Role Of Taxation In Economy

ROLE OF TAXATION IN ECONOMY

WHY DO WE NEED TAXATION?

SOURCES OF PUBLIC FINANCE STATE NEEDS MORE & MORE RESROUCES

SOURCES OF PUBLIC FINANCE • TAX – COMPULSORY payment based on income/profits. • FEE-payment made to the government by a person in exchange of a service. License fee, registration fee. • PRICE- for supply of goods & services eg supply of gas, telephone, railways. VOLUNTARY depending on use. • SPECIAL ASSESSMENT-COMPULSORY payment due to a benefit derived by public works (eg: TPS,BRTS,River front development,Vastrapur lake).

SOURCES OF PUBLIC FINANCE • PROFITS from Public Enterprise-Nava ratan

companies.

• PUBLIC LOANS-borrowings from internal and

external sources. Required to fund new economic development or war etc. • EXTERNAL AID- for specific projects, rural sanitation and water supply, girls education, health care. • ISSUE of NEW PAPER MONEY-Creation of new money, DEFICIT financing.

TAXATION • It is a compulsory contribution imposed by a public authority. • It is the main source of income for public authorities. • Pre-decided. • Dose not confer direct and proportional benefits to tax payer.

IMPORTANCE 1.Capital formation is important in all economic model. 2.Means of resource mobilization, highly dependable, no strings attached.` 3.Instrument for transferring purchasing power from individual to government . 4. Flexible depending on the requirements.

DEVELOPING ECONOMIES 1.Problems related to economic growth, removal of poverty and inequalities, chronic unemployment and regional disparities for e.g. India 2. Tax policy to yield increased revenues to the government, also conform to criteria of buoyancy and elasticity 3. Equity and resource mobilizations dictate that the tax burden should be evenly distributed between sectors and individuals. e.g.agriculture sector vizaviz industries. 4. Tax system to promote private savings and direct them into investment in priority industries (India having high saving rate but low investment rate.)

CLASSIFICATION OF TAXES • IMPACT AND INCIDENCE OF A TAX • RATE OF TAX • METHOD OF TAX

The Incidence of tax When a tax is imposed, or its rates etc, are changed, the effects are felt in different spheres of the economy. The incidence of tax is “the resulting changes in the distribution of income available for private uses”,-Musgrave • Incidence of tax is judged in terms of the money burden of the tax. • Incidence lies upon that final source from which the tax money comes.

Two kinds of tax incidences Specific tax incidence

Differential tax incidence

CLASSIFICATION Direct Taxes J.S.Mill –“direct tax is demanded from the very persons who, it is intended or desired ,should pay it” Indirect Taxes J.S.Mill –“Indirect tax is demanded from the very persons in the expectation and intention that he shall indemnify himself at the expanse of others

Classification –Rate of Tax • PROPORTIONAL TAX-rate of tax remains same irrespective of the size of taxable income. • PROGRESSIVE TAX-Rate of tax increases with increase in taxable income. eg Indian Income Tax system. • REGRESSIVE TAX-rate of tax is inversely proportional to the income. • DEGRESSIVE TAX-Rate of progression is relatively less. Increase in the rate of tax is less then the increase in income.

CLASSIFICATION

Directly paid by the persons on whom it is legally imposed Impact is on the same persons who pays the tax

Indirectly paid by the other persons

Impact is on many persons

Tax burden cannot be shifted to Tax burden can shift to other persons and the consumer the other persons (other directly pay to the local than the payee). Government, State government, Center Government. Example:Income tax ,house Consumption taxes, property tax, land and estate tax excise duties, sales tax, or service tax octroi.

COMPARATIVE STATUS 1950-51 Direct tax 43% Indirect Tax 57%

1990-1991 16% 84%

2003-04 38% 62%

Total Tax Revenue

100%

100%

100%

Note: Figures in percentages of total Tax Revenue Source: Indian Economy, Sundhararam & Datt, 2004

DIRECT TAX:ADVANTAGES 1.

