Taxation System

Tax is a payment compulsorily collected from individuals or firms by government. A direct tax is levied on the income or profits of an individual or a company. The word 'direct' is used to denote the fact that the burden of tax falls on the individual or the company paying the tax and can not be passed on to anybody else. For example, income tax, corporate tax, wealth tax etc. An 'indirect' tax is levied on sale of goods or services. It is called 'indirect' because the real burden of such a tax is not borne by the firm paying it but is passed on to the consumer. Excise duty, customs duty, sales tax etc.
Funds provided by taxation are used by governments to carry out the functions such as:
military defense
enforcement of law and order
redistribution of wealth
economic infrastructure-roads, ports etc
social welfare
social infrastructure like education, health etc
social security measures like pensions for the elderly, unemployment benefits
Taxation System in India
India has a well developed tax structure with the authority to levy taxes divided between the central government and the state governmnets. The central government levies direct taxes such as personal income tax and corporate tax, and indirect taxeslike customs duties, excise duties and central sales tax (CST). CST is assigned to the States in which it is collected. (Art. 269). It is being phased out with the introduction of GST. All other taxes imposed and collected by the Centre are shared with the States. Surcharges and cess are however exempt from sharing. For example, the 3% education cess. the states are empowered to levy state sales tax apart from various other local taxes like entry tax, octroi, etc.
Taxation has always played an important role in the formulation of the government's economic policy. Taxation policy in a developing country like India can play an important part to raise resources for growth; to bring in reduction in inequalities; to direct growth in backward regions; to reduce consumption of luxury goods; to d.irect investment into' small scale sector; to promote savings etc. In the wake of the economic reforms, the tax structure and procedures have been rationalised and simplified. Since 1991, the tax system in India has undergone substantial rationalization-reduced rates and slabs and better administration.
Some of the changes are:
Reduction in customs and excise duties. Peak customs rate is today 10% (2009)
Lowering of corporate tax rates to 30%
Introduction and extension of service tax
Adoption of VAT by all states
GST by 1.4.2010
Simplifying income tax return filing procedures. For example, Saral
Broadening the tax base to include services, STT etc
1/6 system to broaden income tax base served its purpose for almost 10 years after its introduction in 1997 and was removed in 2006
simplifying and rationalising rates and procedures according to the Kelkar Committee recommendations (2002)
Tax revenue as a percentage of GDP decreased initially, after reforms began in 1991, as rates came down and growth of economy was not very robust. Compliance also did not increase proportionate to rate reduction. The Tenth Plan period saw consistent rise in tax collections: In 2008-09 the tax GDP ratio projected was at about 13% of GDP but it fell short due to slowdown of the indian economy as the world economy slumped.
Measures for broadening tax base, strengthening compliance and simplification
service tax on about 100 items at 10%
VAT to bring in many traders and manufactures into the tax base due to transparency and the set-off
Tax to be decuted at source on various items like interest on bank deposits; divident distribution etc
One-by-Six scheme criteria introduced in the Budget 1977-98 lasted till 2006.
Quoting of permanent account number made compulsory for many transactions
securities transactions tax (2005-2006)
Other measures suggested are : minimizing exemptions and concessions; drastic simplification of laws and procedures ;building a proper information system and computerizative and enforcement machinery.
Direct and Indirect Taxes In India The Changing Scenario
In 1990-91, less than a fifth of the Centre's gross tax revenues came from direct taxes. In 2009-10 fiscal year, direct taxes-corporate and income taxes will contribute to 56% of tax collections.
The biggest taxation source of the Centre now is corporate tax-ahead of excise and income (both being equal) and collections.
The general level of prosperity in the country is increasing making more people have taxable incomes. Also, when companies are growing in number and also in their profitability, corporate tax collections increase. Global opportunities mean more profits .. Stock market transactions and wealth build-up also contribute to direct tax collections by way of SIT, capital gains tax, income tax. Apart from the above two reasons, the Government's measures as given below also helped increase the direct tax collections
reduction of peak rates that helps compliance
reduction in the number of rates
strengthening the administration- e-governanee etc
simplification oflaws(Saral etc)
promote voluntary compliance
widening the tax net with lout of 6 policy etc.
