Additional Duties of Customs, Special Additional Duty of Customs, Service Tax, Service tax and Central Surcharges and Cesses have been subsumed.
• 9 state taxes such as State VAT, Central Sales Tax, Luxury Tax, Entry Tax, Entertainment and Amusement Tax, Tax on advertisements, Purchase tax, Taxes on lotteries, betting and gambling, State surcharges and Cesses were subsumed.
• IGST levied collected by Centre and apportioned b/w both Centre and States.
• Exemption from levy of GST to be Rs20 lakhs for normal states and Rs 10 lakh for special category states.
• states cannot levy tax on service and manufacturing of goods
• Parliament shall provide for compensation to states for any loss of revenue for a period of 5 years.
  • To make such compensation certain goods were taxed over and above the 28% max rate viz tobacco, coal, motor vehicles etc.
• Bands of rates of goods to be 5, 12, 18, 28 and a category of exempt goods. Cess to be levied on certain goods such as luxury cars, aerated drinks, pan masala, tobacco products etc over and above 28% .
• GST is levied by both Centre and State, its cross empowerment model allows means that there is only one tax authority for central, state and integrated GST
• anti-profiteering clause and 5 mem National Anti-Profiteering comm formed to oversee this
• GSTN or Goods and Services Tax Network was formed to provide IT services other services to gov
• Harmonised system Nomenclature 6 digit code was dev by WCO to identify taxes on products
• Exports are not subject to GST.

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Steps Taken to Enhance Voluntary compliance

• E-Way bills for transportation of goods over a certain limit. This has made physical verification is possible and prevents misreporting.
• Origin and destination PIN codes in E-way bills have been made compulsory.
• Filing status of returns made by taxpayers have been made public.
• Mismatch in tax filings are prompted through cross checking tax filing forms.
• Repeat reminders through SMS of due date of monthly filing.
• Free software for traders for services such as preparing invoices, GST returns, ITR, Balance Sheet and Profit and Loss statements.
• Questionnaire based return filing
• Compliance rating put in public domain to act as deterrence and induce punctual behaviour from taxpayers.

Tax Related Terms

• Laffer Curve : shows relationship b/w tax rate tax revenue
• Minimum Alternative Tax MAT : applicable to companies that show profit but do not pay tax they are called Zero Tax companies. They have to now pay tax on the profit shown.
  • Applicable to all companies except those engaged in infrastructure and power sectors, free trade zones, charitable activities, venture and angel funds.
  • Foreing companies with income sources within India also come under it.
  • Collected as an advance tax and is presently 15% of book profit plus applicable cess and surcharge
• Withholding tax : tax is withheld on certain types of payments like interest, salaries etc.
• Presumptive tax : it presumes a certain amount of income and taxes it, was brought out for those who did not keep a book of accounts or these accounts.
• Wealth tax : taken when an income exceeds a certain level
• Securities transaction tax : taken on value of transaction is a type of financial transanction tax done on transanction undertaken in the domestic stock exchanges.
  • It is collected by the stock exchanges for the Govt of India.
  • STT is not applicable in case of preference shares, govt securities, bonsd, debentures, currency derivatives, mutual funds other than oriental MFs and Gold ETFs.
  • Transanctions mandated by SEBI such as takeover, buyback, delisting offers etc and off market transanctions of securities do not attract STT.
• Commodities transaction tax : is similar is used to discourage excessive speculation. It can be considered as financial transanction tax.
  • Done only for non agricultural commodity futures at rate of 0.01%.
  • This has made transanctions in commodity derivative as non speculative. Speculation is the act of conducting a financial transanction that has substantial risk of losing value but also holds expectation of a significant gain.
• Fringe Benefits : certain services like transport, staff gym, club etc enjoy less tax called fringe benefits enjoyed by the employees collectively and not individually.
• Perquisites : perks, benefits apart from salaries
• Tax incidence : is the entity on whom tax is imposed viz seller, consumers etc. The point where tax looks as being imposed - it is the event of tax imposition.
• Impact of tax : the point where the tax makes its effect felt is known as impact of tax - the after effect of tax imposition.
• Tax base : value of goods services and incomes on which tax is imposed, taxable income is also an example.
• Tax Shelter
• Hidden tax : ex import duties, indirect taxes
• Consumption tax
• Proportional, Progressive and Regressive taxes are all calculated on the percentage of income.
• Specific duty : tax is calculated based on either weight or number
• Ad Valorem : means according to worth, tax is calculated on basis of value
• Compound Duty : various different values are combined to calculate tax
• Excise : is levied on manufacture of goods within the country
• Customs : on goods imported or exported is collected by Centre
• Negative Income Tax : subsidies, financial aids, UBI etc
• Tax Buoyancy : % change in tax revenue with growth of national income
• Tax Elasticity : % change in tax revenue when there is change in tax rate or tax coverage
• Tax Stability : when there is continuity of policy
• Dividend Distribution Tax : When a company books operating profit it pays dividend to to its shareholders. This was earlier deducted from the company itself but since 2020-21 this would be charged on the dividends earned by the shareholders.
  • it would not apply as a flat rate but depend on the income slab of recipients.
• Tax Expenditure : aka revenue forgone it is any reduction in govt revenue through preferential tax treatment as deductions or credits.
  • It is divergence b/w official tax rate and effective tax rate in India. Where effective tax rate = ratio of total tax collected to the aggregate tax base.
  • They should be treated as incentives given by govt to promote certain sectors.
• Grandfathering : is exempting someone or something from a new law or regulation.
• Collection rate : is ratio of total customs to the total value of imports for a year.
  • It indicates overall incidence of customs including countervailing duties CVD and Special additional duties SAD on imports.