Corporate law and indirect tax introduction

To know about corporate law

1. UNIT – I INTRODUCTION TO INDIRECT TAXES

2. INTRODUCTION The taxation system in India is such that the taxes are levied by the Central Government and the State Governments . Some minor taxes are also levied by the local authorities such as the Municipality and the Local Governments. To run the government and manage the affairs of a state, money is required. So the government imposes taxes in many forms on the incomes of individuals and companies .

3. In India, in 1944, indirect taxes were introduced to protect against British made goods. Some new indirect taxes were introduced by the Indian government after India's independence. But now the GST has replaced many indirect taxes. Indirect tax is the tax levied on the consumption of goods and services. It is not directly levied on the income of a person. Instead, he/she has to pay the tax along with the price of goods or services bought by the seller.

4. Classification of Taxes Broadly taxes are divided into two categories: 1. Direct Taxes – 5 heads of income and deductions 2. Indirect Taxes

5. Direct Taxes : A direct tax can be defined as 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. The  Central board of direct taxes  d eals with matters related to levying and collecting Direct Taxes and formulation of various policies related to direct taxes. 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.

6. Indirect Taxes 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 Taxes (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 the government with the return. In this sense, the term indirect tax is contrasted with a direct tax which is collected directly by the government from the persons (legal or natural) on which it is imposed.

7. Private and Public Goods: Taxation means levy of taxes on goods and services. The goods are, Private and Public Goods .

8. Private Goods : Any product which must be purchased for consumption, and which prevents another individual from consuming it if consumed by one individual is known as a private good. Private goods have a lesser chance to experience the free-rider problem than the public goods as private goods are not readily available for free and a company produces private goods with a goal of making profits. 

9. Public goods : Public goods is a term in economics which refers to the good (commodity) that is available for use for everybody and one person’s usage of it does not diminish or exhaust its availability to others. Public goods are provided as a whole to the society by the government and the consumption of these goods by an individual doesn’t reduce its availability or doesn’t exclude others from consuming it.   Examples of public goods are education, infrastructure, lighthouses, flood control systems, knowledge, fresh air, national security, official statistics, etc.

10. Importance of Indirect Taxation Indirect Taxes have been put in place to ensure that resources are used efficiently by individuals and organizations as lower expenditure on raw materials will mean lower margins cost on taxes. In turn, lowered costs of production will raise profits and foster healthy competition among rival organizations thereby developing the economy. This also provides consumers with a wider variety of options catered to their needs, facilitating improvements in standards of living .

11. Importance of Indirect Taxation ( Contd …) The burden of taxation falls on the consumers in the end , as most retailers, manufacturers and service providers will attempt to recover taxes on initial expenses in the sales price itself. Hence the importance of taxes of this kind lies in how it incentivizes organizations to make their operations as efficient as possible.

12. Characteristics of taxation Tax is a Compulsory Contribution The Assesses will be required to pay Tax if is due from him. Taxes are levied by the Government Common Benefits to All No Direct Benefit Certain Taxes Levied for Specific Objectives Good tax system should be in harmony with national objectives Tax-system recognizes basic rights of tax-payers

13. (1) Tax is a Compulsory Contribution A tax is a compulsory payment from the person to the Government without expectation of any direct return. Every person has to pay direct as well as indirect taxes. (2) The Assesses will be required to pay Tax if is due from him No one can be forced by any authority to pay tax, if it is not due from him. Suppose, if there is a tax on liquor, the state can force an individual to pay the tax only when he drinks liquor. But, if he does not drink liquor, he cannot be forced to pay the tax on liquor. Similarly, if an individual’s income is below the exemption limit, he cannot be forced to pay tax on income.

14. (3) Taxes are levied by the Government No one has the right to impose taxes. Only the government has the right to impose taxes and to collect tax proceeds from the people. (4) Common Benefits to All The tax, so collected by the Government, is spent for the common benefit of all the people. In other words, when the government collects a tax, its proceeds are  spent to extend common benefits to all the people.  The Government incurs expenditure on the defense of the country, on maintenance of law and order, provision of social services such as education, health etc. Such benefits are given to all the people- whether they are tax-payers or non-taxpayers. These benefits satisfy social wants. But the Government also spends on subsidies to satisfy merit wants of poor people.

