2A Flashcards
Fiscal policy meaning and significance?
- ‘Fiscal’ is a word derived from Greek. Means ‘basket’ and symbolizes the public purse.
- Fiscal Policy is the set of Govt. decisions regarding taxation, expenditure, subsidies and other financial operations.
- Using fiscal policy, Govt influences the savings, investment and consumption in an economy, to accomplish certain national goals such as income redistribution, socio- economic welfare, economic development and inclusive growth.
Fiscal Policy helps in?
✓ Full Employment: through rural employment programmes like MGNREGA
✓ To Fight Inflation: Higher Income tax → disposable income → demand curbed, To fight deflation: direct and indirect taxes to boost demand.
✓ To Boost Economic Growth: Provide income tax
benefits on household savings in LIC/Mutual Fund etc. → industries get new capital investment → factory expansion, jobs, GDP growth.
✓ To Boost Inclusive Growth: Higher taxes on rich → use money for health, education, women, poverty removal programs.
✓ To Boost Regionally Balanced Growth: Give tax benefits to industrialists for setting up factories in North East, Left-wing Extremism (LWE) & other backward areas.
✓ Exchange Rate Stability: Give tax benefits to exporters to boost exports; while impose higher taxes on imported items to reduce imports → Current Account Deficit (CAD) controlled → ₹ :$ Exchange rate volatility controlled.
❓ “Fiscal policy” means (UPSC-Indian-Engg-Service-2018)
a) Balancing the revenue collection and expenditure
b) Establishing equilibrium between demand and supply of goods and services
c) Use of taxation, public borrowing and public expenditure by Government for
purposes of stabilisation or development.
d) Deficiency as an instrument of growth
C
Meaning of Budget?
Budget is an annual financial statement containing estimated revenues and expenditures for the next financial year. Budget is the primary tool used by Govt to implement its fiscal policy.
Articles of Consolidated, Public account and contingency fund of India?
266 - Consolidated fund of India and Public account of India
267 - Contingency Fund of India
What comes under Consolidated fund of India, public account of India and contingency fund of India?
Consolidated fund of India- Art 266 - Incoming taxes, loans raised, loans recovered. Withdrawal need Parliament Permission (- except for Charged Expenditure like Judges’ salaries).
Public Account of India - Art 266 - Incoming provident fund, small savings, postal deposit etc.
Govt acts similar to a banker transferring fund from here to there so parliament permission not necessary. IF separate fund is to be created for the first time, for a specific expenditure, then needs parliament permission to “create” it e.g. Central Road Fund Act 2000, where Road Cess on Petrol, Diesel would be deposited.
Contingency fund of India - Art 267 - Unforeseen events ₹ 500 cr by FinSecy on behalf of President.
Parliament approval is “subsequently” obtained, after expenditure. Money refilled from CFI.
❓MCQ-Prelims-2011. The authorization for the withdrawal of funds from the Consolidated Fund of India must come from:
(a) The President of India (b) The Parliament of India
(c) The Prime Minister of India (d) The Union Finance Minister
B
Donation Funds: PMNRF vs PM CARES
PMNRF
Prime Minister’s National Relief Fund (PMNRF)
Originally for helping Pak-refugees. Nowadays for floods, cyclones, earthquakes, accidents, heart/kidney transplant, cancer, acid attack, riots etc.
Not set up by Parliament.
No support given from the budget.
Only runs from donations of ordinary people
and institutions & foreigners donations.
Donors get Income tax exemption.
If company donates money = counted under
Corporate Social Responsibility (CSR).
Prime Minister’s Office (PMO) operates
PM is the ex-officio chairman. He’s assisted by officers.
PM CARES Fund by Modi 2020
Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund
For dealing with any kind of emergency or distress situation, e.g. COVID-19 pandemic
Not set up by Parliament.
No support given from the budget.
Only runs from donations of ordinary people
and institutions & foreigners donations.
Donors get Income tax exemption.
If company donates money = counted under Corporate Social Responsibility (CSR).
Prime Minister’s Office (PMO) operates
Prime Minister is the ex-officio Chairman.