The increase in the relative share of direct tax collections shows that the tax system is becoming more progressive as direct taxes are paid by the well off in general while the indirect taxes are paid equally by all consumers. Direct taxes can be used to promote growth with equity.
Direct taxes help in income redistribution. Decline in the relative share of indirect taxes is also seen as good because it promotes the competitiw nature or Indian economy-attracts investment. In developed countries, direct taxes contribute more to the tax collections.
By taxing earnings· of individuals and corporates rather than production and trade, there is less stifling of economic activity and employment generation.
Cost of direct tax collection
Buoyant economic growth along with higher tax compliance have led to a desirable decline in the cost of direct tax collections as a proportion of total direct tax collections: all-time low of 0.54 per cent in 2007-08.That is, the income-tax department spends 54 paise for every Rs 100 direct tax collected by it. which is among the lowest in the world.
The change is 'best understood when comparison is made with the position in 1998-99, when cost of direct tax collections in percentage term was 1.81%.
The income tax department has a tax base of 3.5 crore assesses. From a level of 9.1%in the late nineties, the tax-lo-GDP ratio was expected to rise to 13% in 2008-09.
Showing decline
Financial year
Direct tax collections
(in Rs cr)
Cost of direct tax collections
(in Rs cr)
Collection cost as percentage of
total collections (%)
1998-99
44,600
852
1.90
1999-00
57,959
894
1.54
2000-01
68,305
929
1.36
2001-02
69,198
993
1.44
2002-03
83,088
984
1.18
2003-04
1,05,088
1,050
1
2004-05
1,31,918
1,138
0.86
2005-06
1,65,208
1,227
0.74
2006-07
2,30,184
1,348
0.59
2007-08
3,14,468
1,689
0.54
VAT
Value added tax is a multi-point sales tax with set off tax paid on purchases of inputs. There is no cascading (tax on tax) effect as there is credit mechanism for taaxes paid for the inputs. The tax is levied on the value of the product and consumption only. Total burden of the tax is exclusively borne by the domestic consumer. Exports are not within VAT.
VAT is superior to the earlier system as the latter suffered from the following problems
cascading effect was rampant as tax was levied on tax. That is, the base on which tax was levied included tha tax already paid on the input
it is arbitrary with a variety of excise rates without rationality and as result classification disputs emerged as to which item fell into which slab of taxation and so litigation mounted
at another level, lobbies emerged to campaign for exemptions and concessions
tax evasion was high as there was no transparency about taxation
a common market could not be developed for want of uniform rates and procedures
in the absence of VAT and transparency, there were a number of local and state-level taxes whose rationality is far from justified
centre and States could not unify their efforts and consolidate domestic indirect taxes.
Advantages with GST/VAT are
no cascading effect
there is no evasion as there is transparency regarding the value chain
tax base will expand as more traders and manufactures will choose to get registered
Brings in FDI as there is simplicity and transparency
Common Indian market will develop
Investment decisions will be made on the basis of merit rather than thelower tax rates offered by states in their 'rate war'.
less interface between the departments and the assessees and so less harassment.
VAT is the new name for sales tax of the states with some modifications like other indirect taxes at the state level being merged with the AT. All states have joined it . Preparatory work is being done regarding
building databases
computerisation
changing procedures
sales tax and other minor taxreforms
awareness building
training of staff
States were given assurances about the compensation in case of losses. Their demand that service tax imposition powers were to be given to them to augment their revenue base was also positively responded to. CST-which is 2% now-will be phased out. They were also promised that some flexibilities would be allowed as regards local sales tax and other similar levies
VAT, being a State subject, the Central Government has been acting as a facilitator for it successful launching and implementation.
VAT is revenue-neutral, that is, the VAT rate aims to keep the same level of collections as before. However, the buoyancy expected is due to the growth and compliance increases.
Cenvat is Central value added tax. It is the union excise duty imposed on manufacturing.
