Introduction to taxation

Introduction to tax, Meaning, definition, basic concepts, types of taxes, Indirect tax, direct tax, difference between indirect & direct tax

1. INTRODUCTION TO TAXATION Prepared by Vinodhini.R Asst.Professor

2. TAX Tax is a compulsory financial obligation levied by the government on income, goods, and activities. It is one of the basic sources of government income which is utilized for providing various services to the people. The authority to impose the tax is in the hands of Central and State Government.

3. TYPES OF TAXES

4. Direct Tax The tax, which is charged on the income or wealth of a person is known as the Direct tax. Here the tax burden falls on the person himself, i.e. taxpayer and tax bearer is the same person. It is a tax in which the money is directly transferred from an individual’s pocket to the government’s pocket.

5. Income Tax: Tax levied on the income of a person. Wealth Tax: Tax charged on the wealth of a person. Others: It includes entertainment tax and interest tax. Types of Direct tax

6. Indirect Tax The tax, which is charged on the goods or services, is known as indirect taxes. Here, the tax burden is shifted to another person, i.e. the taxpayer and tax bearer both are two different persons. It is a tax in which the money is first transferred from an individual to the taxpayer and then to the government

7. TYPES OF INDIRECT TAX On goods: VAT (Value Added Tax): Tax on intrastate sales. CST (Central Sales Tax): Tax on interstate sales. Customs Duty : Tax on the manufacture of goods. Excise Duty : Tax on import or export of goods. Others: Octroi , Entry Tax, etc.

8. On Services: Service Tax

9. DUTY A duty is a kind of tax payable to the government, charged on goods and financial transactions. It comes under the category of Indirect tax. The right to levy duty is in the hands of the Central Government. It also adds to the revenue of the government.

10. TYPES OF DUTIES Excise Duty Custom Duty

11. Excise Duty Tax levied on the production of goods within the country is known as Excise Duty. It is also known by the name Central Value Added Tax (CENVAT). Central Excise Act, 1944 and the Central Excise Tariff Act, 1985 are the two important statutes which govern the Excise Duty in India. At present, the rate of excise duty in the country is 12%.

12. Customs Duty When the goods are traded outside India then the tax levied by the Government of India is known as Customs Duty. It is charged on the import and export of the commodities. Customs Duty is governed by the Customs Act, 1962 and Customs Tariff Act, 1975. The tax charged on imports is known as Import Duty whereas the tax on exports is known as Export Duty.

13. Key Differences Between Tax and Duty   Tax is a financial obligation on Income which is to be paid to the government compulsorily. Duty is a fee payable to the government on the manufacture and import/export of goods. The duty itself is a type of tax . Tax is charged on individuals, wealth, services and sales, whereas Duty is charged on goods. There are two major types of taxes, i.e. Direct Tax and Indirect Tax. Conversely, the major types of duties are Excise Duty and Customs Duty. The Central Government or State Government can impose taxes , but only the Central Government has got the authority to levy duty .  

14. POWERS OF UNION /STATES Indian constitution has divided the taxing powers as well as the spending powers (and responsibilities) between the Union and the state governments. The subjects on which Union or State or both can levy taxes are defined in the 7th schedule of the constitution. Further, limited financial powers have been given to the local governments also as per 73rd and 74th amendments of the constitution and enshrined in Part IX and IX-A of the constitution.

15. The Constitution provides for the formation of a Finance Commission (FC) by President of India, every five years, or any such earlier period which the President deems necessary via Article 280. Based on the report of the Finance Commission, the central taxes are devolved to the state governments.

16. Separation of Powers The Union government is responsible for issues that usually concern the country as a whole, for example national defence , foreign policy, railways, national highways, shipping, airways, post and telegraphs, foreign trade and banking. The state governments are responsible for other items including, law and order, agriculture, fisheries, water supply and irrigation, and public health. Some items for which responsibility vests in both the Centre and the states include forests, economic and social planning, education, trade unions and industrial disputes, price control and electricity. Then, there is devolution of some powers to local governments at the city, town and village levels.

17. Some items for which responsibility vests in both the Centre and the states include forests, economic and social planning, education, trade unions and industrial disputes, price control and electricity. Then, there is devolution of some powers to local governments at the city, town and village levels.

18. The taxing powers of the central government encompass taxes on income (except agricultural income), excise on goods produced (other than alcohol), customs duties, and inter-state sale of goods. The state governments are vested with the power to tax agricultural income, land and buildings, sale of goods (other than inter-state), and excise on alcohol. Local authorities such as Panchayat and Municipality also have power to levy some minor taxes.

19. The authority to levy a tax is comes from the Constitution which allocates the power to levy various taxes between the Centre and the State. An important restriction on this power is Article 265 of the Constitution which states that “No tax shall be levied or collected except by the authority of law.” This means that no tax can be levied if it is not backed by a legislation passed by either Parliament or the State Legislature.

20.   Sources of Revenue for Union Government Income (except tax on agricultural income), Corporation Tax & Service Tax Currency, Coinage, legal tender, Foreign Exchange Custom duties (except export duties) Excise on tobacco and other goods. Estate Duty (except on agricultural goods) (Kindly note that its mentioned in the constitution but Estate duty was abolished in India in 1985 by Rajiv Gandhi Government) Fees related to any matter in Union list except Court Fee Foreign Loans Lotteries by Union as well as State Governments.

21. Post Office Savings bank, Posts, Telegraphs, Telephones, Wireless Broadcasting, other forms of communication Property of the Union Public Debt of the Union Railways Stamp duty on negotiable instruments such as Bills of Exchange, Cheques , Promissory notes etc. Reserve Bank of India Capital gains taxes, Taxes on capital value of assets except farm land Taxes other than stamp duties on transactions in stock exchanges and future markets Taxes on the sale and purchase of newspapers and advertisements published therein. Terminal Taxes on Goods and passengers, carried by Railways and sea or air.

