Tax1.docx

1.1 INTRODUCTION

Introduction The government`s most important source of income is tax revenue. Taxes are meant for general purposes expenditures made by the government. The strategy where by a person manages its business and other activities in such a way so as to legally minimize his tax liability, not through illegal concealments, but through legal compliance to avail tax credits, rebates, exemptions, reductions and deductions etc. The authority to levy a tax is derived from the constitution of India which allocates the power to levy various taxes between the central and state. An important restriction on this article 265 of the constitution which states that no tax shall be levied and collected except by the authority of law .therefore each tax levied and collected has to be backed by an accompanying law, passed either by parliament or the state legislature. In 2015-16, the gross tax collection of the Centre amounted to Rs.14.60 trillion. Tax policies play an important role on the economy through their impact on both efficiency and equity. A good tax system should keep in view issues of income distribution and, at the same time also endeavor to generate tax revenues to support government expenditure on public services and infrastructure development. Cascading tax revenues have differential impacts on firm in the economy with relatively high burden on those not getting full offsets. The reason for levy of taxes is that they constitute the basic source of revenue to the government. Revenue so raised is utilized for meeting the expenses of government like defence, provision of education, health-care, infrastructure facilities. What comes in mind when the word which known as “Tax” in daily life discussions or on some news channel on T.V, newspapers etc. how the Government gets financed and they pay salaries to employees .Or pay pensions to retired employees. The answer to all these questions is found in system called Taxation. When a person go to market and purchase a product or service in that particular market pay a specific amount of tax included in the price of that commodity. like roads, dams etc. differential impacts on firm in the economy with relatively high burden on those not getting full offsets. It was introduced for the first time in India in 1860 to overcome the finical crisis or revenue crisis of 1857. Thus, it is the income tax act 1961 which is currently operative India. Income tax is most important of all direct taxes and with the application of progressive rate schedule provisions of exemption limit. Country has abolished multiple taxes with passage of time and imposed new ones. Few of such taxes are include inheritance tax, interest tax, gift tax, wealth tax act, 1957 was repealed in the year of 2015. The taxation problems are playing within the market economy. Taxes, as obligatory and non-repayable payment, set by the legislation, constitute the main source of state revenues formation. The government uses tax rates and tax privileges to stimulate the development of certain industries, to influence the consumption structure, to encourage the investments in development of the national economy. Taxes form an element of the social existence. Human society is heterogeneous for natural and physiological reasons. Already in antiquity this made people unite their order to common towns, to support the people not able to work and to provide for many other social needs.

.. Taxes constitute an integral attribute of the state. Efforts and wealth for the purpose of responding to natural disasters and external enemies, as well as in order to build common towns, to support the people not able to work and to provide for many other social needs. Taxes constitute an integral attribute of the state. Taxes became a necessary element of the socio-economic relations at the formation of the state. The development and transformation of the state’s organizational forms were always associated with a modification of the taxation system. In the periods of slavery, states used taxes in the form of natural charges and duties (i.e. by collecting food, harvest items, etc., of personal obligations), but with the development of commodity-monetary relations, taxes took a monetary form. Primary taxes were initially applied directly on wealth through land and individual taxes. Secondary taxes appeared later, initially in the form of internal customs charges, and with the development of commodity-monetary relations, in the form of excises, which were paid by all the free individuals. Taxes are a defined as mandatory payments of the contributors to the budget and to the extra- budgetary funds in the amount determined by law and within the stipulated deadlines. Taxes represent the monetary relations of the state with corporations and individuals regards to Taxes are a defined as mandatory payments of the contributors to the budget redistribution of the national income and the mobilization of financial resources to the budgetary and nonbudgetary funds of the state. Taxes became a necessary element of the socio-economic relations at the moment of the state formation. The development and transformation of the organizational forms of the state were always associated with a modification of the taxation system, which depends on the development level of the state’s democratic forms. The economic essence of the state was addressed for the first time in the work of D. Ricardo, who wrote “Taxes form the share of the produce and work of the country, which is transferred to the government, and ultimately they are always paid from the capital or income of the country. The functions of taxation are: Fiscal function  Regulatory function  Stimulatory function  Replication function  Controlling function Taxation, as a particular type of production relation, constitutes a specific economic category with stable internal features, development patterns and forms of manifestation. However, taxation is not just an economic but also a financial category. Taxation has general traits pertaining to all the financial relations, but at the same time, it has its own defining features and functions, which differentiate taxation from the entirety of financial relations. Taxes are the essence and the means for the achievement of the goal of society or the state, i.e. of the goal that people assume for society.” Sokolov wrote: “Taxes should be understood as the compulsory collection of funds charged by the state from corporations and individuals in order to provide for its costs, without offering the tax-payer a corresponding equivalent .Which means that the state collects with the help of taxes means for the formation of a centralized state fund necessary for the fulfillment of the state functions.

