Public Finance - Taxation Flashcards
Tax
Tax is a compulsory levy payable by individuals or corperations to the government without any corresponding entitlement to receive a direct quid pro quo from the government
It is not a voluntary payment and non redeemable which means that it cannot be repaired back from the government
All taxes levied within India need to be back by an accompany law passed by the Parliament or the state legislature act (article 265)
The 7th schedule of Indian constitution has defined subjects on which the union or state or both can levy taxes.
Limited financial powers have been given to the local government through the 73rd and 74th constitutional amendment bills
Taxation is an instrument that is primarily aim that maintaining the government revenues which can be used to achieve various objectives
Important terms associated with taxation
Tax incidence: it shows the entity on which taxes imposed
Tax burden: it shows the entity who actually pay the taxes, i.e. from whom it is collected.
Tax base: refers to the good, services and income on which tax is imposed. It is said that digitization and formulation improves the tax base.
Tax buoyancy: explain the relationship between changes in government tax revenue growth and the changes in the GDP. Refers to the responsiveness of tax revenue to the changes of GDP. Increase in GDP is likely to increase tax revenue
Tax elasticity: defined as a percentage change in tax revenue to tie change in tax rate
Laffer curve: shows the relationship between tax rates and tax revenue collected by the government. As the tax rates increase up to a certain point, tax revenue collected by the government also increases, but after that point that text revenue would drop with an increase of tax rate due to tax avoidance or tax evasion.
Tax avoidance: it is a legal method of reducing tax liabilities by using exemptions in tax laws or various loop holes in laws. For example, investment in public provident fund can be deducted from the taxable income under the section SDC of IT Act, 1961.
Tax evasion: willful and illegal evasion of taxes by individuals, trust and corporations by misrepresenting their financial state of affairs. This includes practices like dishonest tax reporting, declaration of less income and hiding of income in tax havens, etc.
Tax havens: it is a jurisdiction or country, that offers for an individuals and businesses little or no tax liability in a politically and economically stable environment. This countries also provide little or no financial information to foreign tax authorities. For example, the Bahamas, Cayman Islands, Mauritius etc.
Pigouvian taxes: it is a tax on direct market transaction which creates a negative externality borne by individuals not directly involved in transaction. For example, tobacco taxes, sugar taxes, carbon taxes etc.
Retrospective taxation: it is one that is charged for transactions in the long past. Can be a new or additional charge on transaction done in the past. Retrospective taxation allows a nation to implemented rule to impose a tax on certain products, goods or services and charge companies from a time before the date on which the law was passed.
Inverted duty structure: arises when the taxes on raw materials is more than the taxes on the finished products. This puts the domestic manufacturing at a disadvantage, making them uncompetitive.
Methods of taxation
Proportional taxation: it is a type of income tax were everyone pays the same percentage of tax regardless of the income. Also called flat tax. For example, GST
Progressive taxation: it is a system where the tax rate increases as the tax payer’s income increases. Based on the principle of ability to pay. It aims for achieving the objective of redistribution and therefore ideally the tax system should be progressive and not regressive. For example income tax in India
Regressive taxation: decrease in the tax rate with an increase of income and therefore the tax liability of the tax payer decreases with an increase in his income. For example, indirect taxes in India.
Principles of taxation
Principle of equality: the ability to pay. Taxes should be proportional to income
Principle of certainty: text which an entity is bound to pay should be certain and non arbitrary
Principle of convenience: manner of payment of taxable amount must be convenient to the person paying the same
Principle of economy: a good tax system is when the cost of collecting the tag is very small compared to that of the payment collected
Types of taxes
Direct taxes:
Paid entirely by a tax payer to the government
Tax incidence = tax burden, therefore that’s burden can’t be shifted
Progressive in nature
Higher administrative costs are involved
Possibility of tax evasion
Increase in direct taxes = decrease in disposable income and lesser inflation.
Indirect taxes:
Ultimately paid by the end consumer of goods and services
Tax burden can be shifted to the ultimate consumer
Regressive in nature
Lesser administrative costs
Can’t be avaded as are charged on goods and services
Increase in indirect take taxes means higher inflation
Share of direct taxes as percentage of total tax revenue is lesser than 50%.