15. ( 5) No Direct Benefit In the modern times, there is no direct relationship between the payment of tax and direct benefits. The government compulsorily collects all types of taxes and does not give any direct benefit to tax-payers for taxes paid . For example, when taxable income is earned by an individual or a corporation, he or it simply pays the tax amount at the specified rate cannot demand any benefit against such payment. (6) Certain Taxes Levied for Specific Objectives Though taxes are imposed for collecting revenue for the government to meet expenditure on social wants and merit wants , certain taxes are imposed to achieve specific objectives. For example, heavy taxes are imposed on luxury goods to reduce their consumption so that resources are directed to the production of essential goods, such as cheaper variety of cloth,  less costly goods of mass consumption, etc. 

16. (7)Good tax system should be in harmony with national objectives A good tax system should run in harmony with important national objectives and if possible should assist the society in achieving them. It should try to accommodate the attitude and problems of tax payers and should also take into consideration the goals of social and economic justice. It should also yield adequate revenue for the treasury and should be flexible enough to move with the changing requirements of the State and the economy. (8) Tax-system recognizes basic rights of tax-payers A good tax system recognizes the basic rights of the tax-payers. The tax-payer is expected to pay his taxes but not undergo harassment. In other words, the tax law should be simple in language and the tax liability should be determined with certainty. The mode and timings of payment should be convenient to the tax-payer. At the same time, a tax system should be equitable between tax-payers. It should be progressive and burden of taxation should be equitable on all the tax-payers.

17. Objectives of Taxation Initially, governments impose taxes for three basic purposes: to cover the cost of administration, maintaining law and order in the country and for defense. But now government’s expenditure pattern changed and gives  service to the public more than these three basic purpose and it restore social justice in the society by providing social services such as public health, employment, pension, housing, sanitation and other public services. To generate more revenue a government imposes taxes on various types. In general objective of taxations are:

18. 1.  Raising revenue 2.  Removal of inequalities in income and wealth : 3.  Ensuring economic stability : 4.  Reduction in regional imbalances :  5.  Capital accumulation 6.  Creation of employment opportunities 7.  Preventing harmful consumptions 8.  Beneficial diversion of resources 9.  Encouragement of exports 10 .  Enhancement of standard of living

19. 1.  Raising revenue : to render various economic and social activities, a government needs large amount of revenue and to meet this government imposes various types of taxes. 2.  Removal of inequalities in income and wealth : government adopts progressive tax system and stressed on canon of equality to remove inequalities in income and wealth of the people. 3.  Ensuring economic stability : taxation affects the general level of consumption and production. Hence, it can be used as effective tool for achieving economic stability. Governments use taxation to control inflation and deflation

20. 4.  Reduction in regional imbalances : If there is regional imbalance with in the country, governments can use taxation to remove such imbalance by tax exemptions and tax concessions to investors who made investment in under developed regions. 5.  Capital accumulation Tax concession or tax rebates given for savings or investment in provident funds, life insurance, investment in shares and debentures lead to large amount of capital accumulation, which is essential for the promotion of industrial development. .

21. 6.  Creation of employment opportunities Governments might minimize unemployment in the country by giving tax concession or exemptions to small entrepreneurs and labor intensive industries. 7.  Preventing harmful consumptions Government can reduce harmful things on the society by levying heavy excise tax on cigarettes, alcohols and other products, which worsen people’s health. 8.  Beneficial diversion of resources Governments impose heavy tax on non- essential and  luxury goods to discourage producers of such goods and give tax rate reduction or exemption on most essential goods. This diverts produce’s attention and enables the country utilize to utilize the limited resources for production of essential goods only.

22. 9.  Encouragement of exports Governments enhance foreign exchange requirement through export-oriented strategy. These provide a certain tax exemption for those exporters and encourage them with arranging a free  trade zones and by making a bilateral and multilateral agreement 10 .  Enhancement of standard of living The government also increases the living standard of people by giving tax concessions to certain essential goods.

23. Types of Indirect Taxes in India: Goods and Services Tax (GST) Customs Duty 1. Goods and Services Tax (GST):  GST is the most common example of indirect tax, which has replaced an array of other indirect taxes in India such as value added tax, service tax, excise duty, purchase tax and more. GST is a single, unified and the most comprehensive indirect tax which is imposed on the goods and services on the basis of the tax slabs laid by the GST council of India

24. 2. Customs Duty:  Customs duty is levied on you, if you purchase any goods and service from abroad. This duty has to be paid, irrespective whether the product has reached you by air, sea or land. Thus, customs duty is an indirect tax which is imposed to make sure that each and every product coming into India is taxed. After the introduction of GST, a huge change has come in the entire tax landscape of the country. The various indirect taxes such as VAT, service tax, sales tax and others that were mandatory earlier, have now been abolished. GST truly goes by its slogan of “One Nation, One Tax, One Market”.

