2A Flashcards
1
Q
Fiscal policy meaning and significance?
A
- ‘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.
2
Q
Fiscal Policy helps in?
A
✓ 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.
3
Q
❓ “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
A
C
4
Q
Meaning of Budget?
A
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.
5
Q
Articles of Consolidated, Public account and contingency fund of India?
A
266 - Consolidated fund of India and Public account of India
267 - Contingency Fund of India
6
Q
What comes under Consolidated fund of India, public account of India and contingency fund of India?
A
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.
7
Q
❓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
A
B
8
Q
Donation Funds: PMNRF vs PM CARES
A
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
9
Q
What is National Defence Fund?
PM CARES controversy
A
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.
10
Q
Budget word is derived from
A
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”.
11
Q
Is budget mentioned in the constitution? What is Govt required to present every financial year- ?
A
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.
12
Q
What are money bills and article number?
Who decides whether a bill is money bill or not?
A
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].
13
Q
❓ 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
A
14
Q
❓ 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
A
B
15
Q
SIX STAGES OF PASSING THE BUDGET?
A
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
16
Q
What is Vote on account?
A
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.
17
Q
What his Interim Budget?
A
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.
18
Q
Theme of General Budget 2020
A
Constitution doesn’t require for a theme Three themes: 1. Aspirational India: 2. Economic Development for all 3. Caring India:
19
Q
What is Economic survey? Was it presented in 2019?
A
- 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.
20
Q
Economic Survey is named after which year?
A
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”.
21
Q
Themes or formats of economic survey?
A
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
22
Q
Who is a Chief Economic Advisor (CEA)? Tenure and reappointment?
A
- 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.
23
Q
Departments of Finance Ministry?
A
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)
24
Q
Functions of Department of Economic Affairs
A
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.
25
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.
26
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
27
❓ 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
28
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.
29
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.
30
Functions of DIPAM
❖ Department of Investment and Public Asset Management (DIPAM) looks after Disinvestment of CPSE.
31
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.
32
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)
33
❓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
34
❓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
35
❓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
36
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
37
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
38
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.
39
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.
40
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.
41
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.
42
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
43
What are Adam Smith’s 4 canons of taxation?
1. Canon of Equality: Tax should be equal /proportionate to income. Rich people should pay more taxes than poor.
2. Canon of Certainty: dates, slabs, % should be definite & told in advance. Randomly govt should not demand “x%” tax to build statue, temple or mosque.
3. Canon of Convenience: tax payer shouldn’t be made wait for a kilometre long queue & fill up 50 pages worth tax forms.
4. Canon of Economy: to collect ₹ 100 crore tax, govt shouldn’t be spending ₹ 99 crores in salaries of tax officials.
44
❓ 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
45
❓ 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
46
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)
47
Budget-2020: (Expected collection-wise)
Corporation tax > Income Tax > STT
48
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
49
Merits and Demerits of direct tax?
Merits
1. Progressive: richer the person higher the tax: income inequality ⬇
2. Promotes civic consciousness since citizen directly feels the ‘pinch of tax’
3. To⬆savings & investment: Income tax deduction/ exemptions on NPS/ LIC etc.
4. Elasticity: As public’s income level ⬆ then tax revenue ⬆
5. Certainty (when and how to pay IT)
6. Can⬇volatility in International currency exchange rates by imposing Tobin Tax
Demerits
1. Externality not counted: Academic Books Company vs Film star promoting cigars [30% Tax on both].
2. Hardship not counted: Working Carpenter [5%] vs sleeping landlord [5%]
3. High level of direct tax= laziness, less foreign investment.
4. Narrow base because large staff required if we try to collect Income taxes even from poor people.
5. Prone to litigation & loopholes, tax evasion, avoidance.
50
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.)
51
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.
52
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.
53
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.
54
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
55
Corporation Tax Cut on Cooperative Societies before and from Budget 2020
Before 30% + surcharge + cess
| After - 22% + 10% surcharge + 4% cess
56
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
57
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.
58
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.
59
Changes in Equalisation levy in budget 2016 and 2020
Budget- 2016- 6% Equalisation Levy on foreign digital advertisement companies e.g. Google’s adsense, facebook digital ads
Budget- 2020
- 2% Equalisation Levy on foreign companies engaged in: - E-commerce /selling goods & services to Indian
residents e.g. Microsoft/Adobe selling softwares on their site
- Digital subscription to Indian residents e.g. Netflix, Amazon prime
Corona crisis: foreign companies kept requesting Indian govt to defer tax-filling dates & reduce tax%. But Indian Govt not giving them relief.
60
What is Significant Economic Presence?
Significant Economic Presence (SEP):
if a foreign company is making money from Indians through digital ads / streaming services (e.g. NETFLIX videos from overseas servers) then the company has ‘SEP’ in India, therefore, Indian govt has powers to tax it. Budget-2020 made some technical changes into it.
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What is Tax challenges of digitization?
OECD has used a phrase ‘Tax challenges of digitization’ to denote SEP type of problems where digital services type Multinational Corporation (MNC) are avoiding
taxes.
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What is GAFA Tax?
France has implemented tax on large technology companies called GAFA Tax (Google Apple Facebook Amazon) from 1st Jan 2019.
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MCQ-Prelim-2018: With reference to India’s decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct?
1. It is introduced as a part of the Income Tax Act.
2. Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the “Double Taxation Avoidance Agreements”.
Answer Codes: a) 1 only b) 2 only c) Both 1 and 2 d) Neither 1 nor 2
D
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What is Minimum Alternate tax (MAT)?
- Some industrialists use tax-deduction-exemptions-depreciations and accounting tricks to become “Zero Profit Companies” & escape paying Corporation Tax. So,
- Budget-1996 (Chidambaram) introduced 18.5% MAT on book profit using a different type of formula.
Zero profit Company’s location - Outside GIFT city International Financial Services Centre (IFSC) - 15% MAT on its book-profit
Zero profit Company’s location - Inside GIFT city - 9% MAT on its book-profit
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What is AMT (Alternative Minimum Tax) ?
