September 27, 2022

Krithika Jamkhandi

taxation

Introduction:

The Indian tax system can be divided into two categories: direct and indirect taxation. The term “direct tax” refers to a tax that is paid directly to the government by the taxpayer. Indirect taxes are basically non-income-based taxes that fall on the end consumer.

In layman’s words, indirect taxes are levied on suppliers or producers, who then pass the tax on to the end-user. Some of the most common indirect taxes in India are customs duty, goods and services tax (GST), excise duties, value added tax (VAT), and sales tax. Here’s a quick rundown of its definition, features and other aspects.

“A direct tax is really paid by a person on whom it is legally imposed,” Dalton said, “whereas an indirect tax is imposed on one person, but paid partly or entirely by another owing to consequential changes in the terms of some contact or bargaining between them.” JS. Mill says, “The term “direct tax” refers to a tax that is imposed on the people who are supposed to pay it. Indirect taxes are levied on one individual with the expectation and intent that he will compensate himself at the expense of another.”

Direct taxes impose a direct financial burden, whereas indirect taxes impose a financial burden on the person who pays the tax to the government rather than the person who ultimately endures it.

Returning to the distinction between direct and indirect taxes, it will be clear that the theory of progressive taxation cannot be applied to indirect taxes. It would be impractical for the government to impose a system of central excise, say on petrol, in which a higher rate is charged if the fuel is purchased by a very wealthy individual, and lower rates are charged to the less wealthy and poor.

As a result, indirect taxes must be proportional.

Aside from this disparity, there is another one, which is tax avoidance.

Income tax avoidance is conceivable; however, it is not viable to evade excise and customs duties.

In a legal sense, the distinction between direct and indirect taxes is blurred, with the United States Constitution defining a direct tax as one that applies solely to property and poll taxes. These direct taxes are levied solely on the basis of possession or existence. Indirect taxes are levied on a variety of abstract concepts such as rights, privileges, and activities. In this sense, a direct tax on property sales would be appropriate.

An indirect tax is a tax levied by the government and collected from the individual who suffers the tax’s ultimate economic burden through an intermediary (such as a retail business) (such as the customer). This means that if you are a final consumer buying goods or services from anyplace, the tax collected on the manufacturer will be passed on to you. Indirect taxes are so named because, unlike direct taxes, the person paying the tax to the government can pass it on to someone else. They are originally charged to the seller or manufacturer, but are eventually passed on to the consumer. 

An indirect tax is one that the taxpayer can shift to someone else. An indirect tax may raise the price of a good, causing consumers to pay the tax by purchasing more products.

Indirect taxes are sometimes indicated separately from the item’s price, and sometimes they are given combined with the product’s price. Service tax paid on a meal bill, for example, is shown separately, whereas tax paid on fuel is included in the product price. Indirect taxes come in a variety of shapes and sizes. Customs duty is a charge levied on goods brought into (and out of) a country.

Salient features of Indirect Tax:

  1. Its nature was initially regressive. This is due to the fact that it formerly imposed a large burden on a taxpayer’s income, regardless of how high or low it was. However, after the introduction of the Goods and Services Tax, it became more progressive.
  2. Tax payment obligations might be transferred. This means that the tax is paid first by retailers, service providers, and manufacturers. Then they collect it from their client.
  3. The taxable product is always a finished good or service, and the taxpayer is always the ultimate consumer.
  4. Indirect tax encourages people to save and invest, which helps the economy thrive. It is hard to avoid this tax because it is included in the product’s market price.

Taxation in India :

The Goods and Services Tax (GST) is a tax on goods and services that (GST)

The GST was enacted by the central and state governments in 2017. It was adopted by combining a number of taxes, including service tax (ST), central excise duty (CED), VAT, and central sales tax (CST). There are few exceptions, such as liquor and petroleum items, which are still subject to excise charges and VAT.

The government requires cash from its residents in the form of taxes in order to carry out necessary functions such as the development of public institutions, infrastructure, and other welfare activities such as the implementation of welfare schemes. Although the term “tax” is not defined in the Income Tax Act of 1961, it does specify the “Basis of Charge” in Section 4(1) of Chapter II, which describes where and when the tax is to be collected. If we look back in time, we can see how old the concept of tax is and how deeply it is ingrained in our culture.

Tax reforms affecting the size of the tax base, the levels of tax rates imposed within the tax system, administrative efficiency, and the compliance rate all have an impact on the government’s tax collections. In light of the foregoing discussion, an attempt has been made to examine the effects of tax reforms following the 1991 economic liberalisation on the collection of indirect tax income by the Indian government.

Since India’s economic liberalisation in 1991, a series of tax reforms have been implemented to improve tax administration, broaden the tax base, ensure proper compliance, and invariably increase tax revenue productivity in order to finance large development plans that meet society’s social and welfare needs. The intention of boosting tax revenue or increasing tax productivity through tax reforms cannot be contested, even if that intent is not one of the reforms’ aims. Based on the analysis of data on tax revenue collections from indirect taxes, it can be determined that the government’s indirect tax changes did not enhance revenue productivity, as evidenced by the stable indirect tax-to-GDP ratio.

In a country like India, the government’s fiscal space is determined by the overall quantity of tax collection, which is a long-term source of government funding. In comparison to other industrialised countries such as Canada, the United Kingdom, and the United States, India’s government expenditure is financed by taxes to a lesser extent. The fall in the rates of custom duties and excise duties led to a drop in gross central taxes in India, notably after liberalisation (also known as inland tax). This decrease was caused by India’s open economy, which allows foreign countries to take advantage of India’s favourable trading terms.

