15.Taxation Structure in India (Part 1)

Question 1

What are the two classifications of taxes?

Answer 1

The two classifications of taxes are direct taxes and indirect taxes.

Question 2

What is a direct tax?

Answer 2

A direct tax is a tax that is applied on someone, and the burden of this tax is borne by the same person. The burden of direct taxes cannot be shifted to someone else.

Question 3

What is an example of a direct tax?

Answer 3

Income tax is an example of a direct tax.

Question 4

What is an indirect tax?

Answer 4

An indirect tax is a tax that is applied by the government on someone, but the burden of the tax is shifted to someone else. The burden of indirect taxes can be shifted to another person.

Question 5

What are examples of indirect taxes?

Answer 5

Examples of indirect taxes include Goods and Services Tax (GST), service tax, and sales tax.

Question 6

What is a progressive tax?

Answer 6

A progressive tax is a tax where the tax rate increases as the income of a person increases. It means that higher-income individuals pay a higher percentage of tax, while lower-income individuals pay a lower percentage of tax.

Question 7

What is an example of a progressive tax in India?

Answer 7

Income tax in India is an example of a progressive tax.

Question 8

Can you provide the income tax rates in India?

Answer 8

Yes, the income tax rates in India are as follows:
*Up to Rs. 2.5 lakhs: 0%
*Rs. 2.5 lakhs - 5 lakhs: 5%
*Rs. 5 lakhs - 10 lakhs: 20%
*For more than Rs. 10 lakhs: 30%

Question 9

What is the objective of a progressive tax?

Answer 9

The objective of a progressive tax is to reduce inequality in society by placing a higher tax burden on those with higher incomes.

Question 10

What is a regressive tax?

Answer 10

A regressive tax is a tax where the burden of tax payment decreases as income level increases.

Question 11

Can you provide an example of a regressive tax?

Answer 11

An example of a regressive tax is the tax applied by the government on petrol and diesel. Both a poor person and an Audi car owner would need to pay the same amount of tax, but the burden of tax is different for each individual.

Question 12

What is an ad-valorem tax?

Answer 12

An ad-valorem tax is a tax applied on the total value of a commodity, which is calculated by multiplying the quantity of the commodity by its price.

Question 13

Can you provide examples of ad-valorem taxes?

Answer 13

Examples of ad-valorem taxes include property taxes on real estate, sales tax on consumer goods, and value-added tax (VAT) on the value added to a final product or service.

Question 14

What is a specific tax?

Answer 14

A specific tax is a tax applied by the government on specific attributes of a commodity.

Question 15

Can you provide an example of a specific tax?

Answer 15

An example of a specific tax is the taxation on cigarettes based on their length in India. The length of the cigarettes determines the amount of tax levied.

Question 16

What are the characteristics of a sound tax system?

Answer 16

A sound tax system is one that is simple, rational, broad-based, and ensures compliance.

Question 17

What is the significance of tax rates in a sound tax system?

Answer 17

Tax rates should be neither too high nor too low in a sound tax system. There should be an equilibrium point where the tax rate is optimal for both individuals and the government.

Question 18

What happens if tax rates are too low?

Answer 18

If tax rates are too low, the government’s revenue would be less.

Question 19

What happens if tax rates are too high (100%)?

Answer 19

If tax rates are too high, the government’s revenue would ultimately become zero as individuals would not have an incentive to pay such high taxes.

Question 20

What is the objective of setting an optimum rate of taxation?

Answer 20

The objective of setting an optimum rate of taxation is to ensure that individuals are willing to pay taxes to the government, while also maximizing government revenue.

Question 21

What tax reforms were initiated in India in 1991?

Answer 21

In 1991, the Indian government initiated tax reforms by setting up the Raja. J. Chelliah Committee and the Kelkar Committee to suggest reforms in the taxation structure.

Question 22

What was the issue with tax rates in India before 1991?

Answer 22

Before 1991, tax rates in India were around 70-80%. However, higher taxes led to a decline in government revenue, contrary to the belief that charging more taxes would result in more revenue.

Question 23

Who invented the Laffer Curve?

Answer 23

Arthur Laffer invented the Laffer Curve.

Question 24

What does the Laffer Curve show?

Answer 24

The Laffer Curve shows the relationship between tax rates and tax revenues collected by the government.

Question 25

How does the Laffer Curve explain the relationship between tax rates and tax revenues?

Answer 25

According to the Laffer Curve, as tax rates increase from a low level to a high level, tax revenues collected by the government also increase. However, if tax rates continue to increase, it can lead to a decrease in people’s motivation to work, resulting in reduced tax revenues for the government.

Question 26

What happens when tax rates reach 100% according to the Laffer Curve?

Answer 26

According to the Laffer Curve, if tax rates reach 100%, people would choose not to work because their entire earnings would go to the government.

Question 27

What is income tax?

Answer 27

Income tax is a tax levied by the government on the earnings of individuals, including salaried individuals and professionals.

Question 28

What are the current income tax rates in India?

Answer 28

*Up to Rs. 2.5 lakhs: 0%
*Rs. 2.5 lakhs - 5 lakhs: 5%
*Rs. 5 lakhs - 10 lakhs: 20%
*More than Rs. 10 lakhs: 30%

Question 29

What is an alternative income tax rate option available in India?

Answer 29

*Up to Rs. 2.5 lakhs: 0%
*Rs. 2.5 lakhs - 5 lakhs: 5%
*Rs. 5 lakhs - 7.5 lakhs: 10%
*Rs. 7.5 lakhs - Rs. 10 lakhs: 15%
*Rs. 10 lakhs - Rs. 12.5 lakhs: 20%
*Rs. 12.5 lakhs - Rs. 15 lakhs: 25%
*More than Rs. 15 lakhs: 30%

Question 30

What is corporate tax?

Answer 30

Corporate tax is a tax on a company’s profits.

Question 31

What are the tax rates for domestic and foreign companies in India?

Answer 31

*Domestic companies: 30%
*Foreign companies: 40%

Question 32

What is the reduced tax rate for Indian companies with turnover less than Rs 400 crores?

Answer 32

In the budget of 2019-20, Indian companies with turnover less than Rs 400 crores are required to pay tax at the rate of 25%.

Question 33

What is the reduced tax rate for newly incorporated companies in India?

Answer 33

For companies incorporated after 1 October 2019, the tax rate is reduced to 15%. For older companies, the tax rate would be 22%.