- AMT (Alternative Minimum Tax): Concept similar to MAT but for Non-Corporate assesses
e. g. Individual or Hindu Undivided Family (HUF) or Cooperative Society who are earning more than ₹“xx” lakh but not paying direct tax.
Both MAT and AMT subjected to + surcharge + cess.
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What is Dividend distribution tax and its benefits?
- 1997: FM Chidambaram started to levy DDT on a shareholder’s dividend income. In reality, company will cut that much ₹ ₹ portion from shareholders’ dividend, & directly deposit that ₹ ₹ to the govt, as DDT.
Shareholder did not have to pay Income tax on it.
DDT Rate: 15% + cess + surcharge = 20.56% on dividend paid.
Full-Budget-2019: Companies in GIFT-city-IFSC given some exemptions from DDT.
Budget-2020: abolished DDT. But, dividend will be taxable in the hands of shareholder (i.e. he’ll pay income tax on it).
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Benefits?
✓ Previously even lower middle-class shareholder’s ~ 20% dividend was cut in the name of DDT. But now he may have to pay barely 0-5% income tax on income from dividend. Thus, Shareholders get to keep more ₹₹ for spending→ shopping spree → demand, production, economic growth.
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✓ Foreign investors may feel more attracted to invest in Indian shares.
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What is BUYBACK TAX? It's impact, benefit to the company?
Profit making companies sometimes repurchase their own shares back from shareholders.
Impact? These many shares are extinguished from company’s liability side.
Benefit to company? No need to pay dividend on these shares in future.
Budget-2013: Government ordered UNLISTED companies to pay “20% Buyback tax” when they buy back their own shares from the market.
General Budget-2019: made this applicable on LISTED companies as well.
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What is Capital Gains tax?
When an owner makes profit by selling his capital assets such as non-agro-land, property, jewellery, paintings, vehicles, machinery, patents, trademarks, shares, bonds & other securities- then he has to pay CAPITAL GAINS TAX (CGT).
Depending on how long did the owner keep that asset before selling it, he will pay:
- EITHER Long Term Capital Gains tax (LCGT: x%) OR
- OR Short Term Capital Gains tax (SCGT: y%)
n practice, the buyer will deduct that much ₹ ₹ portion from the payment to seller, and deposit to the government.
However, some people form shell companies abroad & do transactions from there to avoid paying taxes to India.
Budget-2018:
- Earlier Listed companies Shares, Mutual Funds Units etc. were exempt from LCGT. But, since large amount of money is invested here and owners make good profits by selling them so government decided to apply the Long Term Capital Gains Tax system on them @10%.
Interim-Budget-2019:
- IF person sells his house on profit, then he has to pay CGT. However, if he uses the profit to invest in two more residential houses in India, then no need to pay CGT. He can use this scheme only once in his lifetime. (Before Budget-2019, it was for only 1 new residential house.)
General Budget-2019
- If Startup entrepreneurs unable to secure capital from investors → they sometimes have to sell their house to arrange money for starting business. So, Government had exempted their house-selling-profit from CGT. This scheme extended it till 31/3/2021.
- Companies operating from GIFT-city-IFSC given some exemptions from CGT.
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❓MCQ: In which of the following circumstances may ‘capital gains’ arise? (Pre’12)
1. When there is an increase in the sales of a product.
2. When there is a natural increase in the value of the property owned.
3. When you purchase a painting and there is a growth in its value due to increase in its popularity.
Answer Codes: (a) 1 only (b) 2 and 3 only (c) 2 only (d) 1, 2 and 3
B
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Who is James Wilson?
James Wilson (financial member of the Council of India, founder of the Economist magazine and Standard Chartered Bank) introduced income tax in India on 24 July 1860 to compensate the British losses during 1857’s Sepoy mutiny. So, 24th July is celebrated as Income Tax Day (Aaykar Diwas).
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What are the tex deductions and exemptions?
tax-deductions and tax- exemptions - like income from agriculture, investments made in Provident Fund, NPS, LIC, Medical Insurance etc (upto a certain limit), house rent allowance (HRA), repayment of home/education loan, money donated in eligible charitable funds etc
- Full-Budget-2019: additional tax deduction given
- if took loans to buy electric vehicle
- if a taking home loan for the first time.
Salaried individuals get standard deduction of ₹50000.
Tax Rebate of ₹12,500 (if taxable income is upto
₹5l)**
**Previously, rebate was ₹2500 if taxable income upto ₹3.5 lakhs but Interim-Budget- 2019 raised it
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What are the Cess charges?
4% Health and education cess on (Tax +
| Surcharge). (Before Budget-2018, there was only 3% Education Cess).
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Surcharge rates and slabs before and after 2019
Surcharge if taxable income is: More than ₹50 lakh upto 1 cr. - Before General Budget-2019 - 10%, After General Budget-2019 - unchanged
Surcharge - More than ₹1 cr upto 2 cr. - Before 10%, After - unchanged
Surcharge - More than ₹ 2 cr upto 5 cr. - Before 15%, After - 25%
Surcharge - More than ₹ 5 cr. - Before 15%, After - 37%
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What is Tax expenditure or revenue forgone?
It is left to individual’s discretion whether he wants to stay in old / new system. But if all people opted for the new slabs then Govt will hypothetically get ₹40,000 crore less (compared to old system). Technically, called “Revenue forgone or Tax Expenditure”
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Benefits of tax expenditure?
⬇Income tax paid = ⬆disposable income with people → shopping spree → ⬆demand → production, economic growth etc.
And shopping spree = ⬆Indirect tax collection e.g Mobiles = 18% GST.
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Suggestions of Direct Task Code Task Force
DIRECT TAX CODE (DTC) TASK FORCE (2017-2019)
2017: Finance Ministry setup this taskforce under CBDT member Arbind Modi. Later, he retired so another CBDT member Akhilesh Ranjan was made Chairman.
