Taxation Tax is a compulsory levy that the state imposes on the citizens. The tax is a binding force which connects the two important pillars of the democracy i.e. state/government with citizens. Each citizen enjoys certain entitlements from government and in return has to contribute to the government in the form of tax payments. If the citizen doesn t pay the tax, either he becomes a free rider (consumes services of the government but doesn t pay tax) or exits (doesn t consume the services of the government). In either case, the accountability factor on the government reduces. So it could be said that tax is an agreement between the state and the citizen wherein the government promises to provide certain entitlements to the citizen and in return the citizen makes the tax payments. Types of Taxation Systems Progressive As the income goes up, taxes also go up Income inequality is reduced Regressive As the income goes up, taxes go down Income inequality is increased Eg-Income Tax Direct Incidence and impact are on the same person Contribution is greater than 50% Major contributors are corporate and income taxes Ex-income tax, wealth tax, corporate tax Indirect Incidence on one person and impact is someone else Contribution is relatively lesser Major contributors are excise (cenvat), customs and services Ex- Cenvat, sales tax, service tax etc
Advalorem Imposed on the basis value of the commodity Chelliah committee recommended more of these taxes Ex- sales tax, VAT etc Specific Imposed based on the specific attributes of the commodities Ex- stamp duty, Excise duty etc o Surcharge- is a charge imposed whenever the income crosses certain level Cess- a tax imposed to achieve a certain objective o Countervailing duty- imposed so as to bring the prices of imports on par with domestic prices Anti dumping duty- imposed by the government whenever a country exports the goods at a lower prices Features of Indian Taxation System o Progressive-most of the taxation imposed by the government are in the form of progressive taxes eg-corporate tax, Income tax etc o Complex- even though the various reforms have been implemented over a period of time in India the taxation structure is considered to be complex with respect to exemptions, filing etc o Loopholes- there are various loopholes using which tax evasion is followed o No tax on income from agriculture Some of the taxes o Service Tax Introduced in 1994-95 with 3 services Levied by central government Gradually the list was expanded and covered more than 100 services From 2012 shifted to negative list approach 2015 it was increased to 14% (inclusive of 3% education cess) Present rate is 15%
o Value Added Tax VAT is a multi-point tax collection wherein the producer/intermediary will pay certain tax based on the value addition VAT-central VAT (CENVAT) and state VAT (Sales Tax) The offsetting is allowed in case of movement of goods either is in the stage of value addition or in the process of being sold from one distributor to another distributor The VAT was introduced in order to reduce the cascading effect CESSo Imposed as per the article 270 o Recent Cesses-Swachh Bharat Cess, Krishi Kalyan Cess Presumptive Taxation o Refers to imposition of tax on the presumption that a certain individual/entity/company earns/enjoys profits enough to be able to pay tax, yet they avoid taxes. The government imposes taxes in such scenario referred to as Presumptive taxation o MAT MAT is a tax levied on profit-making entities that don t pay corporate income tax because of exemptions and incentives Tax levied on book profits FPIs completely exempted Justice A P Shah Committee recommended that FPIs cannot be levied MAT o GAAR (General Anti-Avoidance Rules) These are a set of provisions which try and check tax avoidance. GAAR would come into implementation from 1 st April Observations of Parliamentary Standing Committee GAAR gives arbitrary powers to tax authorities to challenge complex deals Onus lies on the taxpayer
Created uncertainty and ambiguity amongst investors Parthasarathi Shome Committee No retrospective application Deferred till 2016-17 Not applicable on Singapore and Mauritius Not on intra-group transactions No short-term capital gains tax Rate of STT must be increased Problems with Indian Taxation System o The income tax exemption limit has been periodically increased which has led to more income tax payers being exempted. The last time it was raised from Rs 1,50,000 in 2012-13, as a result of this exemption government had to forego Rs 31500 crore o Problems with coverage Only 5.5% of the income earners pay tax The ratio of tax payers to population in voting age comes around to 4%, which should be more than 23% o Government provides a large tax exemptions to the corporate sector which is a revenue foregone o Indian Government under-taxes as well as under spends compared to the developed countries o As a result of presence of unorganized sector, more than 85% of the economy is not covered under taxation