India’s tax-GDP ratio is 11%, that of OECD countries is 34% average.
Direct taxes
Paid directly by the tax payer to the government
Levied on income (income tax, corporate tax, minimum alternate tax, capital gains tax, digital service tax)
Levied on transaction of assets (securities transaction tax, commodities transaction tax, tobin tax)
Levied on expenditure (expenditure tax is not followed by India). It is a tax levied on the total consumption expenditure of an individual. It is different from the tax expenditure. Revenue for gone on account of various tax concessions given by the government like tax exemptions, deductions, tax holidays and incentives, etc.
Income tax: the income tax Act of 1961 imposes tax on the income of individuals or Hindu undivided families or firms or cooperative societies (other than companies) and trusts. All residents are taxable for their income including income outside. Non residents are taxable only for the income received in India or income accrued in India
Corporate tax: it is a direct tax levied on the net income or profit that corporate enterprises make from their business. Imposed at a specific rate as per the provisions of the income tax Act of 1961. Tax rate differ for Indian and foreign corporations. Corporate entities that are liable to pay corporate tax in India are: incorporate corporations in India, corporations that acquire revenues from India and do business on those earned incomes, other foreign enterprises that have permanently established themselves in India, corporations that have on the title of being an Indian resident only for the purpose of tax payment
Minimum alternate tax: companies that are popularly known as zero tax companies show profit as per the companies Act of 2013 but minimise tax out go by taking advantage of depreciation, deduction, exemptions, etc from the government and display income that is zero or negative under the provisions of the income tax Act. Thus, MAT was introduced as a provision in direct tax laws to limit tax exemptions availed by the company so that they mandatorily pay a minimum amount of text to the government and bring these zero tax companies under the tax network. All companies whether public or private, respective of whether Indian or foreign are liable to pay MAT computed @ 15% of the book profit if the normal tax liability is less than MAT. Not applicable to any income received by a company from Life insurance business and shipping income liable to the tonnage taxation.
Capital gain tax: any profit or gain that arises from the sale of capital asset is a capital gain. This gain comes under the category of income (like land, building, cars, machinery, home, shares, bonds, art, patents, trademarks, jewellery etc). Tax levied aur income accrued from capital gain is known as capital gain tax. Short term capital gain tax is higher than long term capital gain tags to discourage speculation and volatility. Long term gain differs for different assets. For equity investments, the time period is more than 1 year. For real estate property, the time period is more than 2 years. For other assets, the time period is more than 3 years.
Digital service tax: India introduced the digital tax in 2016. It is known as the equalization levy, under which 6% levy was applied on the payments made to a non resident by Indian for certain specified services. Initially restricted to online advertisement. Equalisation levy was levied along the lines of GAFA tax (proposed digital tax levied on big tech companies like Google, Facebook, Amazon and Microsoft). This scope of equalisation levy got why didn’t and renamed as DST via Finance Act of 2020. A 2% DST is imposed on non resident digital service providers showing annual revenues of more than 2 crores. The amendment why didn’t the text to include a vast range of digital services such as digital platform Services, software as a service, data related services and several other categories including e-commerce operations. With this amendment, the foreign digital service providers have to pay their fare share of tax on revenues generated in the Indian digital market. DST is not applicable on offshore E-Commerce firms that have a permanent establishment in India or pay income tax in India are exempted
Security transaction tax: direct tax charged on the purchase and sale of securities listed on the recognised stock exchanges in India. Levied and collected by the central government. STT is governed by the Securities transaction tax Act which has specifically listed various taxable securities transactions that include equity, derivatives or equity oriented mutual funds (excluding currency and commodity). The liability of applying the STT is on the broker when the client undertakes transaction in the stock market
Tobin tax: levied on spot currency conversion with an intention to discourage short term currency speculation. First proposed by James Tobin and design to promote currency market stability.