THERE ARE TWO TYPES OF TAXES: Direct tax  Indirect tax Direct tax :The power of dire4ct taxation applies to every individual. It cannot be evaded like the objects of imposts or excise, and will be paid, because all that man hath will he give for his head. This tax is so congenial to then nature of despotism, that it has ever been a favorite under such government. The taxes are the financial charge imposed by the government on income. Revenue raised from the taxes are utilized for meeting the expense of govt. like provision of education, infrastructure facilities such as road, dams etc. Tax is the financial charge imposed by the govt. on income, commodity or activity. Government imposes two types of taxes namely direct taxes and indirect taxes. Under direct taxes, person who pays the tax bears the burden of it example: income tax, wealth tax etc. The present law of income tax is contained in income tax act, 1961. This act is the CHARGING STATUTE of income tax in India. The first income tax act in India was introduced in 1860.It provides for levy, administration, collection and recovery of income tax. the income tax law comprises the income tax act 1961, income tax rules 1962, notification and circulars issued by central board of Direct taxes. Annual finance acts and judicial pronouncements by Supreme Court and High court. Direct taxes, as the name suggests, are taxes that are directly paid to the government by the taxpayer. It is a tax applied on individuals and organizations directly by the government e.g. income tax, corporation tax, wealth tax etc.  Income tax:Income tax is paid by an individual based on his/ her taxable income in a given financial year. Under the income tax act, the term ‘individual’ also includes Hindus undivided families (HUFs), co-operative societies, trusts and any artificial judicial person. Taxable income refers to total income minus applicable deductions and exemptions. Tax is payable if the income is above the minimum taxable limit and is paid as per the differing rates announced for each tax slab for the financial year.  Corporation tax:Corporation tax mean tax levied on companies profits. A tax is levy placed on the profit of a firm to raise taxes. After operating earnings are calculated by deducting expenses, including the cost of goods sold (COGS) and depreciation from revenues, enacted tax rates are applied to generate a legal obligation the business owes the government.  Wealth tax:A simple meaning of wealth tax is a tax levied on personal capital. It is a tax on person’s assets, on his or her net worth. It is not a Tax on income, but rather on an individual’s wealth. Targeting wealthy people for taxation is popular among politicians. In other words, wealth tax is a tax on what we have, as opposed to income tax, which is tax on what we earn. It is helps the reduce inequality- The difference in wealth between the top 1% or 10% richest people and the rest of the population or the poorest individuals.