Taskforce had noted IRS officer, Chartered Accountant, Tax Lawyer, Corporate Consultant etc. Chief Economic Advisor Krishnamurthy Subramanian was also a
member of this taskforce →2019-Aug report submitted to the Finance Ministry.
While Government did not publish full report in public domain, but according to journalists, it contains following suggestions:
1. Replace the Income Tax Act 1961 with a simpler Direct Tax Code.
2. Reduce the corporation tax further.
3. Tax rates for domestic and foreign companies should be same. This will encourage ease of doing business in India.
4. Give additional tax relief for the startup companies.
5. Increase the number of tax slabs from present three (5%,20%,30%) to four (10%, 20%, 30% and lastly 35% for super-rich earning ₹ 2 crore />).
6. Abolish Dividend Distribution Tax (DDT). [which is actually done in Budget-2020]
7. Setup Litigation Management Unit to look after the tax related court cases in an efficient manner.
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What is Hindu Undivided Family (HUF) under direct tax?
- A Hindu, Buddhists, Jains, or Sikhs family members can come together, pool their assets and form an HUF under the Income Tax Act.
- HUF is taxed separately from its members, & helps saving taxes due to certain provisions/loopholes of Income Tax Act.
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What is Presumptive Taxation under direct tax?
Self-employed freelance consultants / professionals such as lawyers, doctors, fashion designers, DJs etc. face difficulty in keeping account books of their income. So, for them Income Tax Act has Presumptive Taxation System i.e. their ‘income/profit’ is computed as “x%” of their gross receipts, and on that amount they’ve to pay income tax (depending on slabs) + applicable cess and surcharges.
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What is Professional tax under direct tax?
It is a separate direct tax Levied by State Government on the professionals (who are not farmers).
Constitution says it can’t be more than ₹2,500 per year per person.
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What is Advance Tax under direct tax?
- New financial year starts from 1st April 2019 and ends on 31st March 2020.
- If everyone paid all of their direct taxes at 11:59PM on 31st March 2020, then govt. will face money-shortage for the whole year till 31st March midnight comes.
- So, Advance Tax mechanism requires people to pay their Income tax and Corporation tax in advance-instalments on quarterly basis (every 3-3 months), If their annual tax liability is ₹10,000 or more.
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What is Tax Ordinance 2020 under direct tax?
Traditionally financial year ends @31st March 2020. So, accordingly, people/companies deposit the taxes, fillup the tax return-forms, buy LIC/PPF/NPS policies (for tax deduction) etc.
- But, corona lockdown → Ordinance extended deadlines to file Income tax, TDS, TCS and GST etc. to June 2020
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What is Tax Deducted at Source (TDS) under direct tax?
Income Tax Act requires organizations to deduct a portion of the payment of recipient at source and deposit it to IT-dept. along with PAN card number of the recipient.
- Then, payment-recipient will be forced to file his tax return form, to unlock his TDS amount.
- On one side, TDS helps fighting tax evasion but on the other side, TDS also creates hardship for lower middle-class persons, because part of their payment is cut in advance.
So, in each budget, Govt will finetune the norms, such as
- Full-Budget-2019: TDS on cash withdrawal to encourage digital payments
- 2% TDS if total cash withdrawn during a financial year exceed 1 crore from a single user-account in bank or post-office. This will encourage digital payments.
- Agricultural Produce Market Committee (APMC) Mandi traders protested that lot of their transaction is cash based. They have to withdraw crores of rupees to pay the farmers, because farmers in remote areas don’t have easy access to banking facilities.
- So Government exempted APMC traders from 1/1/2019 from above TDS on cash withdrawal.
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TDS norms in Budget?
Full-Budget-2019: TDS on cash withdrawal to encourage digital payments
- 2% TDS if total cash withdrawn during a financial year exceed 1 crore from a single user-account in bank or post-office. This will encourage digital payments.
- Agricultural Produce Market Committee (APMC) Mandi traders protested that lot of their transaction is cash based. They have to withdraw crores of rupees to pay the farmers, because farmers in remote areas don’t have easy access to banking facilities.
- So Government exempted APMC traders from 1/1/2019 from above TDS on cash withdrawal.
- Full-Budget-2019: TDS: Other measures (list not exhaustive)
- Even if an individual person is paying larger than ₹ 50 lakhs to contractors or professional, he’ll have to cut 5% TDS. (So tax evasion by real estate brokers, high-profile wedding - organizers etc. can be checked.)
TDS% reduced to 1) attract foreign investment 2) reduce hardship:
1. When Indian company repays loan interest to foreign lenders.
2. Bond market @ Gift-City-IFSC
3. Payment for Technical services
TDS applied / % increased to stop tax evasion opportunities:
4. TDS when an e-commerce company pays to sellers.
5. Loan interest paid by cooperative societies.
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TDS → ATMA NIRBHAR BHARAT REFORMS?
Whenever salary, contract, professional fees, interest, rent, dividend, commission, brokerage, etc. are paid, the payment giver is required to cut a certain % of the amount as TDS and deposit to the Income Tax Department. It helps in tracking tax evasion & tax avoidance.
These TDS rate% vary as per nature of payment. (It could be 0.5% on some payment, it could be 10% on some payment etc.)
FinMin has ⏬ TDS% by 25% compared to their original rates so as to unlock ₹50,000 cr in the hands of people. = ⏫shopping → economic revival.
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What is Tax Collected at Source (TCS) under direct tax?
- If Mika Singh buys an SUV car worth ₹50 lakhs, then it means he must be a rich man. How to ensure he is paying Income Tax regularly (apart from TDS mechanism)?
- So, the car showroom owner (seller) is required to collect extra 1% from Mika (Buyer) and deposit to IT-dept. Mika will have to file tax-return to unlock this amount.
- E-commerce sites also required to pay TCS before releasing money to merchants.
- Indian residents can convert their ₹₹ into foreign currency with the help of RBI- authorized forex dealers under, RBI’s Liberalised Remittance Scheme
- Govt found many Indians not paying single ₹ of income tax and YET:
- converting crores of rupees into dollar$, sending it abroad in pretext of child education / family remittance.