Commodities transaction tax: introduced in budget 2013-14 as the text levied on trading of commodity derivatives i.e. futures and options. This taxes application only for the sellers of commodity derivative and this tax is based on the actual size of a contract. Applicable on non agricultural commodities like gold, silver, crude oil, natural gas, aluminium etc while agriculture commodities are exempted from this tax. Similar to SST, which was levied on the purchase and sale of equities in the stock market.
Cess: cess means a tax that is imposed for an ear marked purpose and the proceeds collected have to be used for that purpose only. According to article 270. It is levied for a specific purpose and funds can’t be utilised for any other purposes. Is calculated on the total tax amount + the applicable surcharge. Can be levied on direct and indirect tax. Paid by all tax payers. Cess rate is fixed. Proceeds for score to CFI and then transferred to specific funds, which are set up under public account.
Surcharge: it is a tax on tax which is not imposed for any specific purpose and it is the discretion of the union government to utilise the proceeds of surcharge for which our purposes it deems fit. According to article 271. Levied to achieve the redistribution objective and funds can be utilised for any purpose. Calculated on the total tax amount only. Levied only on the direct tax amount. Paid only by the high income people. Surcharge rates vary. Proceeds go to CFI.
Proceed from both the cess and surcharge need not be shared with the state government and thus, does not form part of the divisible pool.
Associated concepts
Double taxation avoidance agreement: it is a Treaty signed between two or more countries with an objective that taxpayers in these countries can avoid being taxed twice for the same income. DTAA applies in cases were a tax payer presides in one country and earns income in another. DTAA can either be comprehensive to cover all sources of income or be limited to certain areas like taxing of income from shipping, air transport, inheritance, etc.
The following categories are covered under DTAA, services, salary, property, capital gains, savings or fixed deposit.
There are two established principles which can be adopted under DTAA: sources of income and residence
Under section 90 of the IT Act of 1961, India can enter into an agreement with a foreign country or specify territory for avoidance of double taxation of income for the exchange of information for the prevention of evasion. DTAA’s are intended to make a country an attractive investment destination by providing relief on dual taxation.
Round tripping: refers to money that leads the country through various channels and makes its way back to the country in the form of foreign investment. The various reasons that promote round tripping like tax concessions allowed in foreign countries, encourage the companies to park money there and re-route it. Various channels are, inflated invoices, payments to shell companies overseas, hawala route, etc.
Shell companies are typically corporate entities which do not have any active business operations or significant acids in their possessions.
Transfer pricing: refers to prices of transactions between associated enterprises which may take place under conditions different from those taking place between independent enterprises. In such transactions, one party transfer to another goods and services for a price known as transfer price. Section 92F of the IT Act of 1961 defines arm’s length price as a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions
Base erosion and profit shifting: it is a term used by MNC to describe tax planning strategies and exploit mismatch and gaps that exist between the tax rules of different jurisdictions. It is done to minimise the corporation tax that is payable overall by either making tax profit disappear or shift profits to low tax jurisdictions where there’s little or no genuine activity. BEPS strategy are not illegal, rather they take advantage of different tax rules operating in different jurisdictions. BEPS is an OECD initiative approved by the G20 to identify ways of providing more standardised tax rules globally.
Global minimum corporate tax: OECD announced a global deal of minimum tax agreed by 136 countries in 2021. It included India. GMT applies a standard minimum tax rate of 15% to a defined corporate income based worldwide. Its aim is to discourage nations from tax competition through lower tax rates that result in corporate profit shifting and tax base erosion. GMT is tailored to address the low effective rates of tax shelled out buy some of the world’s biggest corporations including big tech majors like apple, alphabet, Facebook, etc. The solution is the 2 pillar solution.
Advance pricing agreements: agreement between a tax payer and a tax authority that sets out how International transactions between related companies will be priced to avoid any confusion or disagreement about the pricing of those transactions. Its objective is to keep a check on big multinational companies so they don’t engage Intex evasion by adjusting their profits based on their intercorporate transactions (transfer pricing). It is based on the income tax Act of 1961.
