In order to run the government and manage affairs of a state, money is required. So the government imposes taxes in many forms on the incomes of individuals and companies. Broadly taxes are divided in two categories:
- Direct Taxes
- Indirect Taxes
- A tax that is paid directly by an individual or organization to the imposing entity (generally government).
- A direct tax cannot be shifted to another individual or entity.
- The individual or organization upon which the tax is levied is responsible for the fulfillment of the tax payment. Indirect taxes, on the other hand, can be shifted from one taxpayer to another.
- A taxpayer pays a direct tax to a government for different purposes, including real property tax, personal property tax, income tax or taxes on assets, FBT, Gift Tax, Capital Gains Tax etc.
- The term indirect tax has more than one meaning.
- In the colloquial sense, an indirect tax (such as sales tax, a specific tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer).
- The intermediary later files a tax return and forwards the tax proceeds to government with the return.
- In this sense, the term indirect tax is contrasted with a direct tax which is collected directly by government from the persons (legal or natural) on which it is imposed.
Some of the important DIRECT TAXES:-
1. Fringe Benefit Tax:
- In order to reduce the profit on booked entry, many companies started providing various benefits to their employees and maintain them under their input cost. Thus reducing the profit which in turns lead to less taxation by the government.
- Therefore government imposed Fringe Benefit Tax (FBT) which is fundamentally a tax that an employer has to pay in lieu of the benefits that are given to his/her employees.
- It was an attempt to comprehensively levy tax on those benefits, which evaded the tax.
- The list of benefits encompassed a wide range of privileges, services, facilities or amenities which were directly or indirectly given by an employer to current or former employees, be it something simple like telephone reimbursements, free or concessional tickets or even contributions by the employer to a superannuation fund.
- FBT was introduced as a part of the Finance Bill of 2005 and was set at 30% of the cost of the benefits given by the company.
- This tax needed to be paid by the employer in addition to the income tax, irrespective of whether the company had an income-tax liability or not.
- Fringe benefit tax was abolished in the 2009 Union budget of India.
2. Minimum Alternate Tax
- The concept of Minimum Alternate Tax (MAT) was introduced in the direct tax system to make sure that companies having large profits and declaring substantial dividends to shareholders but who were not contributing to the Government by way of corporate tax, by taking advantage of the various incentives and exemptions provided in the Income-tax Act, pay a fixed percentage of book profit as minimum alternate tax.
- As per the Income Tax Act, if a company’s taxable income is less than a certain percentage of the booked profits, then by default, that much of the book profits will be considered as taxable income and tax has to be paid on that.
- It is called MAT and is a direct tax. It was introduced in order to deter some companies who managed their account in such a way that they end up paying zero or no tax to the government.
- Current rate of MAT is 18.5%.
3. Alternate Minimum Tax
- Under the existing provisions of the Income-tax Act, Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT) are levied on companies and limited liability partnerships (LLPs) respectively.
- That means what is MAT to the companies, AMT is to the LLPs.
- However, no such tax is levied on the other form of business organizations such as partnership firms, sole proprietorship, association of persons, etc.
- In order to widen the tax base vis-à-vis profit linked deductions, it is proposed to amend provisions regarding AMT contained in the Income-tax Act to provide that a person other than a company, who has claimed deduction under any section (other than section 80P), shall be liable to pay AMT.
- Under the proposed amendments, where the regular income-tax payable for a previous year by a person (other than a company) is less than the alternate minimum tax payable for such previous year, the adjusted total income shall be deemed to be the total income of such person and he shall be liable to pay income-tax on such total income at the rate of eighteen and one-half per cent.
INDIRECT TAXATION IN INDIA
- Production of goods: Excise or CenVAT
- Distribution of goods: Sales Tax
- Production and Distribution of services (because they can’t be separated): Service Tax
In India, generally taxes on production or manufacturing (Excise) is levied by the centre and taxes on sales (Sales Tax) is levied by the states.