GST The GST will be a revolutionary tax reform which will streamline the indirect tax structure in India. Before India implements GST, throughout the world more than 140 countries have shifted to GST (Malaysia implemented it in 2015). GST bill was introduced (through 115 th CAB) during UPA II, as the Lok Sabha was dissolved the bill lapsed and the new NDA government has re-introduced it as 122 nd CAB. The features of the bill are It will be subsuming all the indirect taxes (some exemptions have been provided as of now) It will streamlining the taxation procedures (only indirect taxes) It will be a dual GST-central and state GST It will lead to creation of GST council o Set up by the president o Union Finance Minister + state Finance ministers o Functions-model GST laws, taxes/surcharge/cess to be levied by the centre and state, exemptions to be given etc o GST council to decide regarding resolution of disputes It provides for the input credit across segments It further reduces the cascading effect The states loosing revenues will be provided compensation It will lead to formation of national market GST vs. Old method Old taxation method Goods and services were taxed separately Different states different tax rates National market not possible Tax on production (origin based taxation) Cascading effect Many indirect taxes Setting off in some cases not allowed GST No differentiation between Goods and services Uniform tax rates across the country National market can be established Tax on consumption (target based taxation) No cascading effect Only one Setting off is allowed
Advantages of GST Overall o It will lead to a unified national market by bringing in uniform indirect tax rates, and bringing in certainty. GST would make doing business in India tax neutral, irrespective of the choice of place of doing business o It will be remove the cascading effect thereby removing the hidden cost of doing business. This reduction in costs is expected to increase the competitiveness. For companies o GST will have a robust IT framework which will compliances such as filing of registrations, returns, payments etc much more easy and transparent For Central and State Governments o The multiplicity of taxes is being replaced by a single robust system with end-to-end IT framework. This will make it easier and simpler to administer the taxes o Will lead to better compliance and increased revenues and also lower the cost of collection of taxes (will lead to revenue efficiency) For the consumer o Because of removal of cascading effect and efficient method of imposing and collecting taxes, the tax burden will come down on the common man Concerns of the states The compensation to be paid the states want a mechanism to be laid down regarding the payment of compensation (full) to be paid to them for the next 5 years The rate of GST Dispute Resolution Mechanism in the original Bill there was a proposal to set up an Independent Tax Dispute Settlement Authority but was watered down in the bill of the present BJP government under which the GST council will have the power to set up Dispute Resolution Mechanism on case-to-case basis. Some of the states agree to this and some are not comfortable. Subramanian committee The design of the tax must be correct hence it must simplify tax administration, protect revenues and encourage compliance
Three rates-standard rate (17% to 18%),Lower rate (12%),Sin rate/demerit rate (40%). over a period India must impose a single tax that would increase the simplification and compliance The exemption of the goods and services under GST will lead to market distortions and increased standard rate, hence the exemption list must be very narrow and consist of the goods and services consumed by the poor. Hence alcohol, real estate etc must be brought under GST The tax base of the central government must be the same as that of the state government (as central government exempts around 300 goods whereas the state governments exempt only 90 goods) 1% Interstate GST should not be implemented as it will prohibit formation of national market The shift to new tax regime may not lead to huge losses of the states, hence fair and timely compensation must be provided by the centre to reinforce trust between centre and states GST implementation must be evaluated every 1 or 2 years Hurdles in implementing GST in India Deciding the tax rate (there is a huge debate going on regarding this and the FM has said it would be decided by the GST council) Inflationary pressures Promoting the adoption amongst the small companies Training tax collectors (as per one of the estimates there is a need to train 60000 tax collectors), IT backbone, bringing the companies up to speed Deciding the threshold (annual turnover of the company beyond which the GST will be applicable-centre and some states are vying for Rs 25 lakh whereas others want it to be Rs 10 lakh) GSTN (GST Network)- it s a SPV formed by the government wherein the central government and the state governments hold 24.5% stake each and remaining 51% is held by the private companies HDFC Bank, HDFC Ltd, ICICI Bank, NSE Strategic Investment Corporation and LIC Housing Finance (some of them have a significant of foreign holding). The argument is that the tax information is very sensitive and should completely come under the control of the government. The GSTN provides the IT framework/backbone for the implementation of the GST. GSTN will be set up as a section 25 company and its functions will involve