- Going for luxury foreign vacations
- so it could be some black money/tax evasion game behind curtains.
- Therefore, Budget-2020: Authorized Forex dealers will have to cut 5% TCS while converting Indian ₹₹ into foreign currency. Similar norms on foreign tour operators.
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What is Tax refund under direct tax?
- A person is eligible to receive income tax refund from IT-dept IF he has paid more tax to the govt than his actual tax liability. e.g. If college deducted 10% TDS from freelance visiting faculty payment, but what if he was in 0% or 5% Income Tax slab?
- Then, Income Tax Department will refund his money with interest.
- Similarly, GST refund can be claimed by an entrepreneur from GSTN webportal.
- ATMA NIRBHAR BHARAT FM announced, “we’ll issue tax refunds more quickly.” So more shopping demand ⏫→ economic revival.
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What are the financial transaction taxes under direct tax?
1- Tobin Tax / Robinhood Tax - though not direct, since GST for foreign currency conversions
2- Securities Transaction Tax (STT)
3- Commodities Transaction Tax (CTT)
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What is Tobin Tax, STT and CTT?
Tobin Tax: - 1970s: Nobel recipient American economist James Tobin proposed a small tax everytime currency is converted into another currency (e.g. $ to ₹).
- Such tax will discourage short term speculative investment and flight of capital from one country to another = stabilizing the global economy and currency exchange rates.
- In India, foreign currency conversions subjected to (previously Service Tax) & now GST.
So not really direct tax. @ some nations levied as direct tax
STT - Securities Transaction Tax (STT) is levied on the sale and purchase of shares, ETF-units, derivatives and other securities at stock-exchanges. It's rate (0.001%-2%) varies as per the nature of the securities.
Commodities Transaction Tax (CTT) is levied on non-agricultural commodities traded at Commodities-Exchanges. Rate ~0.01%.
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```
What are the following direct taxes and who are they levied by?
1- Capital Gains tax
2- Securities Transaction Tax
3- Dividend Distribution Tax
4- Stamp Duty
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1- By union - Applicable when share (or any capital asset e.g. home) is “sold at profit” by its previous owner.
2- by union- Applicable on the selling price of share, bond and other securities.
Irrespective of whether seller is making profit or loss.
3- By union - Applicable on the dividend paid by by company to a shareholder. And Budget-2020 abolished this tax.
4- By State - Application on value of share/bond/securities, immovable properties (e.g. building) and certain types of legal agreements e.g. rent agreement etc.
- Irrespective of whether seller is making profit or loss.
- 2020: Union govt amended the Indian Stamp Act, 1899 so that the Stamp duty rates on share/bonds/securities become uniform across the states.
Union collects → distributes it to State Govt of domicile of the buyer.
- Corona crisis → Union Govt deferred implementation date to 1st July 2020.
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What is Tax incidence and tax impact for indirect tax?
Tax incidence - The person from whom govt collects the tax. (e.g. shopkeeper)
Tax impact - Person who finally bears the tax & can’t pass its burden on further. (e.g. Consumer)
In the indirect taxes, tax incidence and tax impact does not fall on the same person. E.g. Customs Duty on import and export, Excise duty on manufacturing of goods, Service tax on services, Sales Tax, Value Added Tax (VAT), and Goods and Services tax (GST).
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Dept for indirect taxes?
Indirect taxes fall under the Ambit of FinMin→ Department of Revenue → Central Board of Excise and Customs (CBEC) → Budget-2018 renamed it as Central Board of Indirect Taxes and Customs (CBIC)
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Types of indirect taxes?
Ad- Valorem tax - Taxes based on the value of something. E.g. 35% Customs Duty on import of orange juice. So, if juice priced at ₹1000 imported, then ₹350 as tax.
- Easier to administer.
Specific Tax per unit - Tax based on quantity of items. E.g. ₹ 260 Excise duty on production of every 1000 cigarettes of 65- 70mm length. Here we’re taxing them irrespective of their manufacturing price or selling price.
- Difficult to administer, leads to inspector-raj & litigation. But, if slight increase in this tax, then greater burden passed on to the consumer so it helps reducing harmful consumption.
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What are the merits and demerits of indirect tax?
Merits:
➔ Convenient to collect because the traders act as honorary (=unpaid) tax collectors. Wider base because everyone covered e.g. 18% GST on Biscuit.
➔ Elastic: small ⬆brings large revenue, because everyone is affected. Although they’re “relatively” less elastic than Direct taxes.
➔ Can ⬇harmful consumption by imposing higher taxes on cigar, alcohol, soft drinks & fast food.
Demerits:
➔ Regressive in nature, both poor and rich taxed equally for the same item then poor people end up paying more portion of their income in indirect taxes.
➔ This tax is hidden in the price. Customers do not always feel the pinch of paying indirect tax so it promotes less civic consciousness than direct taxes.
➔ Indirect taxes ⬆→ product becomes expensive → demand ⬇ so uncertainty involved in how much ₹ ₹ will
Government actually earn?
➔ High level of corruption, evasion, cascading effect if input credit is not given e.g. erstwhile sales tax system.
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What is Pigouvian tax?
- An externality is a positive or negative consequence of an economic activity experienced by unrelated third parties. E.g. Cement company (related parties: labourers & consumers benefit); whereas unrelated third parties (local community, flora and fauna) are harmed by cement company’s air-pollution.
- English economist Arthur C. Pigou proposed taxing the companies that create such negative externalities: e.g. polluting industries, cigarettes (passive smoking), alcohol (social disharmony).
- We HAVE high level of indirect taxes on petroleum, tobacco and alcoholic products.
- We HAD “Clean environment cess” of Rs 400 per tonne of coal (but abolished in GST)
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What is cascading effect of indirect taxes?
If a government levies 10% indirect tax every time an item is sold, then buyer will have to to pay tax on tax. This ‘cascading effect’ of indirect taxes raises the price of final product.