Ex-officio Trustees: Ministers of Defence, Home Affairs, Finance
3 Nominated Trustees: experts from health, science, social work, law etc. PM selects
What is National Defence Fund?
PM CARES controversy
1962: a separate ‘National Defence Fund under PM to help military & paramilitary forces’ families. Other features mostly similar to above funds.
Usually, such Government donation funds are registered under Indian Trust Act, 1882.
But, some legal experts / critics suggest these donations should be brought under Public Account / Consolidated Fund to bring accountability & transparency.
Controversy? PM CARES Fund officials refused to give information to a person under Right to information Act (RTI), so now courtcase about applicability of RTI on this.
Budget word is derived from
Budget comes from a French word ‘bougette’ meaning a leather bag / suitcase.
- Finance Minister would keep documents in it → present in parliament.
- 2019: FM Nirmala Sitharaman ended this colonial practice by presenting the budget in a traditional four-fold red cloth ledger.
CEA K.Subramanian said the ‘budget documents’ inside this red-cloth should be called “Bahi-Khata”.
Is budget mentioned in the constitution? What is Govt required to present every financial year- ?
While the term ‘budget’ is not given in our constitution, but for each financial year, the Government is required to present following:
Art 112 - Annual Financial Statement (AFS) containing receipt and expenditure of last year (and projections for the next year).
1) The revenue expenditure must be shown separately from other
expenditures.
2) No compulsion to show railway budget separately from general
budget.
3) No compulsion to show plan expenditure separately from non-plan.
Art 265 - Finance Bill to obtain Parliament’s permission to collect taxes.
Parliament can reduce or abolish a tax proposed by the Govt. but Parliament cannot increase tax beyond what Govt has proposed in the Finance bill.
E.g. If Modi Govt’s Finance bill proposes to increase tax on imported shoes from 25% → 35%”. Then
Members of parliament can vote to allow tax @ 35% / reduce/ remove it.
Members of parliament CANNOT vote to increase tax to 45%”.
Art 114 - Appropriation Bill to obtain Parliament’s permission to spend money from Consolidated Fund of India (CFI: Art 266). Such expenditure can be of two types :
1) The expenditures ‘charged’ upon the Consolidated Fund of India e.g. Judges salaries. They can be discussed but they are non-votable & automatically approved.
2) The expenditure ‘made’ from CFI. E.g. ₹ ₹ for a scheme. They’re discussed and voted.
What are money bills and article number?
Who decides whether a bill is money bill or not?
The finance bill and appropriation bill are considered money bills under article 110. Therefore Rajya Sabha (RS) approval is not necessary.
- At maximum Rajya Sabha can discuss it for 14 days and give suggestions to Lok Sabha for amendments, but it’s not binding on the Lok Sabha to accept Rajya
Sabha’s suggestions.
- Sometimes, the ruling party does not have majority in Rajya Sabha to pass other type of ordinary bills (e.g. a bill to transfer National Housing Bank (NHB)’s ownership from RBI to Govt. or abolishing some low-profile statutory body or enacting a law to make Aadhar card compulsory).
Then, ruling party packs those ordinary bills’ proposals inside Finance Bill to get it approved without Rajya Sabha’s obstruction.
- In such scenarios, whether a given bill is money bill or not?= Lok Sabha Speaker’s decision is final [Art.110(3)]. Decision cannot be enquired by any Court [Art.122].
❓ What will follow if a Money Bill is substantially amended by Rajya Sabha? (Pre’13)
a. The Lok Sabha may still proceed with the Bill, accepting or not accepting the
recommendations of the Rajya Sabha.
b. TheLokSabhacannotconsidertheBillfurther.
c. The Lok Sabha may send the Bill to the Rajya Sabha for reconsideration.
d. ThePresidentmaycallajointsittingforpassingtheBill.
A
❓ Find correct statement(s): (Pre’15)
1. The Rajya Sabha has no power either to reject or to amend a Money Bill.
2. The Rajya Sabha cannot vote on the Demands for Grants.
3. The Rajya Sabha cannot discuss the Annual Financial Statement.
Codes: (a) 1 only (b) 1 and 2 only (c) 2 and 3 only (d) 1, 2 and 3
B
SIX STAGES OF PASSING THE BUDGET?