25. Direct tax Vs Indirect tax Context Direct Tax Indirect Tax Meaning Paid directly to the government Paid to the government via intermediary Levied on Profits and income Goods and services Taxpayer Individuals, HUFs and businesses End-consumers of products, goods and services. Tax Rate Directly depends on income and profits Same for everyone Tax Burden Progressive Rate of tax is flat so tax burden is regressive Transfer of liability Not transferable Can be transferable Tax Collection Complex Quite convenient Types Income Tax and STT Goods and Services Tax (GST) Evasion Possible Not possible

26. ADVALOREM AND SPECIFIC DUTIES

27. What Is an Ad Valorem Tax? An ad valorem tax is a tax based on the  assessed Value of an item, such as real estate or personal property. The most common ad valorem taxes are  Property taxes  levied on real estate. However, ad valorem taxes may also extend to a number of tax applications, such as import duty taxes on goods from abroad.

28. Ad Valorem Tax: Ad Valorem Tax refers to the tax levied on assets depending on their assessed monetary value. These are imposed by state and municipal governments of a region and calculated annually. Such taxes help respective administrations gather revenue and ensure it is adjusted and collected as per the spending limits of an individual. The Latin phrase  ad valorem  means "according to value." So all ad valorem taxes are based on the assessed value of the item being taxed. Property ad valorem taxes (property taxes) are usually levied by local jurisdictions, such as counties or school districts. Ad valorem taxes are generally levied on both real property (land, buildings and other structures) and major personal property, such as a car or boat. 

29. It is different from the specified taxes, whereby individuals have to pay taxes every time a transaction occurs. Instead, the price of the property in question is evaluated first, and accordingly, an  ad valorem tax rate  is applied to it. Then, based on the calculation, the owners pay the tax. Ad valorem duties are designed to generate revenue for the government and are applied to various goods entering a country, contributing to the overall cost of importing and affecting the pricing and profitability of goods in international trade.

30. Merits of Advalorem Duty: Easy to identify the value of commodities. Keeps the tax burden steady Higher revenue during inflation Limitations of Advalorem Duty: Difficult to administer Difficult to estimate value Difficult to predict quantum of revenue

31. Specific Duty: A specific duty is not related to the value of the imported goods but to the weight, volume, surface, etc. of the goods. The specific duty stipulates how many units of currency are to be levied per unit of quantity   A specific duty is a levy of a given amount of money per unit of the import, such as $1 per yard or per pound. An ad valorem duty, on the other hand, is calculated as a percentage of the value of the import. It is levied as to the weight, lengthy, bulky or some other unit of measurement of the commodity concerned. The value of goods manufactured or imported/exported is not important for this purpose. Only the weight, lengthy, bulky etc.,of the commodities decide the quantum of duties.

32. Merits of Specific Duty: Less chance of tax evasion Easy to administer and collection Certainty in the amount of duty Certainty in the Quantum of revenue Limitations of Specific Duty: Static revenue yield Tax burden increase in depression

33. Advalorem Vs Specific duty Basis of difference Advalorem duty Specific duty Basis of levy Levied on the certain percentage of value of commodity to be taxed Levied as to the weight, length, bulkiness etc., of the commodity to be taxed. Administration of duty Difficult to administer. It is easier to administer and collect. Prediction of quantum of revenue The Govt., cannot predict the quantum of revenue yield due to changes in the prevailing price levels. The Govt., can predict the quantum of revenue yield Chance of tax evasion The duty is based on the value mentioned in the invoice. There is a chance for manipulating the value. hence, there is chance of tax evasion. It is ascertained at any time. Hence there is less chance of tax evasion. Tax burden It keeps tax burden steady. It does not keeps tax burden steady. Revenue Yield It brings revenue during the period of rising prices. Revenue yield is static in nature.