- Then, both buyer and seller will prefer to do transaction without bills, to entirely avoid tax liability and its cascading effect → Govt.’s revenue collection ↓, Fiscal deficit ↑, black money ↑
- This problem can be solved, if govt gives some type of cashback, reward points or input tax credit to the sellers, on the indirect taxes they’ve already paid in previous stage.
- To claim such input tax credit, the sellers will have to show the bills/ invoices for each stage = self-policing = black money ↓.
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Chronology of Indirect Taxes reforms
- Centra Excise Act - Union - 1944
- Central Sales Tax Act - Union - 1956
- Customs Act - Union - 1966
- Modifies Value Added Tax (MODVAT) - Union - 1986
- 5% Service Tax/Swachh Bharat Cess & Krishi Kalyan Cess (Service Tax+Cess = total 15%) - Union - 1994
- Central Value Added Tax system (CENVAT) - Union - 2004
- Value Added Tax - State - 2005
- Goods and Services Tax (GST) - Both - 2017
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❓MCQ-UPSC-Pre-2014. 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
D
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❓MCQ-UPSC-CDS-2013-I. Which of the following are direct tax in India? 1. Corporation tax 2. Tax on income 3. Wealth tax 4. Customs duty 5. Excise duty Ans. Codes: (a) 1, 2 and 3 (b) 1, 2, 4 and 5 (c) 2 and 3 (d) 1, 3, 4 and 5
A
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Indirect tax - GST timeline?
2004 - Vijay Kelkar Task Force on Fiscal Responsibility and Budget Management (FRBM) recommends GST.
2006 - In Budget speech, P.Chidambaram announces the launch of GST from 2010
2011 - UPA government introduces 115th Amendment Bill 2011 to implement GST lapsed with the dissolution of 15th Lok Sabha.
2014-16 - Modi govt. introduces 122nd Constitutional Amendment Bill 2014 in 16th Lok Sabha. Since GST aimed to change federal financial relations, so under Art.368, this constitutional bill required: Special Maj - 2/3rd P&V in such a way that is more than 50% total strength + 1/2 of States ratification
- Ultimately, it passed & became - 101st Constitutional Amendment Act, 2016
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What are 102-104th Constitutional Amendment Act
- 102nd , 2018: Constitutional status to National Commission for Backward Classes
- 103rd , 2019: 10% EWS
- 104th , 2020: Anglo Indian reservation removed in LS & State Legislative Assembly but SC/ST continued till January 25, 2030
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GST Council composition
| Voting and Quorum?
Under 279-A President of India to appoint a constitutional body, “GST Council” headed by Finance Minister.
Union Representatives - 2 Voting power: 1/3rd
1. Finance Minister as the Chairman
2. Union Minister of State for finance or revenue.
States’ representatives (31) Voting power: 2/3rd
- Each state government (including UT with legislature: J&K, Delhi & Puducherry) can nominate 1 minister to GST council- it may be their minister of finance or Dy.CM or any other minister as per their wish.
- One of them will be selected as the Vice- Chairman of GST council.
✓ If all members don’t no unanimously agree over a proposal → it’ll be put for voting → then minimum 3/4th votes required to pass the proposal.
✓ Council Meetings to proceed only with quorum of 50% of total membership.
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Functions of GST council
1. List of indirect taxes, cess, surcharge of the union and states to be subsumed under
GST-regime.
2. Decide the date from which Crude oil, Petrol, Diesel, Aviation Turbine Fuel and Natural Gas will be put under GST regime. (Until then excise-VAT on these five hydrocarbon fuel products, will be unilaterally decided by Union and individual States).
3. Decide Standard rates for GST (i.e. CGST, SGST and UTGST). IGST = {CGST + (SGST or UTGST depending on destination)}
4. Decide Special rates for GST, during natural disaster / calamity if required. E.g. 2019-Jan, GST-Council also allowed Kerala to levy a 1% calamity cess on intra-state trade for next two years, for the rehabilitation of 2018’s flood-victims.
5. Integrated GST (IGST) system during interstate commerce, and its tax-sharing.
6. Norms related to GST registration of businessmen. If a goods selling Bizman has turnover above “x” lakhs, he must register @GSTN online portal, he must collect GST from consumers and deposit it there. Originally the “x” was ₹20 lakhs for ordinary states; ₹10 lakhs for Sp.cat states & Telengana. However, in 2019-Jan the GST council doubled this limit to ₹40l & ₹20l respectively
7. Protecting the interests of the special category states i.e. 8 North Eastern states and Himalayan states (Himachal and Uttarakhand.)
8. Compensation to the states for their revenue loss in switching from VAT to GST regime (through Cess mechanism)
9. Dispute settlement between Union vs state(s), state(s) vs state(s).
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What is GST INPUT TAX CREDIT ?
GST is a ‘destination based’ indirect tax on consumption of goods & services. It is applicable on supply of goods or services as against the previous indirect taxes that worked on the concept of manufacture, sale, exchange, transfer etc.
in same the State (or UT without legislature) = Intra-state supply -
1 Union levies→CGST
2 State / UT without legislature levies→SGST / UTGST
in another State (or UT w/o LSR) = Inter-state supply
1. Union levies IGST =CGST + (SGST or UTGST depending on destination).
2. From this IGST→ CGST goes to Union, and the other portion goes to the Destination State/UT without legislature.
The input tax credit (ITC) is a tax credit amount a company can use for offsetting its tax-liability in future.
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What is Cross-utilization of ITC?
- IGST credit can be used for payment of all GST taxes.
- CGST credit can be used only for paying CGST or IGST.
- SGST credit can be used only for paying SGST or IGST.
If the goods or services are sold in union territory without legislature, then instead of SGST, they (practically the Union Govt) will levy UTGST.
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Centre's Indirect taxes subsumed in CGST- For import-export: Basic Customs Duty, cess / surcharge on it?
No, Customs Duty is NOT replaced with GST. It’s separate from GST-regime. So, imported goods are subjected to Custom Duty + IGST.
Previously, imported goods were subject to Customs
Duty + education cess but Budget 2018 replaced it with Customs Duty + 10% Social Welfare Surcharge
Budget-2020: 5% Health CESS on imported medical devices for building hospitals.