Presentation of budget General Discussion Scrutiny by departmental committees Voting on demands for grants, cut motions, guillotine. Passing of Appropriation Bill Passing of Finance Bill
What is Vote on account?
The Constitution does not mandate any specific date for presentation of the Budget, but it is presented to the Lok Sabha on such day as the President directs.
Before 2017: Presented in the last working day of February. Then it’ll pass through six stages- consuming all the time upto May month.
But while those six stages were going on, the financial year will be over (on 31st March) so previous year’s Appropriation Act’s validity will be over.
Then govt cannot withdraw money from the Consolidated Fund of India even for the routine expenditure like staff salary, electricity bills.
So, to avoid such crisis, government will put a motion for vote on account.
Here, parliament (= practically Lok Sabha) will allow the govt to spend some money from the CFI, till the (next) Appropriation Act for next financial year is passed.
Vote on Account is generally granted for two months for an amount equivalent to one- sixth of the total budget estimation.
Vote on Account is no longer necessary because
Constitution has no compulsion to put budget on a specific date. So, 2017 onwards,
Modi Govt. began tabling the budget on the first working day of February.
All the six stages are completed by the last week of March.
Appropriation bill gets passed and signed by President before completion of 31st March. So they did not require vote on account in 2017, 2018.
However, in 2019’s Interim Budget, Modi Govt demanded vote on account because they
planned to place full-budget after general elections.
What his Interim Budget?
Our constitution does not define or require interim budget.
But, during election year or extreme situation (E.g. when coalition government may collapse before its term) it’s considered unethical for such Govt. to make drastic/populist changes in budget like “2gm gold for the marriage of every BPL-girl.”
So, while they’ll present a budget in the regular fashion i.e. 3 documents (AFS, FinBill, Appro.Bill) & 6 Stages of Passing. But it (should) not have grand populist announcements.
Such budgets are called Interim Budgets, and were presented in 2004 (Yashwant S.), 2009 (Pranab M.), 2014 (Chidambaram P.) and 2019 (Piyush G.)
Just like a Regular General Budget, an Interim budget is valid for the whole financial year, however in between if new government is formed, they may present another budget to change the provisions.
E.g.2014-Feb: FM Chidambaram presented (interim) budget in 15th Lok Sabha, but then UPA/Congress defeated in general election→ 2014-July: BJP’s FM Arun Jaitley presented (Full) General Budget in 16th Lok Sabha.
2019-Feb: FM Piyush G. presented Interim budget in 16th Lok Sabha → 2019-May: Modi won General Election → 2019-July: FM Nirmala S. presented (Full) General Budget in 17th Lok Sabha.
Theme of General Budget 2020
Constitution doesn’t require for a theme Three themes: 1. Aspirational India: 2. Economic Development for all 3. Caring India:
What is Economic survey? Was it presented in 2019?
- A (two volume) document prepared by the Chief Economic Adviser (CEA) in the finance ministry. Vol2 shows annual data of past year. Vol1 shows prospects & suggestions for the future years.
- There is no constitutional obligation to prepare or present it but usually it’s tabled in the parliament a day before the Union Budget.
- 2019-Feb: No economic survey was presented before the interim budget.
- 2019-July: Economic Survey presented before the (Full) General Budget.
Economic Survey is named after which year?
While Budget is labelled after next financial year (e.g. 2019-20), the Economic survey is labelled after previous Financial Year.
e.g. The survey tabled on Feb-2018 is labelled as “Economic Survey 2017-18”, the Survey tabled in July-2019 is labelled “Economic Survey 2018-19”.
Themes or formats of economic survey?
till‘13-14 - Single Volume survey.
2014-15 - Adopted Two Volume Systems like “IMF’s World Economic Outlook”.
- Vol1= future suggestions | Vol2= Past data.
- Explicitly mentioned Theme in preface “Creating opportunity and reducing vulnerability” (through JanDhan-Aadhar-Mobile = JAM trinity)
2017-18 - No theme in preface. PINK Cover for -Ending Gender Violence.