22. Sources of revenue for State Governments Taxes and duties related to agricultural lands Capitation Taxes Excise on liquors, opium etc. Fees on matters related to state list except court fee Land Revenue, Land and buildings related taxes Rates of Stamp duties in respect of documents other than those specified in the Union List Taxes on mineral rights subject to limitations imposed by the parliament related to mineral development Taxes on the consumption or sale of electricity Sales tax on goods (other than newspapers) for consumption and use within state.

23. Taxes on advertisements except newspaper ads. Taxes on goods and passengers carried by road or on inland waterways Taxes on vehicles, animals and boats, professions, trades, callings, employments, luxuries, including the taxes on entertainments, amusements, betting and gambling. Toll Taxes.

24. Concurrent Powers The property of the Union is exempted from State Taxation; and the property of the states is exempted from the Union Taxation. But the parliament of India can pass legislation for taxation by Union Government of any business activities / trade of the state which are not the ordinary functions of the state

25. INDIRECT TAXES The indirect taxes are the levies made by Central and State government on the expenditure, consumption, services, rights and privileges yet not on the property or income. This includes duties of customs paid on imports, as well as excise duty paid on production and value added tax on certain stages of production and distribution of products etc. Indirect tax is often also known as the consumption tax, since they are a regressive measure in application, and not rooted in paying ability.

26. Types of Indirect Taxes Goods and Services Tax : The law on GST was brought to action in July 2017, with 17 indirect taxes under its purview. All major services and service tax has been subsumed under the GST- On the state level : State excise duty Additional excise duty Service tax Countervailing duty Special additional custom duties

27. At the central level, it covers: Sales Tax Entertainment Tax Central sales Tax Octroi and entry Tax Purchase Tax Luxury Tax Taxes on lottery gambling and betting Levies on products outside GST purview: Taxes on products that use alcohol and petroleum products.

28. Sales Tax : The tax levied on the sales of goods. The Union Government imposes this sales tax on the Inter-State sale, while the sale tax on Intra-state sale is levied by the State Government. This tax has a three-segment bifurcation along Inter-State Sale Sale during import/export Intra-State Sale

29. Service Tax : Service tax are indirect indices which taxpayers pay on various paid services. These paid services include- Telephone Tour operator Architect Interior decorator Advertising Health centre Banking and financial service Event management Maintenance service Consultancy service Service tax interest is 15%

30. Value Added Tax : The state governments collect this category of taxes. For instance, when a person buys a product that it is important, we pay an additional tax known as Value Added Tax. Paid to the government, the VAT has a rate that is composed along nature of item and respective state of sale.

31. Custom Duty and Octroi Tax : Levied upon goods imported into the country from abroad. The tax of custom duty is paid at the entry port of a country such as the airport. The rate of taxation is variable as per product’s nature. Octroi is charged upon the goods entering a municipal zone.

32. Excise Duty : Excise duty is an indirect tax form that is charged on the goods produced inside a country. This duty is different from the custom duty. This is also known as CVAT, or Central Value Added Tax.

33. Anti-Dumping Duty : This is levied upon goods that are exported at a rate less than the standard rate by the nation to some other nation. This tax is levied upon by the Central government.

34. Newly Implemented Indirect Tax (GST) GST is a highly regarded tax system for the country. It is amongst the latest indirect tax systems operating under the constitution of India. The importance of this taxation regime lies in the fact that it covers under itself various other indirect taxes operating inside the country. This tax regime has been brought in mark a change in the economy of the country and to lessen the cascading effects from tax duties that deliver overall market inflation.

35. Features of Indirect Taxes Payment and Tax Load  - The service provider makes payment of indirect taxes and this is transferred to a final consumer. Liability of Tax  – Here the seller or service provider makes payment on indirect taxes which are transferred to final consumer. Nature  – Initially, indirect taxes used to have a regressive nature. Yet, now with the coming of GST, they have become quite progressive. Evasion  - Indirect taxes are hard to evade due to direct implementation through goods and services. Investment and Saving  - Most indirect taxes are largely growth-oriented since they de-motivate the consumer and encourage savings. Social Coverage  - The indirect tax has a much larger coverage since their charge falls upon each individual buying products or services.

36. Advantages Of Indirect Taxes Contribution by the poor Poor folk are outside the purview of direct taxes and this is the only way that this section of the society contributes. This goes along the basic principle of giving every person a share towards the growth of the country using state governments. Convenient Taxpayers are saved from indirect taxes since they are paid while buying things. Also, it is easy for state authorities to gather this tax since they are direct upon collection from the factories / ports, saving effort and time. Easy collection Gathering these taxes is an automatic function performed when purchasing and selling goods and services.

37. Comparison of Direct and Indirect Taxes   Direct Taxes It is levied on income and activities conducted. Indirect Taxes It is levied on product or services. Direct Taxes The burden of tax cannot be shifted in case of direct tax. Indirect Taxes The burden of tax shifted for indirect taxes. Direct Taxes It is paid directly by person concerned. Indirect Taxes It is paid by one person but he recovers the same from another person i.e. person who actually bear the tax ultimate consumer.

38. Direct Taxes It is paid after the income reaches in the hands of the taxpayer Indirect Taxes It is paid before goods/service reaches the taxpayer. Direct Taxes Tax collection is difficult. Indirect Taxes Tax collection is relatively easier. Direct Taxes Example Income tax, wealth tax etc. Indirect Taxes Example GST, excise duty custom duty sale tax service tax