1. Excise duties:
- Excise duty (Central VAT) is a tax on manufacture of goods within the country. Excise duties are levied under the Central Excise and Salt Act, 1944, the Excise Tariff Act, 1985 and the Modified Value Added Tax (MODVAT) scheme or CENVAT.
- The rates of excise duty levied vary depending inter alia on the nature of item manufactured, the nature of the manufacturing concern, and the place of ultimate sale.
- The duty rates are either ad valorem (i.e. a fixed percentage of the cost of production), specified (a fixed rate depending on the nature of the manufactured item, for example length of product or count of product), or a combination of both.
- The MODVAT scheme, introduced in 1986, on the recommendation of L K Jha Committee, applies to certain specific items.
- The objective of this scheme is to limit the cascading effect of duty incidence on a number of goods subjects to excise which are further used as inputs for other excisable goods.
- Under the scheme, MODVAT credit can be claimed on the purchase of raw materials on which excise have been paid.
- This MODVAT credit can be used to set off excise duty payable on subsequent manufacture of goods.
2. Sales tax
- Sales tax is levied on the sale of a commodity which is produced or imported and sold for the first time.
- If the product is sold subsequently without being processed further, it is exempt from sales tax. Sales tax is levied by either the Central or the State Government, Central Sales tax or 4% is generally levied on all inter-State sales.
- State sales taxes that apply on sales made within a State have rates that range from 4 to 15%.
However, exports and services are exempt from sales tax.
3. Service tax:
- Service tax is a part of Central Excise in India. It is a tax levied on services provided in India, except the State of Jammu and Kashmir.
- The responsibility of collecting the tax lies with the Central Board of Excise and Customs (CBEC).
1. VAT (Value Added Tax)
- Value added tax or VAT is an indirect tax, which is imposed on goods and services at each stage of production, starting from raw materials to final product.
- VAT is levied on the value additions at different stages of production.
- VAT is widely applied in the European countries. However, now a number of countries across the globe have adopted this tax system. GST (Goods and Service Tax) which is to be implemented in India is nothing but a kind of VAT system.
2. Goods and Services Tax (GST)
- The Goods and Services Tax (GST) is a value added tax to be implemented in India, the decision on which is pending.
- It will replace all indirect taxes levied on goods and services by the Indian Central and State governments. It is aimed at being comprehensive for most goods and services with few tax exemptions.
- India is a federal republic, and the GST will thus be implemented concurrently by the central and state governments as the Central GST and the State GST respectively.
- The implementation of GST will lead to the abolition of other taxes such as octroi, Central Sales Tax, State-level sales tax, entry tax, stamp duty, telecom license fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services etc, thus avoiding multiple layers of taxation that currently exist in India.
Advantages of Implication of GST in India:
- It will boost up economic unification of India; it will assist in better conformity and revenue resilience; it will evade the cascading effect in Indirect tax regime.
- In GST system, both Central and state taxes will be collected at the point of sale. Both components (the Central and state GST) will be charged on the manufacturing cost.
- It will reduce the tax burden for consumers;
- It will result in a simple, transparent and easy tax structure; merging all levies on goods and services into one GST.
- It will bring uniformity in tax rates with only one or two tax rates across the supply chain; o It will result in a good administration of tax structure;
- It may broaden the tax base; o It will increase tax collections due to wide coverage of goods and services. o It will result in cost competitiveness of goods and services in Global market. o It will reduce transaction costs for taxpayers through simplified tax compliance. o It will result in increased tax collections due to wider tax base and better conformity.
Limitations in implementing GST in India
- Experience of various countries shows that it is very difficult to manage GST system. Even various developed countries find it difficult. India’s tax collecting authority is not equipped technically to handle it.
- Computerization of data is needed. o Amendment of Constitution is required for which consensus of at least half of the states is needed, which is very difficult in today’s rise of regional politics.
- It is resource intensive as large data collection is required.
- Invented by Arthur Laffer, this curve shows the relationship between tax rates and tax revenue collected by governments.
- The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue.
- Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.