34. GST IN INDIA- CONSTITUTIONAL BASIS OF TAXATION IN INDIA

35. Goods and Services Tax (GST) in India is a comprehensive, destination-based indirect tax that was introduced to replace a complex tax structure of multiple indirect taxes levied by the central and state governments. The constitutional basis for GST in India is provided by the 101st Amendment Act of the Indian Constitution, which came into effect on July 1, 2017.

36. The key constitutional amendments that laid the foundation for GST are: Constitution (One Hundred and First Amendment) Act, 2016 : Introduction of Article 246A: Goods and Services Tax Council: Compensation to States:

37. Constitution (One Hundred and First Amendment) Act, 2016 : This amendment was a historic step in the Indian tax system . It introduced Article 246A to the Constitution, which empowers both the Parliament and the State Legislatures to make laws with respect to goods and services tax imposed by the Union or by such States. It also introduced a new Article 279A, which established the Goods and Services Tax Council . Introduction of Article 246A: Article 246A provides for the concurrent powers of the Union and the States to make laws with respect to GST. It defines the respective areas of legislation for the Union ( CGST - Central Goods and Services Tax) and the States ( SGST - State Goods and Services Tax).

38. Goods and Services Tax Council : Article 279A of the Constitution established the Goods and Services Tax Council. The Council is a joint forum of the central and state governments, and it is responsible for making recommendations on important issues such as tax rates, exemptions, and threshold limits. This collaborative approach ensures uniformity and consensus among the center and the states. Compensation to States: The 101st Amendment Act also introduced Article 279A(4)(g), which ensures that states are compensated for any loss of revenue arising from the implementation of GST for a specified period, as determined by the GST Council.

39. GST In India: GST, i.e., Goods and Services Tax in India, is a multi-stage, comprehensive, destination-based monetary tax levied on every value-addition practice in the supply chain. It was implemented on July 1, 2017, under the Finance Ministry of India, aiming to make the country a unified common market.

40. Objectives of Goods and Services Tax (GST): Before introducing anything, there is an objective that we want to achieve, and the same is true with the GST tax structure in India. Check out the three main objectives of this: Simplify the tax system:  GST replaces the multiple tax system of India with a single tax. Thus, it removes cascading taxes and increases transparency for businesses. Boost economic growth:  After implementing GST, the interstate movement of goods becomes easy. This ultimately reduces trade barriers and transaction costs and helps with economic growth. Improve tax administration:  The most important part of the complete GST tax structure in India is that it reduces the compliance burden on businesses. The centralized GST system notices increased revenue collection with improved transparency and trust in the government.

41. Structure of GST: Key Components: Central Goods and Services Tax (CGST):  CGST is collected by the central government on the supply of goods and services within a state. Based on the types of goods supplied, the different tax rates are charged (0%, 5%, 12%, 18%, or 28%). State Goods and Services Tax (SGST):  The state government collects the SGST on the supply of goods and services within a state. Similarly to CGST, goods fall under different tax slabs according to their types. Integrated Goods and Services Tax (IGST):  When the goods or services are supplied between states or union territories, then the central government. The IGST rate is typically the sum of the CGST and SGST rates applicable to a specific good or service. Union Territory Goods and Services Tax (UTGST):  UTGST is applied in union territories with a legislature (like Puducherry and Delhi). It works similarly to SGST but is collected by the union territory government.

42. Importance of Understanding GST Structure If you want to operate your business smoothly, then you must understand the importance of the GST tax structure in India. Compliance:  Businesses have to understand the structure of GST in India properly to classify their services under the correct tax slab. This also helps them to pay the correct GST and follow the tax guidelines. Pricing Strategy:  GST impacts the final price of goods and services. Businesses need to adjust their pricing strategies to reflect the applicable GST rates and remain competitive. Supply Chain Optimization:  As goods are moved within and out of the state, it is necessary to understand the difference between these two for managing logistics and maintaining GST compliance. Record-Keeping:  If businesses have an idea about the GST structure, then it helps them maintain purchases and sales records, including GST invoices and challans . All these details help them maintain proper documentation and accurate filing of GST returns.

43. Importance of Understanding GST Structure (contd....) Tax Filing:  Every business files a GST return with the tax authorities. If they know about the different types of returns and their due dates, then they file returns on time. Input Tax Credit (ITC) Maximization:  Having an idea about the ITC can help businesses claim maximum credit for the GST paid on their purchases. This will help them reduce their overall tax liability.