Fears about VAT
Following are fears
states may lose revenue
it may be inflationary
traders resent the penal powers being given to authorities
Fears are misplaced as
states will be compensated-the principle, quantum and the methodology will be worked out. In fact, service tax revenue that the shares will be entitled to will benefit them
while some goods attracting more taxes now will be cheaper, those attracting less taxes will be costlier and so on average, prices will be normal. Initially, prices may go up but in course of time, as the investment picks up and the CST is removed, there will be more goods available.
VAT is assessee friendly and relies on voluntary compliance as the entire value chain is transparent
VAT exists in more than 100 countris today. India introduced VAT, the initial step being taken in 1986 in the form of Modvat-modified VAT that included set off for a few commodities only and was confined to excise duties only.
Cenvat in replacement of central excise duties came into effect earlier in the decade. VAT as a replacement of r state sales tax was adopted from the beginning of the fiscal year 2005-2006.
GST is expected to come in from the fiscal year 2010-2011.
11th Plan Tax strategy
Experience with tax collections during the Tenth Plan has been encouraging, with both the Centre and the States experiencing an increase in revenue collection as a percentage of GDP. With further improvements in tax administration in the Centre, aimed at increasing compliance within a framework of prodent tax rates and the implementation of VAT by most of the states, it is reasonable to assume that tax revenue as percentage of GDP can be 2.9% points higher in the 11th Plan. GDP growth of 9% and inflation between 4 to 5% in the 11th Plan period is the assumption and tax revenue buoyancy with respect GDP of 1.25 for the Centre and 1.15 for the States are projected.
Reduction of rates where possible; phasing out of exemptions; rationalization of sslabs; introduction of GST; simplification of procedures; encouraging compliance are some of the elements of the tax strategy of the EFYP.
Tax Reforms in India
Since the beginning of the 1990's, as a part of the economic reforms programme, the taxation system in the country has been subjected to consistent and comprehensive reform. The need for the tax reforms arises from the fact that
tax resources must maximised
international competitiveness must be imparted to the Indian economy
transaction costs must be reduced
the high-cost nature of Indian economy needs to be corrected so that
compliance increases
equity improves
investment flows
On the direct tax front, the reforms are the following:
Reduction and rationalization of rates-there are only three rates of income tax today with the highest rate at 30%
Simplification of procedures
Strengthening of administration
Widening of the tax base to include more tax payers in the tax net
Exemptions are gradually being withdrawn.
MAT was introduced for the.'zero tax' companies
Long term capital gains tax on shares is removed and short term capital gains tax is 15%.
1/6 formula for widening the base of income tax lasted for 10 years from 1997.
Indirect Taxes
Reduction in the peak tariff rates-10% is the peak customs duty todat which was more than a 90% reduction since 1991.
The number of slabs has come down drastically
There is a progressive change from specific duty to ad valorem tax
VAT is introduced and GST will be effective in 2010-11
Extension of service tax to more than 100 items at 10% rate
Tax expenditure
Tax expenditure refers to revenue forgone as a result of exemptions and concessions (personal, corporate, indirect tax). It was introduced for the first time in 2006-07. Union Budget in which year the revenue foregone was Rs 1,00,000 crore. It is enough to fund all the flagship programmes while adhering to FRBM targets. If exemptions are scrapped, tax revenue will increase by at least 5% of GDP.
Such exemptions have been justified for promoting balanced regional growth; dispersal of industries; neutralisation of disadvantages on account of location; and incentives to priority sectors, including infrastructure. These should be subject to a sunset clause, as tax exemptions often create pressure groups for their perpetuation.
Such exemptions and concessions distort resource allocation and stunt productivity. They also result in multiplicity of rates, legal complexities, classification disputes, litigation, higher cost of tax compliance and administration.