Economy The tax payer makes the payment to the state directly and deducting the cost of collection, which directly adds up to the State’s income. 2. Certainty Proper provision for the payment of taxes on times, easy for the State to make financial plans . 3. Elasticity The yield from direct tax increases with an increase in wealth and population 4. Social effects & Distributive justice Redistributes the fruits of developments, develop civic consciousness among tax-payers. Reduce the glaring inequalities in the distribution of wealth and income. Income tax and inheritance taxes are useful in this direction.

INDIRECT TAXES :ADVANTAGES 1 Convenience Indirect taxes are convenient to the tax payers and the State both .The tax –payer makes the payment when he purchases commodities in small amount and he does not feel them. The State can collect them in bulk from importers, exporters and producers. 2. Elasticity With proper adjustments indirect taxes are elastic sources of revenue. If they are imposed on commodities of wide consumption, the revenue from them can increase to a great extent.

3. Diffculty of evasion Ordinarily, indirect taxes cannot be easily evaded. They are included in the prices of commodities and every time a commodity is purchased, the purchaser pays the tax

OTHER CLASSIFICATIONS Temporary and Permanent Taxes Temporary taxes

Permanent taxes

A tax on war profits to pay off Taxes on income a large amount of debt in a short period of time. Example:Kargil war tax

Example: property tax

OTHER CLASSIFICATIONS On basis of method of assessment. SPECIFIC AND AD VALOREM TAXES

Specific taxes

Ad valorem taxes

A physical measurement like Tax on value of a commodity. the weight or volume of a Definite percentage of value of commodity. goods.

Example : water tax

Example :Finished goods

SINGLE TAX AND MULTIPLE TAXES Single taxes

Multiple taxes

The single tax is the tax on some A multiple tax system is preferably one-class of commodities only once preferable to a single tax system, but in the revenue system of a country. too great a multiplicity of taxes would be undesirable.

The Physiocrats proposed a single A large number of taxes, however tax on the economic rent of land. small, would involve a large cost and difficult to collect.

Example:

Example: Yarn, Textile

GRADUATED AND PROGRESSIVE TAXATION Graduated taxation

Progressive taxation

A variation in the rate of tax with variation in the amount on income,property,etc

When tax rate rises with an increases in income,etc graduate is upwards and is known as progressive taxation It has forms :Step system and Sad system Step system: Specific rates were laid down for the whole of the income. Hence under this income, the tax amount did not rise gradually, but it moved by leap or jumps Slab system: The tax is calculated or different slabs of income

Example: property tax

Example: income tax

NATIONAL TAXES Collected by the central government like (income, wealth, corporate tax ,custom duties). STATES TAXES On goods and services manufactured and produces in the state, on land and real estate transactions (stamp duties). LOCAL TAXES By ULB/ Municipalities / Municipal Corporate/Development Authorities (vacant land taxes, Sanitation ,Water and Property Tax.)

DOUBLE TAXATION • Double taxation is the case where two or more countries concurrently tax the same tax payers on account of the same subject matters of tax (such as income, property, etc). • Double taxation generally arises on account of conflicting criteria adopted by different countries to levy the taxes.

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Two or more governments may enter into an agreement where by it is ensured that the same subject matter is not taxed by two governments. This solution would be called avoidance of double taxation. Governments may enter into an agreement whereby the economic units liable to double taxation are provided partial relief. A country may decide to give unilateral tax relief to its own subjects even when no tax agreement exists with other countries. India has entered into comprehensive agreement for the advantage of double taxation of income with several countries including Austria, Belgium, and The federal republic of Germany, France, Japan and the Scandinavian countries.

FOR AN EFFICIENT SYSTEM • • • • • • • •

EQUALITY CERTAINTY CONVINENCE ECONOMY PRODUCTIVITY ELASTIC DIVERSITY SIMPLICITY

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