2018-19 - No theme. But Sky Blue Cover for -Blueprint for making India a $5 trillion economy”
2019-20 - No theme but Lavender Purple color cover to show the synthesis of old and new ideas for wealth creation & economic freedom. Just like ₹100 currency note which comes in both “old” series as well as “new” Mahatma Gandhi series with lavender/purple color
Who is a Chief Economic Advisor (CEA)? Tenure and reappointment?
- Falls under Finance ministry’s Department of Economic Affairs
- Usual tenure 3 years, reappointment possible, but not a constitutional or statutory body.
- Has control over Indian Economic Service (IES) officers.
- Notable CEAs in Past: Manmohan Singh, Raghuram Rajan, Arvind Subramanian (2014-
18) . 2018-Dec: Krishnamurthy Subramanian became the new CEA.
Departments of Finance Ministry?
1- Department of Economic Affairs (DEA)
2- Department of Expenditure
3- Department of Revenue
4- Department of Financial Services (DFS)
5- Department of Investment and Public Asset Management (DIPAM)
- Indian Audit and Accounts Department
❖ As per IYB-2020, FinMin = 5 departments
❖ This (lesser known) dept is headed by Constitutional Body: Comptroller and Auditor General (CAG)
Functions of Department of Economic Affairs
Fiscal policy, Preparation and presentation of Union budget including the Railway component of budget. Budget for union territories without legislature, budget for States under president rule.
DEA announces the Interest rates of small saving schemes.
DEA assigns infrastructure status to a particular sector, maintains a website
www.pppinindia.gov.in, to provide information related to PPP.
Organizations under/related to DEA
1) Constitutional Body: Art. 280: Finance Commission. DEA liaisons with it.
2) Statutory Body: Board for Industrial and Financial Reconstruction (BIFR) – abolished after the coming of another statutory body- Insolvency and Bankruptcy Board of India (IBBI) under Corporate Affairs Ministry.
3) Chief Economic Advisor (CEA) - prepares and presents the economic survey 1 day before presenting the union budget
4) Financial Stability and Development Council (FSDC): is neither Constitutional nor statutory body. FM is chairman. Members include the chiefs of all financial regulatory
bodies- such as RBI, SEBI, IRDAI, PFRDA and the chief of IBBI
5) PSU: Security Printing and Minting Corporation of India Ltd. (SPMCIL). Registered under the Companies Act responsible for printing currency notes, coins, commemorative coins, cheques, postage stamps, non-judicial stamps, passports/visa and other travel documents etc.
Functions of and organisations under Dept of expenditure
- Here the Controller General of Accounts (CGA from ICAS service) prepares estimate of how much money to be spent from consolidated fund of India.
- It also deals with Pay Commission reports, Pension Accounting office.
- Web Portals of Expenditure Department:
✓ Public Financial Management System (PFMS): for disbursing money to various Ministries and departments at Union and State level
✓ Bharatkosh- Non Tax Receipts Portal (NTRP): For selling India yearbook Yojana Kurukshetra mags etc products and services by the government of India
❓ Public Financial Management System (PFMS) is a web-based online software application designed, developed , owned and implemented by the (UPSC-CDS2019-II)
A. Department of Financial Services
B. Institute of Government Accounts and Finance
C. Controller General of Accounts
D. National Institute of Financial Management
C
Dept of expenditure - CGA
Functions of and organisations under Dept of Revenue
Looks after the taxation matters using bodies:
Statutory Bodies / Quasi-judicial bodies-
❖ Central Boards of Revenue Act 1963
o Central Board of Direct Taxes (CBDT)→ Department of
Income Tax
o Central Board of Indirect Taxes and Customs (CBIC). Before-
2018-March, it was known as Central Board of Excise and Customs (CBEC). It implements GST from 1st July 2017, under the 101st Constitutional Amendment Act, 2016.
❖ Authorities for Advance rulings under Acts for IT, Customs & Central Excise, GST
❖ Various Tribunals and appellate bodies related to taxation.