Vijay Kelkar Committee on Direct Taxes Recommendations
The Committee in 2002 recommended the following
lowering tax rates for both individuals and corporates.
dispensing with the exemptions on savings instruments
an increase in the annual exemption limit from Rs 50,000 to Rs 1,00,000 and two rates of personal income-tax of 20% and 30%. 20% rates will apply to income above Rs 1,00,000 up to Rs 4 lakh. For assessees with annual taxable income exeeding Rs 4 lakh, the panel recommended a 30% tax rate.
scrapping existing standard deduction of Rs 20,000
cut in the statutory corporate tax rate from 35 % to 30% for domestic companies.
The MAT on book profits should be abolished
wealth tax should be scrapped
bringing agriculture under the tax net. States could pass a resolution under Article 252 of the Constitution authorising the Centre to impose tax on agricultural income and assign it to States.
Kelker Committee on Indirect Taxes Recommendations
three-slab excise and customs duty structure-10% and 20% and an additional zero duty tier for goods such as life saving drugs. defence and atomic energy-related imports. While the 10% slab will be applicable on raw materials, inputs and intermediate goods. the higher 20% slab will be levied on all finished goods. Agricultural goods will attract a far higher duty of 150%
bringing in more small scale units into the excise net.
simpler customs procedure
Service Tax
Service tax was first imposed in 1994. Today the rate is 10%, having been reduced form 12% as a part of the third fiscal stimulus in 2009 February. About 100 services are being taxed. Widening the service tax net is meant to eventually introduce GST by 1.4.2010.
Service tax collections in 2008-09 were Rs 60,000 crore-18% increase.
Major services that are currentlyl taxed include telecom, insurance, brokerage, banking and financial services, courier, port services, etc. Some of the minor activities on which service tax has been recently imposed include, beauty parlours, pandals or tenthouse services, drycleaning, cable operators, etc.
Telephone services yield the maximum amount
The service sector has emerged as an important area of economic activity. Reasons for taxing services
Its share in the country's Gross Domestic Product (GDP) has increased from about 28% in 1951, to 55% (2009).
Taxing services is important to raise resources and increasing the tax-GDP ratio
service providers should share the tax burden with others-industry
as the share of industry in GDP decreases while that of services exppands, the tax base shrinks unless services are taxed.
failure to tax services distorts consumer choices, encouraging spending on services at the expense of goods and savings.
as most of the services that are likely to become taxable are positively correlated with expenditure of high income households, subjecting them to taxation will improve equity.
Union Budget 2009-10 extended service tax ,to advice, consultancy or technical assistance provided in the field of law. The tax change will not affect individual practitioners or those rendering services to individuals.
Service Tax and Indian Constitution
In the Seventh Schedule to the Constitution, under Article 246, the item relating to "taxes on services" was not specifically mentioned in any entry either in the Union List or in the State List.
H9wever, Entry 97 of the Union List empowers Parliament to make laws in respect of any other matter not enumerated in List II (State List) or List III (Concurrent List), including any tax not mentioned in either of those lists. Since "taxes on services" is not there in any of the lists, service tax is at present levied by the Central Government in exercise of the powers under Entry 97 of the Union List.
The 88th amendmen~ to the Constitution( 2004) inserted Article 268A, amended Article 270 and inserted in the Union List (List I) entry No. 92C --- 'taxes on services'.
The amendment to the Constitution places services tax formally under the Union List. This will pave the way for the Centre to levy and collect the tax. Federal aspects of it will be laid down by the Parliament.
Union Budget 2009-10 and tax changes
Income Tax Exemption Limit has been raised to Rs. 2.40 lakh from Rs. 2.25 lakh for Senior Citizens.
Income Tax Exemption Limit has been raised to Rs. 1.90 lakh from Rs. l.80 lakh for Women
Income Tax Exemption Limit has been raised to Rs. 1.60 lakh from Rs. 1.50 lakh for All Others.
Service tax levied on law firm
To maintain overall customs and excise duty structure
MAT hiked to 15% of book profit
Commodity transaction tax abolished
Tax holiday for exporters extended untill 2012
Abolish fringe benefit tax·units
Goods and services tax from April 1, 2010
Share of direct taxes has increased to 56 per cent in 2008-09.