Central Board of Direct taxes
Statutory authority functioning under the Central Board of revenue act of 1963
It is a part of the department of revenue in the ministry of finance
Headed by the chairman and also comprises of 6 members selected from the Indian revenue service
Functions include formulation of policies, dealing with matters relating to levy and collection of direct taxes and supervision of The functioning of the entire tax department
CBDT also proposes legislative changes in direct tax enactments and changes in rates and structure of taxation in tune with the policies of the government
Indirect taxes
Taxes levied on goods and services and differ from direct taxes because they are not levied on a person who pays directly to the government. Instead, they are levied on products and are collected by the person selling the product
Pre GST regime:
Excise duty: levied by centre (for manufacturer)
Central sales tax: levied by the centre but goes to the manufacturing States (interstate sale)
Sales tax or VAT: levied and collected by the centre (intra state sale)
Basic custom duty: levied and collected by centre (on imports and exports)
Service tax: levied and collected by the central government (on services)
Problem with this regime: multiplicity of taxes making it a complex regime
Tax on tax system leads to cascading effect which makes the good cost clear and does exports become uncompetitive
Non uniformity among the tax rate of States
Goods and services tax
It is an indirect tax on the manufacturing, sale and consumption of goods and services throughout India that replaced many interact tax laws that previously existed
It is based on the principle of destination based consumption taxation against the earlier principle of origin based taxation
Multi State taxation which is levied on every value addition at each stage like the earlier VAT system that existed in states.
This would me to get the ill effects of cascading, improve competitiveness and improving the liquidity of the businesses
Imports of goods and services deemed as supply of goods and services are both in course of interstate trading and does attract IGST. Imports of good attract basic custom duty and IGST and imports of services attract IGST.
Exports are zero rated which means GST will not be levied on export of any kid of goods and services
Dual structure of GST: both centre and state simultaneously levying on common tax base.
Supply of goods and services:
Intra state: CGST collected by centre and SGST collected by State
Interstate IGST (share between centre and consumption state or destination against the principle of CST).
GST is implemented through the enactment of the 101st constitutional amendment act with rigid procedure (special majority in Parliament + ratification by at least ½ of state Legislatures but passed with simple majority). A Constitutional amendment Act is required to bring alterations in 7th schedule (federal feature) and assigning concurrent powers to centre and States to levy GST on all supplies
Taxes subsumed under GST:
Subsumed central taxes: central excise duty, duties of excise (medicinal and toilet preparations), additional duties of excise (goods of special importance), additional duties of excise (textiles and textile products), additional duties of customs, special additional duty of customs, service tax, central surcharges and cesses.
Subsumed state taxes: state VAT, Central sales tax, luxury tax, entry tax, entertainment and amusement tax, taxes on advertisements, purchase tax, tax on lotteries, betting and gambling, state surcharges and cesses
GST Council:
It is a constitutional body set up under the article 279 (1) of the Indian constitution
Members: Union finance minister is the chairperson and the Union minister of state (finance) from the centre. Each state can nominate a minister in charge of finance or taxation or any other minister as a member.
Voting power: centre has ⅓ vote in council while states have ⅔ weightage in council
Decision: any decision needs 75% (¾) of the vote support
Quorum: 50% of the total membership for Council meetings
Functions: under article 279A (4), the Council makes recommendations to the Union and the states on important issues rating to GST: goods and services that maybe subjected or exempted from GST, principles that govern place of supply, threshold limits, GST rates including the floor rates with bands and special provisions for certain states, etc.
GST tax structure:
The primary GST slabs for any regular tax payers are presented pegged at:
0% : certain dairy products like fresh milk, pasteurized milk, buttermilk, eggs, vegetables, etc.
5%
12%
18%= largest items, lower than 40%, fall under this slab rate
28% = mainly consists of luxury goods like AC machines, luxury cars and tobacco products, carbonated beverage, Pan masala etc
Apart from these primary GST slabs, there are a few items of GST rates @ 3% like pearls, silver, gold, etc.
Alcoholic liquor for human consumption is excluded from the scope of taxation under GST.
There are other items which are not out of the GST scope but GST rate has not been announced for the following items: crude petroleum, high speed Diesel, motor spirit or petrol, natural gas and aviation turbine fuel
GST composition scheme:
It is an easy, low procedure and compliance friendly tax scheme for small and medium enterprises.