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Centre's Indirect taxes subsumed in CGST- On imports: Special Additional Customs Duty (SAD), Countervailing Duty (CVD)
They’re not ‘replaced’ with CGST, but simply abolished.
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Centre's Indirect taxes subsumed in CGST - For Central Sales Tax (CST)
CST was the Union tax levied on sale of items in inter- state trade, and it was assigned to the ‘Origin state’. It’s replaced with IGST (= CGST + SGST)
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Centre's Indirect taxes subsumed in CGST - On providing services: Service tax and Krishi Kalyan Cess and Swatchh bharat Cess
Yes, completely replaced by CGST. These previous cess / surcharge are deleted.
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Centre's Indirect taxes subsumed in CGST - On manufacturing/production of goods: Excise duty and various Cess / surcharges on it.
Yes, completely replaced by CGST (except 5 hydrocarbon fuels: petrol, diesel etc.)
- Excise on manufacturing medicinal & toiletry
preparations containing alcohol (e.g. Cough syrups,
deodorants and perfumes) also replaced by CGST.
- Alcoholic Liquor for human consumption- falls in
States’ purview so Union Excise / CGST not applicable on it.
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Centre's Indirect taxes subsumed in CGST - For Excise duty on Tobacco products
It’s replaced with 14% CGST. Further, Union also levies + GST Compensation Cess + National Calamity Contingency Duty** on them.
- **because 101st Constitutional Amendment allows Union to tax tobacco products separately.
- NCCD money goes to Public Account → National Disaster Response Fund set up under Disaster Management Act, 2005.
- Budget-2020: ⬆National Calamity Contingent Duty on Cigarettes and other tobacco products
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Centre's Indirect taxes subsumed in CGST - For Excise duty on production/refining of Crude oil, Petrol (Motor Spirit), Diesel, Aviation Turbine Fuel and
natural gas
- Once GST council decides the date they’ll be brought under GST-regime.
- Until then refineries / oil-drilling companies have to pay excise duty+cess/surcharges to Union for production / manufacturing of these items. (and petrol pump owner, etc will have to pay VAT to states on their sale.)
- Presently, Petrol & Diesel are also subjected to Union’s Road and Infrastructure Cess which goes into Public
Account→ Central Road & Infrastructure Fund setup under Central Road Fund Act 2000 (The word “Infrastructure” was added by Budget-2018).
- Full-Budget-2019 ⬆the excise and road- infrastructure cess on petrol and diesel.
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Centre's Indirect taxes subsumed in CGST - For Corporation Tax, Income Tax, Capital Gains Tax, MAT, STT, CTT
They’re DIRECT Taxes of State so not replaced by GST. The GST is meant to replace INDIRECT Taxes only.
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Budget-2020 Projections for Union Taxes in Descending order of Revenue?
- Indirect taxes in ↓ order of revenue: GST > Excise > Customs
Direct taxes in ↓ order of revenue: Corporation > IT > STT
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State's Indirect taxes subsumed in SGST - On sale of goods: State Value Added Tax (VAT) (In some states
called “Commercial tax”
Yes, By default VAT is replaced by SGST
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State's Indirect taxes subsumed in SGST - On State VAT on selling of Crude oil, Petrol (Motor Spirit), Diesel, Aviation Turbine Fuel and natural gas
Once GST council decides the date, these’ll be brought under GST-regime. Until then, petrol pump owners, LPG gas distributors etc. will have to collect VAT (+ any cess / surcharges) from the customers and deposit to the state government.
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State's Indirect taxes subsumed in SGST - For State Excise on production of liquor for human consumption
and
For State VAT on sale of liquor for human consumption.
No, they're completely kept out of GST.
Since inception of our Constitution, the power to tax liquor was with :States, & it constituted a major source of revenue for them, so States were unwilling to hand it over in GST regime.
Had the govt tried to bring liquor under GST-regime, then majority of the SLAs may not have passed this Constitutional Amendment Bill.
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State's Indirect taxes subsumed in SGST - For Electricity Duty
No, it’s not replaced by SGST
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State's Indirect taxes subsumed in SGST - For Road Tax on vehicles.
No, it’s not replaced by SGST.
Its status as direct/indirect tax is vague because in some states/ vehicle categories: buyer himself deposits while in some cases, seller required to collect & deposit.
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State's Indirect taxes subsumed in SGST - For Purchase tax on vehicle, boats, and animals
Yes replaced by SGST
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State's Indirect taxes subsumed in SGST - For Advertisement tax on hoarding, banners etc.
Yes replaced by SGST
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State's Indirect taxes subsumed in SGST - For Luxury tax at Hotels, Spas, Resorts etc.
Yes replaced by SGST
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State's Indirect taxes subsumed in SGST - For Entry tax/Octroi for entry of goods in an area -
Yes replaced by SGST
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State's Indirect taxes subsumed in SGST - For Taxes on Lottery, horse race betting, gambling etc.
Yes replaced by SGST. Since they’re ‘sinful/demerit goods’, they’re subjected to highest slab : 14% SGST + 14% CGST = 28%
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State's Indirect taxes subsumed in SGST - For Entertainment Tax on Cinema, Live Performance shows etc.-
Yes, replaced by SGST unless levied by a local body. e.g. Kerala local bodies 10% on movie tickets.
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State's Indirect taxes subsumed in SGST - For Income tax on Agriculture, Professional tax, Property tax, Stamp Duty, Land revenue
They’re DIRECT Taxes of State so not replaced by GST. The GST is meant to replace INDIRECT Taxes only.
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❓MCQ. Consider the following items:(Asked in UPSC-Pre-2018)
1) Cereal grains hulled 2) Chicken eggs cooked
3) Fish processed and canned 4) Newspapers containing advertising material Which of the above items is/are exempted under GST (Good and Services Tax)?