o Common IT infrastructure to central & state governments, tax payers and other stakeholders o Back end services to be provided to the state/central tax department Global Experience of GST implementation The rationalization of tax rates has been the biggest hurdle in various countries. The only country which has successfully implemented dual GST with rationalized rates is Canada which varied the tax rates many a times even after the implementation. In some of the cases it has been observed that the implementation of GST has led to inflationary spikes (in 1994, when GST was introduced in Singapore, it led to inflation) Difficult to make the businesses comply with new tax regime. It was observed in Malaysia that there was a huge resentment from the business community to adapt a new tax regime even after giving more than 1.5 years. With very less time remaining in India (to be implemented from 1 st April 2017) it makes the task more challenging (in Malaysia, sector specific papers regarding practices were published which provided a smooth passage) The infrastructure, training etc. if not implemented well enough could lead to problems with small, medium enterprises, delay input credits etc. Has been regressive in some instances i.e. it has more impact on the poor rather than rich
Recent Initiatives TPRU and TPC The Tax Administration Reforms Council (TARC) which was headed by Parthasarathi Shome has made the following observations o In the present scenario there are multiple bodies which give recommendations-cbdt, CBEC o The revenue secretary is not a tax expert but takes the call regarding these taxes o There is a lack of co-operation between CBDT and CBEC; and the selection of members is based on seniority not on expertise o India has one of the highest number of disputes and lowest rate of recovery of tax arrears o There s absence of research based policy and impact assessment studies; and ICT benefits have not been reaped Hence the TARC has given the following recommendations o The Pre-filing of tax returns must be made available to all the individuals o CBDT and CBEC must be integrated in the next 10 years o Post of Revenue Secretary must be abolished and the functions must be allocated to two boards Governing Council to oversee the functioning of the two boards Tax Council to suggest policy and legislation o There should be focus on specialization o Retrospective legislation should be avoided o Both the boards must start a drive to liquidate the current the current cases The Ministry of Finance announced the formation of the Tax Policy Research Unit (TPRU) and the Tax Policy Council (TPC) on February 2, 2016
TPRU Tax Policy Research Unit o Functions Conduct studies on issues of fiscal and tax policies referred to it by CBDT and CBEC and will provide independent analysis of such issues Will prepare and disseminate policy papers and background papers on various tax policy issues To assist Tax Policy Council chaired by FM in taking appropriate tax policy decisions To co-operate with State Commercial Tax Departments. Tax Policy Council o The Tax Policy Council will look at all the research findings coming from Tax Policy Research (TPRU) Unit and suggest broad policy measures for taxation. o The Council will be advisory in nature, which will help the Government in identifying key policy decisions for taxation. o Tax Policy Council under the Union Finance Minister with 9 other members will be constituted
SHYAM S KAGGOD (ECONOMICS FACULTY-BYJU S)
POINTS TO BE COVERED Taxation-concept Types of taxation systems Some concepts-gst, Capital gains tax, cess etc Problems with Indian Taxation System
Types of Taxation Systems Progressive & Regressive Direct & Indirect Advalorem & Specific Tax avoidance and Tax evasion Surcharge & Cess Countervailing & Antidumping
SOME OF THE CONCEPTS Service tax VAT Presumptive Taxation GAAR Capital Gains tax GST
GST-CASCADING EFFECT A B C Selling Price= 100 Tax @ 10% Will buy it at 110 & adds profit of 20 Selling Price= 130 Tax @ 10% Will buy it at 143
GST-INPUT TAX CREDIT INPUTS A Tax paid is 100 OUTPUT B Tax paid is 120 Tax to be paid is 400 Tax Paid to the government is 50 C Tax paid is 130
WHY GST? Cascading effect Multiplicity of indirect taxes Setting off not allowed/difficult in some case The transportation costs will add to the costs Lines between goods and services have blurred (eg- IPR are considered goods for imposing sales tax and as services for imposing service tax)
GST Streamlining/subsuming all the indirect taxesone nation one indirect tax First introduced in 2011 and again in December 2014 115 th CAB and 122 nd CAB