Under the scheme, small tax payers can get rid of TDS GST formalities and pay GST at a fixed rate of turnover
The composition scheme under GST requires businesses to file GST returns on quarterly and annual basis which is different from monthly GST return filing
It can be opted by the following category of people, manufacturers and traders of goods (with an annual turnover greater than 1.5 crore), restaurant services not supplying alcohol (annual turnover greater than 1.5 crore), service providers other than restaurant services (with an annual turnover greater than 50 Lakhs)
There are certain benefits that are not available to composition tax payers like, input tax credit can’t be claimed and limited area of operation as composition dealers can’t engage in inter state sales transactions
GST Glossary
GST compensations cess: in theory, the GST should generate as much revenue as the previous text regime. However the new regime is taxed on consumption and not manufacturing. This means that manufacturing States would lose out the revenue and therefore, the idea of compensation was mooted to assuage these states. Legislation: specified under the GST (compensation to States) act of 2017. The aim was for states to be guaranteed compensation for any revenue shortfall below 14% growth for the first 5 years but it has been recently extended for another 5 years. The GST act states that the cess collected and the amount as may be recommended by the GST Council would be created to the compensation fund. Levied on notified goods. Mostly belonging to the luxury and demerit categories. It has to be paid by all the tax payers except the exporters and those who have opted for the GST composition scheme.
GST Appellate tribunal: the CGST act empowers the central government to constitute, on the recommendations of the GST Council, an Appellate tribunal. It is a quasi judicial body and is a forum of second appeal to resolve disputes related to the GST in India. It hears appeals against orders passed by the GST authorities or appellate authority under the central and state GST acts. Composed of a national bench and various regional benches, headed by a chair person appointed by the central government. GSTAT will ensure that there is uniformity in redressal of disputes under GST and ensures a speedier resolution of cases.
Good then service tax network:
Not for profit, government company incorporated under section 8 of the companies Act of 2013. 100% shareholding is held by the government (50% with the union government and 50% jointly with state government & UTs). Developed an indirect taxation platform for GST in India. The platform helps tax payers in preparing, filing returns, making payments and complying with indirect tax regulations. Provides IT infrastructure and services to the central and state governments, tax payers and other stakeholders.
E-waste bill system: an e-way bill is a permit needed for interested and interest rate transportation of goods worth ₹50,000 or more. Contains the details of the goods, the consignor, the recipient and the transporter. Electronically generated through the GSTN. When an e-way bill is generated, a unique e-way bill number is allocated and is available to the supplier, recipient and the transporter. Goods excluded are perishable items, precious jewellery, cooking gas cylinders, raw silk, wool and handlooms. Typically the Bill’s validity is one day for every 100 KM of movement of goods.
National anti profiteering authority: statutory mechanism under GST law to check the unfair profiteering activities by the registered suppliers under GST law to ensure that traders are not realising unfair prophet by charging high prices from consumers in the name of GST. Its core function is to ensure that the commensurate benefits of the reduction in GST rates on goods and services done by the GST Council must be passed on to the consumer by way of reduction in prices of respective goods and services. Ceased to exist as of Dec, 2022 and all the powers have been transferred to the competition commission of India, which now handles all GST anti profiteering complaints.
Input tax credit: it is the tax that a business pays on a purchase and that it can use to reduce tax liability when it makes a sale. At the time of paying tax on output one can reduce the tax that has already been paid on input and pay the balance amount. A business under composition scheme cannot avail of input tax credit
Reverse charge mechanism: it is an mechanism where the recipient of the goods or services is liable to pay GST instead of the supplier. Under the RCM, the recipient of goods cannot claim an input tax credit as the supplier has not paid any tax for their sales.
Central Board of indirect taxes and customs
Created under the central boards of revenue act of 1963
Part of the department of revenue under the ministry of finance
National nodal agency responsible for the administration of customs, GST and narcotics in India
Deals with the tasks of formulation of policy concerning levy and collection of customs, Central excise duties, CGST and IGST.