(a) 1 only (b) 2 and 3 only
(c) 1, 2 and 4 only (d) 1, 2, 3 and 4
C
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Difference between GST (Regular) scheme and GST Composition Scheme
GST (Regular) scheme:
- If an industrialist or seller is registered with GST, he must collect the taxes at varying rates, and deposit them on the monthly basis at GSTN web portal.
-Good: He will get input tax credit,
Bad: He’ll have to deposit tax & forms on monthly basis @GSTN web portal
-Compulsory if turnover is above “x” lakhs / crores.
- 1.12 crore taxpayers registered here
GST Composition Scheme:
- Such monthly compliance is very tedious for small entrepreneurs / small merchants so they may opt for GST Composition scheme wherein instead of above (5-12-18-28%) rates they’ll have to collect only flat rate GST of 1% on goods, 5% on restaurants, 6% on all services.
-Bad: He’ll NOT GET Input Tax Credit.
Good: He’ll not have to deposit tax/forms on monthly basis to GSTN webportal. He’ll have to do it on Quarterly basis (3-3-3-3 months)
-Optional scheme, NOT compulsory. NOT every supplier is eligible. Only if turnover is below “y” lakhs / crores, and doing “z” type of biz, then you’ll be eligible.
-Hardly 17 lakh taxpayers registered here
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What is Tax collection at source on e-commerce?
- Merchant Jethalal sells mobiles through Amazon @10k+18% GST.
- Customer pays 10k+18% GST to Amazon.
- Amazon is then required to deduct 1% of 10k & upload to GSTN portal, and gives (remaining amount+GST) to Jethalal. (=1% Tax collection at Source).
- If Jetha wants to get that deducted amount, he’ll have to upload things at GSTN portal.
- TCS ensures nobody can evade taxes while selling through E- commerce sites.
- This norm became effective from 1st October 2018.
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What is Reverse charge mechanism?
- Normally, a seller must collect the GST tax from buyer & deposit to the govt.
- However, in selected cases when seller is not registered with GST number, while buyer is registered with GST number, then buyer will have to deposit the tax to government.
- ‘Reverse Charge Mechanism’ is associated with GST, just like ‘E-way bill’ mechanism is associated with GST.
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What is E-way bill mechanism? and E-invoice?
E-WAY BILL SYSTEM FROM 2018 ONWARDS
When goods worth ₹50,000/> are moved within a state (intrastate) or from one state to another (inter-state), then the truck/transport/cargo/shipping/aeroplane company must generate E-way Bill from GSTN Portal / App / SMS.
- E-way bill’s self-declaration (that our truck is carrying “x” type of goods worth “y” value) reduces the scope of bribery, delay, red-tape, harassment at the check post, thereby ensuring a hassle-free rapid movement for transporters throughout the country. E-way bill system became effective from 2018.
- GST council announced the E-invoice (=bill generation) from January-2020 on pilot basis, then E-way bill will not have to be generated separately. This will provide relief to businessman, will improve the tax-surveillance and fight against false ITC-credit claims through fake invoices.
- As such E-invoice was to become compulsory from 1/April/2020. However, because of Corona, deadlines have been deferred.
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How was Compensation given to States after GST?
Parliament enacted GST Compensation to States Act 2017
✓ Under its provisions, GST council recommended Union Govt to impose “GST Compensation Cess” on specified luxury & demerit goods, like
○ pan masala (60%), tobacco products (cess varies as per product),
○ aerated water & Caffeinated Beverages (12%), coal / lignite (₹400 per tonne),
○ motor vehicles-aircraft-yacht (3-22% depending on type of vehicle).
✓ The cess thus collected is used for compensating States for their revenue losses during the first five years since inception of GST.
✓ The formula uses 2015-16 as base year to measure states’ revenue, & assumes 14% annual growth in VAT system. Then relatively, how much less ₹₹ did state receive in SGST? = compensation will be given accordingly.
✓ Liquor Taxes are outside GST-purview so Bihar / Gujarat / Nagaland / Lakshadweep / Parts of Manipur can’t ask more ₹ for compensation from this fund for having liquor prohibition
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What are the GST related organisations?
1- GST Council
2- Group of Ministers (GoM)
3- Distribution of Admin. Responsibilities
4- National Anti-Profiteering Authority (NAA/NAPA)
5- Authority for Advance Ruling (AAR)
6- GSTN Network (Not for Profit Company)
7- Project Saksham: Digital/ICT integration (2016)
8- HSN and SAC Codes
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What is the work of Group of Ministers (GoM) under GST related organisations?
These committees are set up by GST Council to look into specific issues from time to time
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What is National Anti-Profiteering Authority (NAA/NAPA) under GST related organisations?
- GST provides input credit for most of the indirect taxes of the Union and State Government. So, entrepreneur’s cost of production should ⬇, then he should also ⬇the prices for consumers, yet many companies had not reduced their prices.
- e.g. Dominos Pizza, Nestle, Hindustan Unilever toothpaste & detergents etc.
- To curb their profiteering, Union govt has set up NAA under Central Goods and Services Tax Act, 2017.
- Depending on the case, NAA can order the culprit company to 1) reduce prices 2) refund money with interest to consumers 3) deposit money to Consumer Welfare Funds at union & state level 4) Impose penalty upto 10% of profiteered amount 5) cancel registration.
- Further appeal→ High Court.
- This Authority shall cease to exist after two years from its inception (2017), unless GST council renews it. 2019-Jun: GST council extended it for another 2 years, which
means all crooked companies have not yet stopped profiteering.
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What is Authority for Advance Ruling (AAR) under GST related organisations? Higher Appeal and benefits?
- Diabetic foods supplements are subjected to 12% GST whereas pasteurized milk is subject to 0% GST. If Amul plans to launch ‘Amul Camel Milk' with bottle label: "Camel milk is easy to digest, high in an insulin-like protein, hence beneficial for diabetic person."
- So, whether Amul’s product be subjected to 0% GST or 12% GST? An entrepreneur would like to have such clarification from Tax authorities before starting the production, lest he gets tangled in raids and litigations afterwards.
- So, CGST Act, 2017 provides for a statutory body called Authority for Advance Ruling (AAR), where entrepreneur can seek such advance clarification.