Indirect tax:An indirect tax such as sales tax, per unit tax, value added tax , goods and services tax , excise, is a tax collected by an intermediary from the person who bears the ultimate economic burden economic burden of the tax. Types of indirect tax: India Service Tax The India Service Tax is 12.36% and is made up of several components, each of which must show separately on a sales invoice. Both the education CESS and the secondary and higher education CESS are a stated percentage of the service tax rate. The total tax rate then equals 12.36%. This rate has remained steady for several years, but can be increased by the Indian Government if they choose to do so. This tax applies to nearly all services and is levied by the Central Board of Excise and Customs (CBEC). The tax rate is outlined as follows: India Service Tax (12% total) India Education CESS Tax (.24%) [2% of 12%] India Secondary and Higher Education CESS Tax (.12%) [1% of 12%] Sourcing service transactions can be difficult since the rules for sourcing vary depending on the type of service transaction involved. For example, while a service is generally sourced to where the recipient of the service is located, this could change if the services being provided are online services.  Central Sales Tax (CST) The Central Sales Tax applies to the sale of goods between states, often referred to as interstate sales. The CST rate charged on general sales is equal to the value added tax rate at the ship-from location, often referred to as the originating state. There are special circumstances under which the CST rate is fixed at 2%. Transactions taxable at 2% are those that take place between registered dealers, and where a C Form is presented. The C Form is issued to registered taxpayers by their state tax department. The CST is administered and collected by the local sales tax authorities of each state. The state in which the transaction commences collects this tax and keeps this tax.  Value Added Tax (VAT) for Indian States Up until 2005, many Indian states administered a general sales tax. Beginning April 2005, all Indian states slowly adopted Valued Added Tax Acts and Rules. The VAT system was supposed to simplify the complexity of indirect taxes in India, but due to the continuation of CST on interstate sales and the Service Tax on services, the new system did not necessarily provide simplification. In addition to the standard VAT rate, each state has adopted a variety of VAT Schedules which specify goods that should be taxed at reduced rates or increased rates. For example, bicycles and tricycles are often taxed at a reduced rate in a variety of states whereas luxury items such as liquor are taxed at an increased rate in a variety of states. VAT rates in Indian states range from reduced rates of 4% to increased rates of 30%. Changes to these rates do occur and Tax ware regularly monitors all jurisdictions in India to insure all Indian rates and content in the Tax ware Enterprise System are current.

Indian tax regime In India the power of the taxation has been divided between Centre and State under article 246 of the constitution .as per said article the Centre has power to tax under list I of the schedule VII of the constitution, the state can tax under list II of the schedule and both can make law under list III of the schedule. Therefore, there is a clearly defined and multiple tax regime in India. Taxation structure existing in country:Taxes levied by Country Centre excise and customs

Taxes levied by State Value added tax (state sales tax)

Service Tax

Local tax

Direct tax Prior to introduction of VAT in the Centre and in the States , there was a burden of multiple taxation in the pre-existing duty Central excise duty and the State sales tax systems . before any commodity was product, inputs were first taxed, and then after the commodity got produced ,with input tax load , output was taxed again. this was causing a burden of multiple taxation (i.e. “tax on tax”) with a cascading effect. Moreover, in the sales tax structure, when there was also a system of multi-point sales taxation at subsequent levels of distributive trade, then along with input tax load, burden of sales tax paid on purchase at each level was also added, thus aggravating the cascading effect further. In India, VAT was introduced and Central level for a selected no. of commodities in terms of MODVAT with effect from March 1, 1986, and in a step by step manner for all commodities in terms of CENVAT in 2002-03. Subsequently, after Constitutional Amendment empowering the Centre to levy taxes on services, these service taxes were also added to CENVAT in 2004-05. When VAT is introduced in place of central excise duty, a set-off is given, i.e., a deduction is made from the burden for input tax. In case of VAT in place of sales tax system, a set off is given from tax burden not only for input tax paid but also for tax paid on previous purchases. with VAT the problem of tax on tax and related burden of cascading effect is thus removed. Before introduction of vat, in the sales tax regime, apart from the problem of multiple taxation and burden of adverse cascading effect of taxes as already mentioned, there was also no harmony in rates of sales tax on different commodities among the states. Not only were the rates of sales tax numerous (often more than ten in several states), and different from one another for the same commodity in different states, but there was also an unhealthy competition among the states in terms of sales tax rates-so called “rate war”-often resulting in, revenue-wise, a counter-productive situation. It is in this background that attempts were made by the States to introduce a harmonious VAT in the states, keeping at the same time in mind the issue of sovereignty of the states regarding the state tax matters The state started implementing VAT 1, 2005 After overcoming the initial difficulties, all the states and union territories have now implemented vat.

Introduction of Goods and services tax In India Gst is levied on supply of goods or services or both, in India including the state of Jammu and Kashmir. Gst is a destination based tax on consumption of goods and services. It is levied at all stages right from manufacture up to final consumption with credit of taxes paid at previous stages available as set-off. In a nutshell, only value addition is taxed and burden of taxes and burden of taxed and burden of tax is to be borne by final consumer.