Federal TaxlGDP ratio is 11.5%
No surcharge of 10% on personal income tax. Earlier the highest bracket was subjected to it
No change in corporate taxes
Hike in IT exemption for women to Rs 1,90,000
Govt committed to tax reforms
Increase automation in direct tax collection
New tax code in 45 days
Centralised processing center at Bengalooru to streamline taxation
Income tax forms should be user friendly
Tax system should be such that it should encourage voluntary compliance
Saral form 2 will be introguced .
Political funding will get 100% tax deduction
Govt to extend service tax to goods moved by rail. port
Tax haven
A tax haven is a country or territory where certain taxes are levied at a low rate or not at all.
Individuals and/or Corporate entities can find it attractive to move themselves to areas with reduced or nil taxation levels. This creates a sitution of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies.
Similarly, any country which modifies its tax laws to attract foreign capital could be considered a tax haven. The central feature of a haven is that its laws and other measures can be used to evade or avoid the tax laws or regulations of other jurisdictions.
Following are the characteristics of a tax haven:
nil or nominal taxes;
lack of effective exchange of tax information with foreign tax authorities;
lack of transparency in the operation of legislative. legal or administrative provisions;
no requirement for a substantive local presence; and
At the London G20 summit in April 2009, G20 countries agreed to blacklish tax havens. An "internationally agreed tax standard" was drawn up in the meet.
Tax havens ar responsible for loss of revenue of government; black money as secrecy laws protect tax evaders; money laundering and so on.
Cayman Islands, Gibraltar, Liechtenstein, Switzerland are some of the tax havens.
Expenditure tax
A consumption tax/expenditure tax is imposed on spending on goods and services. The term refers to a system with a tax base of consumption. It usually takes the form of an indirect tax, such as a sales tax or value added tax. However it can also be structured as a form of direct, personal taxation: tax on luxury consumption.
Expenditure taxes of this kind have been briefly implemented in the past in India and Sri Lanka
This indirect tax is enforced under the Expenditure Tax Act, 1987. The hotels in India collect expenditure tax from their customers.
The objective is to tax expenditures on luxury goods and services; reduce their consumption and divert demand and investment into wage goods and essentials.
However, administration is difficult; collections will be minimal; exemptions will be many (health, education etc); an so on.
Further, with the rise in incomes and growth of prosperity, the line between essential and luxury is blurring and the rationale for the expenditure tax is being lost.
Instead ad valorem tax-based on the value and not quantity -will take care of the need to tax the high value goods.
Pigovian tax
The Pigovian tax is imposed on bodies that have a negative externality. For example, pollution. Externality means impact of one person's actions on the well, being of an outsider (bystander or third party). for example, the seller and consumer of petrol together will harm th third person with pollution Example of negative externality is exhaust fumes from automobiles. Positive externality refers to a good effect on the third party. For example. restoration of historic buildings, reserach into new technologies. Carbon tax is one example in the context of the need to discourage fossil fuels and encourage renewable sources due to climate change threat.
Tobin tax
James Tobin economist, proposed a worldwide tax on all foreign exchange transactions-when foreign capital enters a country and when it leaves. The aim is to check speculative flows. Long term investment-generally FDI, will not suffer as it does not invest for speculative (short term) reasons like FIIs.
Tobin justified the tax on two grounds.
First, it would reduce exchange rate volatility and improve macroeconomic performance.
Second, the tax could bring in revenue to support for development efforts or exchange rate stabilization.
The defining characteristic of a Tobin tax is that the tax is levied twice-once when one acquires foreign exchange, and again when one sells the foreign exchange.
The south east asian currency crisis (1997) is attributed to the dynamics of hot money (portfolio investments or FII flows).
Tobin tax can be imposed only if all the countries accept the proposition. Otherwise, FIIs can go to countries where the tax is not imposed.
Minimum Alternative Tax (MAT)
Some companies, by intelligent tax planning and accounting, avoid taxes. they pay no tax and are called zero tax companies. However, they show book profits and may even be distributing dividend. In order to bring such companies under the income tax act net, MAT was introduced in 1996. They are required to pay MAT at 15% of book profits-up from 10% in the Union budget 2009-10.