- Higher appeal? Appellate Authority for Advance Ruling (AAAR).
- Benefit? reduces litigation & harassment afterwards → Ease of doing business → attract Foreign Direct Investment (FDI)
136
What is GSTN Network under GST related organisations?
2013: Goods and Services Tax Network (GSTN) “Not for Profit” Private ltd. company was set up under the Companies Act.
2018-May: GST Council approved acquisition of entire 51% equity held by non- Governmental institutions & distribute it equally between Centre and the State Governments.
- This company runs the GSTN online portal, where the suppliers register themselves, pay their GST, claim input tax credits, generate e-way bills etc.
[Infosys ltd. helped develop the web portal.]
- GSTN Network ltd. also provides the IT infrastructure and software services to GST officials for monitoring the tax compliance, issuing notices, data mining etc.
- In future, such data could also be shared with the RBI’s Public Credit Registry (PCR) so the lenders can have a complete picture of the borrower’s business.
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What is GST Suvidha Providers (GSPs)?
- GST Suvidha Providers (GSPs): These are selected private IT/Fintech companies that develop apps / software to help the taxpayers interact with GSTN portal. E.g. Zoho
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What is Project Saksham (2016) under GST related organisations? What is antarang portal?
The portals/softwares and digital processes of CBIC had to be re-engineered to align with the GSTN portal.
So,
- 2016: CBEC/CBIC launched, “Project Saksham” for Digital/ICT re-engineering/web portals’ integration.
- Separately, 2018: Indian Railways also launched Project Saksham but with different objective of employees’ training and skill-upgradation for doing railway related work.
- Separately, CBIC has Antarang portal for internal communication among CBIC officers.
139
What is SWIFT?
SWIFT (Single Window Interface for Facilitating Trade). - CBIC's portal for Union's indirect tax - customs duty
140
What is HSN and SAC Codes under GST related organisations? benefits?
Service Accounting Code (SAC) are used for classifying services for GST rates. e.g. coaching services = SAC Code 999293 = 18% GST.
Harmonized System of Nomenclature (HSN) developed by the World Customs Organization (WCO) is used for classifying goods for GST rates. e.g. Jarda scented
tobacco = HAC code 24039930 = 28% GST.
- Benefit? HSN-SAC coding helps in computerised accounting, billing, digitization, surveillance & big data analytics by Tax authorities.
141
What is PAN and GSTIN? Who issues it? What are it's objectives?
Permanent Account Number - issued by the Income Tax Department, Objective - Prevent evasion of direct taxes.
Goods and Services Tax Identification Number issued by the Central Board of Indirect Taxes & Customs (CBIC)
Objective - Prevent evasion of GST, and help the entrepreneurs claim their input credits.
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What is Business Identification Number (BIN)
- PAN number is required for various activities like opening of bank account, opening of demat accounts (for trading in securities), obtaining registration for GST, VAT-Excise registration (for Petrol-Liquor dealers) etc.
- So, PAN is slowly becoming a Common Business Identification Number (CBIN) or simply Business Identification Number (BIN)- because if a Department knows your PAN number they can dig all information about you, know whether you’re eligible to fill up a particular tender or contract or a scheme application form or not?
143
What is UID? Who issues it and what are its objectives?
UID (=Aadhar Card)
Issued by a Statutory body- Unique Identification Authority of India (UIDAI) that functions under
Ministry of Electronics and Information Technology (MeitY).
Primary objective is to eliminate bogus beneficiaries in government schemes & reduce subsidy leakage. Auxiliary benefits: Identifying dead bodies, tracking criminals, mobile number ownership, tax evasion etc.
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Benefits of GST
✓ GST covers both goods and services, with standard rates, minimal number of cess/surcharges.
✓ GST online portal and e-way bill system reduces the interface between tax-officials and the assesses, thereby reducing the scope of harassment, bribery and Inspector Raj. (=Ease of doing business)
✓ GST provides input credits to suppliers thereby incentivizing them to sell with invoice at every stage. Thus, GST will expand our tax collection, and deter tax evasion.
✓ GST Input credit system ⬇ the cascading effect of taxes, ↓ cost of manufacturing & selling, while its anti profiteering authority ensures that such benefits are passed on to the customers in the form of reduced MRP.
✓ Federal nations such as Canada and Australia shifted from VAT to GST regime. It helped boosting their revenue, GDP and exports.
✓ Thus, GST will help to create a unified common national market for India, & catalyse “Make in India”.
GST provides input credits in more efficient and comprehensive manner therefore, instead of trying to become Jack of all trades, company will pursue Ancillarisation, Subcontracting and Outsourcing to procure from MSME industry and freelance
professionals.= More jobs
SGST/UTGST rates are uniform throughout India, so there is no scope of rate arbitrage. Whether you buy a laptop from Chennai or Mumbai the GST% tax rate will be same.
Both CGST and SGST are computed on the same base (₹10,000), therefore tax burden on final consumer is less in GST regime, than in Excise-VAT regime.
Thus, GST will reduce overall impact of tax on end-customer, so his purchasing power will improve, leading to more demand, more sales, more business expansion and GDP growth & jobs.
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GST Benefits for Zero Rated Exports?
- When company buys raw material or intermediate goods it will have to pay GST but if final product is exported outside India (or sent to Special Economic Zone/SEZ in India), it'll be subjected to 0% IGST.
- So, whatever GST the company had paid on the inputs, all of that will become its “Input Tax Credit” (and company can use this ITC to pay for the taxes on the purchase of raw material and intermediate goods in the next time), thus reducing its cost of production.
- This will improve price competitiveness of Indian products in foreign markets.
- Australia and other GST countries also follow similar “zero rated export” regime.
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MCQ. What is/are the most likely advantages of implementing ‘Goods and Services Tax (GST)’? (Asked in UPSC-Pre-2017)
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
A
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What are the challenges for GST?
High Rates and Multiple Slabs
Frequent changes harming long term business planning
Fall in collection
Inconvenience to Small Traders