Genesis of Gst in India: In 2000, the Vajpayee govt started discussion on Gst by setting up an empowered committee. It was task of designing the Gst model and overseeing the IT back-end preparedness for its rollout.  GST is considering to be a major improvement over the pre-existing central excise duty at the national level and the sales tax system at the state level. The new taxis a further significant breakthrough and the next logical step towards a comprehensive indirect tax reform in the country.  The GST was recommended by the kelkar task force on implementation of the fiscal responsibility and budget management (FRBM) Act, 2003. The task strongly recommended fully integrated GST on national basis.  A proposal to introduce a National level gst by april1,10 was first mooted in the budget speech by the union finance minister , shri p. chindambram, while presenting the central budget of 2007-08. Since the proposal involved reform / restructuring of not only indirect taxes levied by the centre but also the states, the responsibility of preparing a design and road map for the implementation of GST was assigned to the empowered committee of state finance ministers.  In 2014 the talks of ushering in GST, however, gained momentum when the NDA government tabled the constitution bill, 2014 on GST in parliament on 19 dec, 2014.The lok-sabha passes the bill on 6th may 2015 and rajya-sabha on 3 August, 2016. Subsequent to ratification of the bill by more than 50% of the states, constitution (122nd Amendment) bill,2014.received the assent of the president on 8th sept, 2016, which paved the way for introduction of GST in India.  The central GST legislation – central GST tax bill,2017, integrated gst bill, 2017 were introduced in lok sabha on 27th march, 2017 and were passed on 29th march 2017 and with the receipt of the presidents assent on 12th april 2017, the bill were enacted. The enactment of the central act was followed by the enactedment of the state GST laws by various legislatures. Telangana, Rajasthan, Chhattisgadh, Punjab, goa and bihar were among the first ones to pass their respective state GST laws.  Government rolled out gst w.e.f. 1st july, 2017.  The introduction of GST is a very significant step in the field of indirect tax reforms in india. By amalgamation a large no. of central and state taxes into a single tax, it will mitigate cascading or double taxation in a major way and pave the way for a common national market.  France was the 1st country to implement GST in year 1954. Within 62 years of its advent, about 160 countries across the world have adopted GST becaz this tax has the capacity to raise revenue in the most transparent and neutral manner.

RATIONALE OF THE GST Despite this success with vat, there are still certain shortcomings in the structure of vat both at the central and at the state level. The shortcomings in CENVAT of the government of India are as follows: Non- inclusion of several central taxes in the overall framework of CENVAT, such as additional customs duty, surcharge etc. and thus keeping the benefits of comprehensive input tax and service tax set-off out of reach for manufacturer’s/dealers.  No step has yet been taken to capture the value-added chain in the distribution trade below the manufacturing level in the existing scheme. The introduction of GST at the central level will not only include comprehensively more indirect central taxes and integrated goods and service taxes for the purpose of set-off relief, but may also lead to revenue gain for the Centre through widening of the dealer base by capturing value addition in the distributive trade and increased compliance. In the existing state-level VAT structure there are also certain shortcomings as follows: Several taxes which are in the nature of indirect tax on goods and services, such as luxury tax, entertainment tax, etc. , have yet not been subsumed in the VAT.  CENVAT load on the goods remain included in the value of goods to be taxed under state VAT, and contributing to that extent a cascading effect on account of CENVAT element.  Non integration of VAT on goods with tax on services at the state level and cascading effect of service tax. In the GST both the cascading effects on CENVAT or service tax are removed with set-off , and a continuous chain from the original producer’s point and the service provider’s upto the retailer’s levels is established which reduces the burden of all cascading effects. GST is not simply vat plus service tax but an improvement over the previous system of VAT and disjointed of service tax. Implementation of gst will also remove several roadblocks in the existing taxation system in India. a)tax cascading – the goods and services tax act will overcome thew problem of taxcascading through input tax credit mechanisms.