PROVISIONS OF GST BILL The bill empowers both central and state governments to take decisions/make laws regarding taxes GST council Set up by the president Union Finance Minister + state Finance ministers Functions-model GST laws, taxes/surcharge/cess to be levied by the centre and state, exemptions to be given etc GST council to decide regarding resolution of disputes
PROVISIONS OF GST BILL
PROVISIONS OF GST BILL The additional Interstate GST will be levied by central government (additional levy of 1% withdrawn) Exemption-alcoholic liquor for human consumption, GST council to decide when to impose taxes on crude petroleum, high speed diesel, petrol, natural gas and Aviation Turbine Fuel (ATF) Compensation to be given for 5 years
GST
OLD VS NEW Old method Goods and services were taxed separately Different states different tax rates National market not possible Tax on production (origin based taxation) Cascading effect Many indirect taxes Setting off in some cases not allowed GST No differentiation between Goods and services Uniform tax rates across the country National market can be established Tax on consumption (target/end based taxation) No cascading effect Only one Setting off is allowed
GST EXAMPLE
SUBRAMANIAN COMMITTEE Simplify tax administration, protect revenues and encourage compliance Three rates-standard rate (17% to 18%),Lower rate (12%),Sin rate/demerit rate (40%) Alcohol and real estate must be brought under GST 1% Interstate GST should not be implemented Compensation to reinforce trust between centre and states GST implementation must be evaluated every 1 or 2 years
SUBRAMANIAN COMMITTEE
COMPOSITION SCHEME
BENEFITS OF GST IMPLEMENTATION
GST - CONCERNS Anti-Profiteering measures Tax rate - multiple tax rates Revenue protection e-way bill system Inflation Compliance amongst the small businesses
SOME OF THE PROBLEMS RELATED TO INDIAN TAX SYSTEM India under taxes and under spends compared to developed countries The ratio of voters to tax payers is only 4% (it should be 23%) The exemption limits have been increased from time to time (in case of Income Taxes) Most of the economy is not covered under taxation. Only 5.5% of the income earners pay tax Government provides tax exemptions to corporates
EXEMPTION LIMIT
STEPS TO BE TAKEN BY GOI To refrain from raising exemption thresholds Reducing corruption Subsidies for the well-off need to be scaled back Property tax needs to be developed
SOME TAXATION REFORMS GoI has announced that it will be phasing out tax exemption given to corporates (tax incentives to the corporates for 2015-16 were Rs 68711)
SOME TAXATION REFORMS Recommendations of R V Easwar committee report to be implemented Computerization of IT department work The tax refunds must be provided faster and in case of delays the beneficiary has to be incentivized Treat stock trading returns up to Rs 5 lakh as capital gains and not as business income TDS rates for individuals must be reduced from 10% to 5% GST reform GAAR reform
QUESTIONS Which one of the following is not a feature of Value Added Tax? (2011) (a) It is a multi-point destination-based system of taxation (b) It is a tax levied on value addition at each stage of transaction in the production-distribution chain (c) It is a tax on the final consumption of goods or services and must ultimately be borne by the consumer (d) It is basically a subject of the Central Government and the State Governments are only a facilitator for its successful implementation
QUESTIONS The sales tax you pay while purchasing a toothpaste is a (a) tax imposed by the Central Government. (b) tax imposed by the Central Government but collected by the State Government (c) tax imposed by the State Government but collected by the Central Government (d) tax imposed and collected by the State Government
QUESTIONS What is/are the most likely advantages of implementing Goods and Services Tax (GST)? 1) It will replace multiple taxes collected by multiple authorities and will thus create a single market in India. 2) It will drastically reduce the Current Account Deficit of India and will enable it to increase its foreign exchange reserves. 3) It will enormously increase the growth and size of economy of India and will enable it to overtake China in the near future Select the correct answer using the code given below: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3
QUESTIONS Consider the following statements 1. Tax revenue as a percent of GDP of India has steadily increased in the last decade 2. Fiscal deficit as a percent of GDP of India has steadily increased in the last decade Which of the statements given above is/are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2
QUESTIONS (200 WORDS) Discuss the recommendations of Subramanian Committee on GST Discuss the recent initiatives of the Indian government in the taxation segment GST is not the panacea for all the ills of Indian Economy critically evaluate GST regime represents an improvement in form as well as substance compared to previous tax regimeexplain
QUESTIONS GST has led to co-operative federalism/economic Union of India-elaborate GST though revolutionary needs fine-tuning if India wants to reap its benefits-discuss GST implementation rather than reducing the litigation may lead to tax terrorism-discuss