Book profit is Profit which is national made but not yet realized through a transaction, such as a stock which has risen inn value but is still being held. It is also called unrealized gain or unrealized profit or paper gain or paper profit.
Prsumptive Tax
Presumptive Tax The Estimated Income Method of assessment for certain categories of businesses is prevalent in several countries. Presumptive taxation involves the use of indirect means to ascertain tax liability. Which differ from the usual rules based on the taxpayer's accounts. The term presumptive is used to indicate that there is a legal presumption that the taxpayer's income is no less than the amount resulting from application of the indirect method.
The reason for the presumptive tax is that in a number of businesses the assessees do not maintain books of accounts or the books of accounts maintained are irregular and incomplete.
It was introduced in India in the early nineties for traders but was withdrawn as the success rate was low.
Inverted duty structure
Higher import duty on the raw materials than on the finished product are called inverted duty structure. It puts the domestic manufacturers at a disdvantage making them uncompetitive. For instance, compact fluorescent lamps (CFLs). where the import duty on raw materials for manufacturing CFLs is 9.7% more than on finished bulbs. This skewed duty structure makes domestic CFL manufacturers uncompetitive.
Transfer Pricing
Transfer pricing involves charging for goods supplied to the subsidiary. The international norm in this regard is the arms length principle' which means that when two related parties deal in goods and services, pricing must be done objectively and commercially. It the principle is not followed, it means losses for the government. For example, an MNC has a subsidiary in India and elsewhere. The corporate tax rafes are high in India. Therefore, the price of goods sold by the MNC to the two subsidiaries in the two countries is shown differently-higher in India and less in the other country. In that case, Indian subsidiary shows less profits or more losses and tax liability (corporate tax) is less.
Thus, transfer pricing is gernerally done in a way as to show high profit in countries where the corporate tax rate is low and low profits/losses where the rate is high. Therefore, transfer pricing norms existing today need to be rationalised so that the tax revenues that are due to the government are not eroded.
Cess
The term cess is generally used to mean a tax. It is a term formerly more particularly applied to lo local taxation in which sense it is still the official term used in Ireland; otherwise it has been superseded by "rate". In India it is applied to any taxation, such as irrigation-cess, educational cess and the like.
Usually, cess may be understood as specific for a purpose and surcharge fora general purpose.
Government imposes a cess on petrol and diesel to raise additional resources to finance the National Highways Development Project (NHDP). This cess on petrol and diesel will accrue entirely to the dedicated Central Road Fund (CRF) and will be earmarked exclusively for the development of national highways.
Proportional, progressive and regressive tax
An important feature of tax systems is whether they are proportional tax (the tax as a perentage of income is constant over all income levels), progressive tax (the tax as a percentage of income rises as income rises), or regressive tax (the tax as a percentage of income falls as income rises). Progressive taxes reduce the tax incidence on people with smaller incomes, as they shift the incidence disproportionately to those with higher incomes.
Words
Tax-incidence : It shows the entity on whom tax is imposed. It is different from th tax burden as shown below:if government increases tax on petrol, oil companies may absorb it if competition is intense or they may pass it on to private motorists. Tax incidence here refers is on companies and the burden may be on the consumer.
Tax Burden : It means those who actually pay taxes-from whom tax is collected. However, who ultimately pays the tax (the tax "burden") is determined by the marketplace. Depending on the market forces involved, a tax can be absorbed by the seller or by the buyer (in the form of higher prices), or by a third party like sellers' employees in the form of lower wages.
Tax haven : low -tax jurisdictions like Switzerland, Panama and Hong Kong where companies and some wealthy individuals arrange to maintain their investments due to low-tax environment.
Tax Base : The value of goods, services and incomes on which tax is imposed. When economists speak of the tax base being broadened, they mean a wider range of goods, services, income, etc. has been made subject to a tax. In the case of income tax, the tax base is taxable income. Some kinds of income are excluded from the definition of taxble income, such as savings. For sales taxe, the tax base is the value/volume of items that are subject to tax; essential goods, for example, are not part of the tax base.