Attached / Subordinate-
❖ Enforcement Directorate (for enforcing PMLA and FEMA Act)
❖ Central Economic Intelligence Bureau
❖ Central Bureau of Narcotics Financial Intelligence Unit
Associated PSU-
Goods and Service Tax Network (GSTN) is a non-profit company. Originally its 51% shareholding was with HDFC, ICICI etc. but 2018- Government decided to make it 100% owned by Union & State Governments.
Functions of and organisations under Dept of financial Services
Functions of DFS:
Schemes for Financial Inclusion, PSB supervision and recapitalization, Public Sector Financial Intermediaries, including their regulators (Except EPFO, ESIC etc.)
Organizations under/related to DFS:
❖ Bank Board Bureau: Neither Constitutional / statutory. Setup through gazette notification for selection of top officials (MD, CEO, Chairman and full-time Directors)
for PSBs, LIC and other public sector financial institutions.
❖ PSU: National Credit Guarantee Trustee Company (NCGTC): For providing credit guarantee for loans in Mudra, certain MSME loans, Stand up India, education-skill development related loans.
Functions of DIPAM
❖ Department of Investment and Public Asset Management (DIPAM) looks after Disinvestment of CPSE.
The highest official in each of the 5 departments of finance ministry is called?
Among those 5 secretaries, the senior-most is designated as? and functions?
The highest official in each of 5 departments of finance ministry is called ‘Secretary’ (usually an IAS), and among those 5 secretaries, the senior-most is designated as the Finance Secretary, who signs ₹ 1 note.
Indian Audit and Accounts Department under FinMin is headed by?
❖ As per IYB-2020, FinMin = 5 departments
❖ This (lesser known) dept is headed by Constitutional Body: Comptroller and Auditor General (CAG)
❓MCQ-Prelims-2015: Find correct Statement(s):
1. The Department of Revenue is responsible for the preparation of Union Budget that
is presented to the Parliament.
2. No amount can be withdrawn from the Consolidated Fund of India without the
authorization from the Parliament of India.
3. All the disbursements made from Public Account also need the authorization from
the Parliament of India.
Codes: (a) 1 and 2 only (b) 2 and 3 only (c) 2 only (d) 1, 2 and 3
C
❓MCQ-Prelims-2010: Which one of the following is responsible for the preparation and presentation of Union Budget to the Parliament?
(a) Department of Revenue (b) Department of Economic Affairs
(c) Department of Financial Services (d) Department of Expenditure
B
❓MCQ-CDS-2012: Fiscal Policy in India is formulated by:
(a) the Reserve Bank of India (b) the Planning Commission
(c) the Finance Ministry (d) the Securities and Exchange Board of India/
C
What is Incidence of Tax? Who collects Incidence of Tax for direct and indirect tax?
Incidence of Tax: Point from where government collects the tax.
- Direct Tax (e.g. 5% Tax on your income) collected by Income Tax Assessee
- Indirect Tax (e.g. 18% GST on purchase of Biscuit) is collected by Shopkeeper/seller
What is Impact of Tax? Who collects Impact of Tax for direct and indirect tax?
Impact of Tax: point where the burden of tax is ultimately felt and can’t be transferred elsewhere.
- Direct Tax - Income Tax Assessee
- Indirect Tax - Customer/buyer
The incidence and impact of tax is felt on same or different persons, for direct and indirect tax?
direct tax - On the same person
indirect tax - Not on the same person.
What is Proportional tax?
If Govt. had a single 10% flat rate direct tax on income irrespective of whether you’re a poor, middle class, upper middle class or a rich person. Then each taxpayers’ same proportion of income(10%) will go into taxes.
What is Progressive and Degressive tax?
- 5%-20%-30% income tax slabs depending on your income.
- Thus, richer the person, bigger proportion of his income will go into taxes. Thus, direct taxes are progressive in nature.
- Degressive tax: It is a blend of progressive tax and
proportional tax. If a direct tax increases upto a point & after that limit, a uniform rate is charged (5-5-10-10-…10). So, its partly proportional because tax rate remains unchanged even if income increases.
What is Regressive tax?
- 18% GST on Biscuits worth ₹100 = ₹18 paid as (indirect) tax.