The Indian taxation system is both progressive and proportional in nature, progressive in the sense that as income rises, so does the rate of tax paid as per the slab, and proportional in the sense that tax is imposed in proportion to the amount being assessed. Although tax is collected in accordance with the constitution’s Seventh Schedule, which comprises all three lists (Union List, State List, and Concurrent List), tax does not belong to just one of the three lists; it is dependent on the sort of tax and who is being taxed. “No tax shall be levied or collected except by authority of law,” declares Article 265 of the Indian Constitution.

By focusing on India’s exports, the industries that would have been comparatively well-organised under a distortion-free indirect tax structure lose worldwide competitiveness. Furthermore, there are insufficient full offsets of taxes imposed on fob export prices. The allocation of productive resources in a well-organised manner and the provision of complete tax offsets are projected to result in increases in GDP, profits to the factors of production, and economic exports. The implementation of a comprehensive goods and services tax (GST) is predicted to increase India’s GDP by 0.9 percent to 1.7 percent, ceteris paribus. The real earnings to the factors of production are likely to increase.

Taxation in the Global Sphere: 

The time series reveal that tax collections in most high-income nations have been relatively consistent over the last decade, but trends and patterns in the developing world are less obvious. Tax revenues have been steadily increasing in many cases, particularly among upper-middle income countries. Turkey stands out: in 1980, it collected around 13.5 percent of GDP in taxes (about half of what the United States did), but by 2001, it had nearly doubled tax collections, nearly catching up to the United States.

Australia, Canada, and New Zealand have a large number of cultural and economic aspects, which allows for interesting comparisons. In their research paper, Bolton, T.examined the tax systems of the three countries through a brief empirical comparison of the macroeconomic effects of the introduction of the goods and services tax in each country. They employed macroeconomic indicators such as neutrality measures, aggregate consumer price fluctuations, economic growth effect, tax yield effect, and current account balance effect, among others. Their research shows that GST not only increased tax revenue in the three nations, but it also had significant effects on growth, price, current account, and budget balance.

Long-term data from Latin America, on the other hand, reveals that middle-income nations have also increased tax revenues during the development process – albeit later and with some changes in the relative importance of specific tax tools. The visualisation depicts the composition of Colombia’s tax receipts, based on data from Arroyo-Abad and Lindert (2016). These figures are for central government revenues and are stated as a percentage of national income, or GDP. Comparable data, from the same source, is also available for Peru.

The so-called tax wedge, which is a combination of high taxes and social contributions, has a significant impact on labour costs in the EU. According to OECD estimates from 2003, the tax wedge in Belgium and Germany was 54.5 percent, compared to a minimum of 14.1 percent in Korea. However, the situation is not consistent (in Ireland, the tax wedge is 24.5 percent and falls drastically for one-worker couples with children, to just 7.4 percent). Furthermore, social contributions frequently account for a considerable amount of the tax wedge (the portion of labour costs due to personal income taxes is, for instance, only 5 percent in Greece whereas it exceeds 30 percent in Denmark). Employees’ social contributions, particularly pension contributions, which typically make up the greatest portion of payments, might have a detrimental impact on employment.

A well-functioning Value Added Tax system is critical to the market economy’s strong development and the coordination of intergovernmental budgetary relations. Due to flaws in China’s concurrent implementation of Value Added Tax and Business Tax, it is critical to modify the Value Added Tax in order to enlarge the tax base. One of the most important components in achieving it is the support of local governments. As a result, it’s critical to rethink the VAT income sharing method and create a solid long-term financing guarantee for local governments to deliver public services.

Another argument advanced by proponents of tax shifts is that the burden of taxing would no longer be borne simply by domestic producers, but would also effect imports. This effect, however, is contingent on whatever indirect taxes being raised.

18. Increasing import duties would, depending on supply elasticity, shift a portion of the tax burden to foreign producers by changing the terms of trade. This approach, however, is not feasible due to WTO agreements prohibiting it. Even if the policy were to be adopted, economists agree that boosting import taxes would cause more harm than benefit since it would distort the international division of labour and risk triggering a trade war.

Tax changes have a number of redistributive issues. Reduced income taxes combined with an increase in VAT reduces the tax burden on higher-income households while increasing it on lower- and middle-income households. Direct income taxes’ redistributive qualities have traditionally been an essential rationale for their inception and significant expansion over the twentieth century17. Recent experience suggests that this component would gain popular attention: in Slovakia, where a tax reform increased reliance on indirect taxation while also adopting a flat income tax, the debate focused on the reform’s redistributive effects. Low-income households were eventually compensated as a result of this. The political landscape is changing. In addition, the models used cannot assess the sectoral impact of an increase in indirect taxes as a whole. In general, an increase in excise taxes will have a bigger sectoral impact than a broad increase in VAT; nevertheless, even a VAT increase may have a differential impact, such as on big-ticket items. According to Belgian authorities, the construction industry, for example, is opposed to a cut in employer social security contributions funded by a VAT increase.

Another issue is the expenditure profile’s inter-temporal profile. Revenue taxes affects both the consumption and savings components of revenue in principle (even though in practise the taxation of the savings component is much less heavy). It would be normal to expect a reduction in direct taxes and an increase in consumption taxes.

The legal distinction between direct and indirect taxes was significant enough to merit the ratification of the 16th Amendment to the United States Constitution in 1913. Prior to this modification, the law required that all direct taxes imposed by the government be allocated directly to the population.

Conclusion:

Not only is the tax system progressive, but the tax to GDP ratio is also low compared to other countries. We discovered that India already has modest personal income and corporation tax rates, as well as graduated slabs. We’ve discovered that India now has a moderate tax rate for both corporate and personal income tax, and there’s no reason to lower it. However, administrative costs are a major concern, increasing not only the cost of collection but also the time required to complete all compliances. Because of the numerous exemptions and deductions available to taxpayers, India loses a significant portion of its revenue.

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