Tax rate : It indicates how much tax is due from each source. Some tax system have high rates but have a narrow base allowing generous deduction of business expenses. Other tax systems have a wide base with few exemptions and lower rates.
Tax Shelters : Any technique which allows one to legally reduce or avoid tax liabilities. It is a way in which the taxpayer can invest his income in a particular kind of investment that gives tax concessions.
Difference between tax avoidance and tax evasion : There are provisions in the law that allow one to save and invest in a manner that leads to reduction in taxable income. If these provisions are used for the benefit, it is called tax avoidance. It is lawful to take all available tax debuctions. Tax evasion, on the other hand, is a punishable offence. Tax evasion typically involves failing to report income, or improperly claiming deductions that are not authorized.
Hidden taxes : are taxes that are concealed in the price of articles that one buys. Hidden taxes are also referred to as implicit taxes. The most well-known form of the hidden tax is the indirect tax Examples of hidden taxes are import duties.
Specific duty : Weight or quantity or number is the basis for taxation.
Ad Valorem : A Latin term meaning " according to worth". referring to taxes levied on the basis of value. Taxes on real estate and personal property are ad valorem. Luxury goods are taxed higher even if they weigh the same or number the same as ordinary goods.
Compound duties : are a combination of value and other factors based on which tax is imposed.
Negative income tax : Subsidy is a negative income tax. It is a taxation system where income subsidies are given to persons or families that are below the pverty line. The government will send financial aid to a person who files an income tax return. reporting an income below a certain level.
Octroi : Entry 52 of the State List, VII Schedule, which specifies tax on the entry of goods into a local area is the octroi. Octroi has been a main source of revenue for most of the urban local bodies in India. It is criticized for the fact that it is an obsolete method of tax collection; and involves stoppage of vehicles at the check posts outside the city limits, therby obstructing a free flow of vehicular traffic: waste of business hours: loss of fuel etc.
Tax Buoyancy : It refers to the percentage change in tax revenue with the growth of national income. That is, growth-based increase in tex collections.
Tax Elasticity : Tax elasticity is defined as the percentage change in tax revenue in response to the change in tax rate and the extension of voverage. Buoyancy, on the other hand is the response to economic growth when the base increases but there is no change in the rate.
Tax Stability : It means no frequent changes and continuity of policy in a predictable and transparent manner. Although revenue from different taxes varies from year to year, revenue stability is desirable because it makes it easier for a government to build a credible spending and borrowing plan for the year ahead. Taxes whose revenue is relatively stable contribute to overall revenue stability. Market players also can plan better.
Excise Duty : Excise duty is a tax on manufacture and is levied on the manufacture of goods within the country.
Customs Duty : When goods are imported or exported, customs duty is imposed and collected by the Union Government. Peak customs duty today is 10%.
Dividend Distribution tax : Companies giving dividend have to pay tax on the amount distributed as dividend.
Withholding tax : It means withholding of tax from certain payments including interest, salaries paid to employees. professional fee. payments to contractors etc. It is the same as TDS.
Capital gains tax : It is the tax on the gains made from buying and selling assets like land shares etc. If the gain is made in the assets held for over three year (one year for shares), it is called long term capital gain and taxed. for shares, there is no long term capital gains tax. For short term capital gains (less than one year), it is 15% for shares.
Wealth Tax : When income accumulates into wealth, it gets taxed after a point. Wealth tax is levied only in respect os specified non-productive assets such as residential houses, urban land, jewellery, bullion motor cars etc.
Tonnage tax : Taxable profits from shipping activities are to be determined at fixed rates by reference to the tonnage of their ships, rather than by reference to profits. Union Budget 2004-2005 introduces it for Indian shipping companies to make them more profitable and competitive and also to invite FDI.
Securities transaction tax : Introduced in the Union Budget 2004-2005, it is a tax on the value of all the transactions of purchase of securities that take place in recognised stock exchange of India. It is meant to make up revenue loss from the abolition of long term capital gains tax.