- When Mukesh Ambani buys one packet, and a poor man buys one packet, greater proportion of poor man’s income is gone in taxes. Thus, indirect taxes are regressive in nature.
MCQ. Which one of following is a progressive tax structure? [UPSC-CDS-2015-II]
(a) Tax rate is the same across all incomes (b) Tax rate increases as income increases (c) Tax rate decreases as income increases (d) Each household pays equal amount of tax
b
What are Adam Smith’s 4 canons of taxation?
- Canon of Equality: Tax should be equal /proportionate to income. Rich people should pay more taxes than poor.
- Canon of Certainty: dates, slabs, % should be definite & told in advance. Randomly govt should not demand “x%” tax to build statue, temple or mosque.
- Canon of Convenience: tax payer shouldn’t be made wait for a kilometre long queue & fill up 50 pages worth tax forms.
- Canon of Economy: to collect ₹ 100 crore tax, govt shouldn’t be spending ₹ 99 crores in salaries of tax officials.
❓ Which of the following was not advocated by Adam Smith? (UPSC-CDS-2019-1)
a) Canon of equality b) Canon of certainty
c) Canon of convenience d) Canon of fiscal adequacy
D
❓ Find Correct Statements (UPSC-CDS-2016-1)
1. Ability to pay principle of taxation holds that the amount of taxes people pay should relate
to their income or wealth
2. The Benefit Principle of taxation states that individuals should be taxed in proportion to
the benefit they receive from Government programmes
3. A progressive tax takes a larger share of tax from poor families than it does from rich
families
4. Indirect taxes have the advantage of being cheaper and easier to collect
Answer Codes: (a) 1 and 3 only (b) 2 and 4 only (c) 1, 2 and 4 only (d) 1, 2, 3 and 4
C
Direct Taxes types? and of Union and State govts?
Direct Taxes On income -
of Union Govt -Corporation Tax, Minimum Alternate Tax (MAT)
- Income Tax on income except agri.
- Capital Gains Tax (CGT)
of State govt - 1. Agriculture Income tax 2. ProfessionalTax
(Constitutional ceiling of max ₹2500 per year)
Direct tax On assets, transactions -
of Union Govt - Securities Transaction Tax (STT)
& Commodities Transaction Tax (CTT)
of State govt - 1. LandRevenue
2. Stamp/Registration duty
3. Property tax in urban
areas
Direct tax On expenditure -
of Union Govt - -
of State govt- #Road Tax (although debatable as in some States/categories of vehicles- the seller will collect & submit)
Budget-2020: (Expected collection-wise)
Corporation tax > Income Tax > STT
Corporation tax is imposed by [UPSC-CDS-2013-II]
(a) State Government (b) Central Government
(c) Local Government (d) State as well as Central Government
b
Merits and Demerits of direct tax?
Merits
- Progressive: richer the person higher the tax: income inequality ⬇
- Promotes civic consciousness since citizen directly feels the ‘pinch of tax’
- To⬆savings & investment: Income tax deduction/ exemptions on NPS/ LIC etc.
- Elasticity: As public’s income level ⬆ then tax revenue ⬆
- Certainty (when and how to pay IT)
- Can⬇volatility in International currency exchange rates by imposing Tobin Tax
Demerits
- Externality not counted: Academic Books Company vs Film star promoting cigars [30% Tax on both].
- Hardship not counted: Working Carpenter [5%] vs sleeping landlord [5%]
- High level of direct tax= laziness, less foreign investment.
- Narrow base because large staff required if we try to collect Income taxes even from poor people.
- Prone to litigation & loopholes, tax evasion, avoidance.
What is Union tax and which fund does it go into?
- Computed on taxable income, profit, transaction.
- Goes to Consolidated Fund of India → Later divided between Union and states as per the Finance Commission formula. (except if IGST: divided on GST Council’s formula.)
What is surcharge and which fund does it go into?
- Computed on Tax amount. So, it is a ‘tax on tax’. This ₹₹ will also goto CFI. It is not shared with States using Finance Commission Formula.
- Usually, surcharge doesn’t have any clear objective in ‘prefix’, so it may be used for any purpose.
- Exception is 10% Social Welfare Surcharge on the customs duty on imported goods. → ₹₹ specifically used for social welfare schemes of the Union.
What is cess and which fund does it go into?
- Computed on [(Tax) + (Surcharge, if any)]
- Clear objective is mentioned. E.g. Krishi Kalyan Cess, Swachh Bharat cess, Road & infrastructure, Health & Education, GST compensation cess etc.
- By default, cess goes to CFI→ from there, to a specific fund in Public Accounts e.g. Central Road Safety Fund, Prarambhik Shiksha Kosh etc.
- Cess is not shared with States using Finance Commission Formula. (Although some of the cess money will invisibly go to states as a part of scheme
implementation e.g. Pradhan Mantri Fasal Bima Premium share, etc.) - GST Compensation Cess is shared with States, as per GST Council formula.
What is corporation tax?
- It is a direct tax collected by the Union govt.
- Also known as “Corporate Income Tax (CIT)”
- It’s Levied on Company’s profit, under the Income-tax Act, 1961.
Corporation Tax Cut before and after 2019-Sep
Since Indian corporate sector was facing a slowdown, Nirmala.S announced tax-cuts:
Existing Indian companies:
before Sept 2019 - 25-30% depending on turnover
+ 0-12% surcharge depending on profit + 4% health edu cess
after sept 2019 - 22 % tax + 10% surcharge on (tax) + 4% cess (on tax + surcharge) = 25.17%
New INDIAN MFG company registered from 1/10/2019. (but they must start manufacturing by 31/3/2023)
Budget-2020: new INDIAN electricity cos also eligible in this
before Sept 2019 - -
after Sept 2019- 15 % + surcharge & cess as given above
= 17.01%
Foreign Company’s profit from India
before Sept 2019 - 40%+surcharge+cess
after Sept 2019 - no change
Zero profit companies
before Sept 2019 - 18.5% MAT
after Sept 2019 - 15% MAT
Corporation Tax Cut on Cooperative Societies before and from Budget 2020
Before 30% + surcharge + cess
After - 22% + 10% surcharge + 4% cess
Corporation Tax: announcements in 2019 and 2020 budgets?
General Budget-2019:
✓ Additional tax benefits to companies producing solar power, electric batteries, computer server, laptop etc. in any part of India.
✓ Companies operating from GIFT-city-IFSC given 100% exemption from Corporation Tax for 10 years. (previously this ‘tax holiday’ was for 5 years)
Budget-2020:
✓ Tax holiday for developers of affordable housing extended till 31/3/2021. (meaning 0% corporation tax / capital gains tax on their profit)
✓ If a Sovereign Wealth Fund invests in Indian infrastructure projects → Tax holiday for them. E.g. Abu Dhabi Investment Authority
Corporation Tax on Startups
Startup is a company not older than 10 years and not having turnover more than 100 cr.
Govt helps them through Startup India Scheme ( more in Pillar4B). Budget-2020 →
✓ Startup can claim 100% deduction on its profits, for 3 years out of the first 10 years of incorporation. (as such they get tax benefits under Startup India scheme, but new budget fine tuned those technical definitions further.)
✓ Start-ups generally use Employee Stock Option Plan (ESOP) to attract talented employees. But ESOP was subjected to various direct taxes → New budget gave some technical reliefs to them.
What is equalisation levy?
If a foreign company makes profit in India, they have to pay 40% Corporation Tax.
If an Indian businessman purchases digital advertisement slots in google - adsense / facebook = those e-ad companies are making profit.
Earlier, google/facebook did not pay tax on that profit, claiming their business activity is done outside India on global servers.
So, Budget-2016 imposed tax on such income/fees of foreign digital advertisement companies.
Officially called “Equalisation Levy” (EQL), unofficially nicknamed “Google Tax”.
It’s not part of “Income Tax” or “Corporation Tax” under the Income Tax Act 1961, but separately imposed by the Finance Bill 2016.
Foreign Company can’t escape it saying we’re protected under Double Taxation Avoidance Agreement (DTAA) in our home country.
