Direct and Indirect Taxes

Taxes are classified as direct tax and indirect tax. But the meaning of these two types of taxes is not clear. For a long time economists interpreted these two types in different ways. For instance, one group of economists considered taxes on production as direct taxes and those on consumption as indirect taxes. J.S. Mill distinguished these two types of taxes in terms of the ability to shift the tax. Any person on whom the tax is imposed, if he himself pays the tax, it is called direct tax and if he is able to shift the tax to somebody who ultimately pays it then it is called indirect tax. For example, income tax is paid by a person as it is levied on the income earned by him, so it is a direct tax. On the other hand the sales tax imposed on the seller is shifted to the buyer. Now-a-days the distinction between direct and indirect taxes is explained with reference to the basis of assessments and not on the point of assessment. Hence, taxes assessed on the basis of income are called direct taxes and those assessed on the basis of expenditure are called indirect taxes. However, even this classification is not free from difficulties. For instance, when one man’s income is treated as another man’s expenditure, tax on one man’s income may become the tax on another man’s expenditure. Hence, till date there has been no satisfactory distinction between direct and indirect taxes. However, in practice this distinction is retained more for the purpose of grouping the different taxes.… Read the rest

Principles of a Sound Tax System

According to Mrs. Hicks, a sound tax system should have the following characteristics:

  1. It should facilitate financing of public services.
  2. Tax, should be levied according to the ability of the people, the index of ability being income and family circumstances and
  3. Similarly placed persons should pay similar taxes to avoid any discrimination.

From the discussion above, we may lay down the following four broad characteristics as the principles of a sound tax system.

  1. Equality in Tax Burdens: This principle suggests that when the taxes are levied they ensure equality in tax burdens. In other words, through taxes the government can ensure that the tax burden is spread in such a way that persons who are placed in similar positions are made to bear the same burden of taxes. This implies that people who are better-off should bear more tax burden than those who are worse-off. Though this principle is universal, yet in the implementation of this principle problem like indicators of equality, effectiveness in practice, the method of achieving this equality, etc., will all be faced.
  2. Productivity: With the ever increasing responsibility of modern welfare state, the need for financial resources is always felt. As the modern governments spend huge amounts of money on public projects to maintain high level of public welfare, they have to raise enormous funds through taxation. Unless taxes are productive, the governments will find it difficult to implement public projects. Especially in a developing country, taxes are to be highly productive so that country can achieve growth with stability.
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Adam Smith’s Canons of Taxation

Canons of taxation are sets of criteria by which to judge taxes. These canons are still widely accepted as providing a good basis by which to judge taxes. Adam Smith laid down four canons of taxation. They are:

  1. Canon of Ability: According to this principle of taxation, the people in a country should contribute towards the government expenditure. Their contribution should be according to the ability to pay of each individual. A rich man should contribute more and the poor either should contribute less  or can be exempted. This principle of taxation will ensure that the cost of public expenditure is shared by the people in accordance with their individual ability.
  2. Canon of Certainty: Adam Smith insisted that the government should know in advance the amount of revenue that it could raise and the time when it could mobilize the revenue. On the part of individual tax payers, they must know clearly the amount of tax that they have to pay, the time when they should pay and the method of paying the tax. Adam smith felt that it is necessary that the people should be certain about their tax commitment, so that there cannot be any exploitation of the tax payers either by the government or by the tax collectors.  This implies, once the people are clear about the amount of lax, they will plan their expenditure accordingly so that tax payment will not be felt a penalty.
  3. Canon of Convenience: According to this canon, the tax should be such that it is levied at the time when it is convenient for the people to pay.
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Overview of Tax Regime in India

DIRECT TAXES Individual Income Tax & Corporate Tax

The provisions relating to income tax are contained in the Income Tax Act 1961 and the Income Tax Rules 1962. The Income Tax Department is governed by the Central Board for Direct Taxes (CBDT) which is part of the Department of Revenue under the Ministry of Finance. In terms of the Income Tax Act, 1961, a tax on income is levied on individuals, corporations and body of persons. Tax rates are prescribed by the government in the Finance Act, popularly known as Budget, every year.

The Government of India has recently taken initiatives to reform and simplify the language and structure of the direct tax laws into a single legislation – the Direct Taxes Code (DTC). After public consultation the Direct Taxes Code 2010 was placed before the Indian Parliament on 30 August 2010, when passed DTC will replace the Income Tax Act of 1961. The DTC consolidates the provisions for Direct Tax namely the income tax and wealth tax. When it comes into effect, probably April 2012, it is likely to have significant impact on the tax payers especially the business community.

In the case of Individuals, incomes from salary, house and property, business & profession, capital gains and other sources are subject to tax. Women and Senior citizens are extended some special privileges. Individuals’ incomes are subjected to a progressive rate system. Tax treatment differs depending on the residence status.

Income of the company is computed and assessed separately in the hands of the company.… Read the rest

Goods and Services Tax (GST) in India

Goods and Services Tax (GST) is part of the proposed tax reforms that centre round evolving an efficient consumption tax system in the country. Presently, there are parallel systems of indirect taxation at the central and state levels.

In the Union Budget for the year 2006-2007, Finance Minister proposed that India should move towards national level Goods and Services Tax that should be shared between the Centre and the States. He proposed to set April 1, 2010 as the date for introducing the goods and service tax (GST).

Goods and Services Tax is proposed to be an indirect tax levied on manufacture, sale and consumption of goods and services at a national level concurrently by Central and State Governments. This Integration of goods and services taxation would end the distortions of differential taxation treatments of manufacturing and service sector.

The Central and State governments both charge a multitude of indirect taxes at present. The Central government charges tax Customs duty, Excise duty, Central sales tax (CST) and Service tax. The State governments charge Sales tax or Value Added Tax (VAT), Entry tax, Octroi, Stamp duty and taxes on transportation of goods and services. The introduction of goods and services tax will lead to the abolition of these taxes. This will eliminate effect of multiple taxation layers.

The first step towards introducing Goods and Services Tax is to progressively converge the service tax rate and the CENVAT rate at the same tax rate. It aims to replace Service tax, CENVAT and VAT from April, 2010.… Read the rest

Income Tax Assessment Procedure

Ascertaining total income is one major task of the procedure involved in levying tax on an assessee.  The task of assessing the income returned and determination of tax liability is called ‘assessment’.  The term ’assessment’ has been used in the Income-tax Act meaning differently contexts.  In certain situations, it refers to computation of income, sometimes to the determination of tax payable and in some cases to the whole procedure laid down in the Act of imposing tax liability on assessee.

Assessment of income relating to one Financial Year (FY) starts in the succeeding financial year, which is called Assesment Year (AY). Income tax assessment procedure begins when an assessee files his return of income to the income tax department.

Filing of return [Sec 139 (1)]

A person has to file return of income in the prescribed form within the specified time limit if his total income exceeds the maximum non-taxable limit. A person other than a company though income is less than the nontaxable limit, who satisfies any one of six economic criteria and residing in a specified area.

  1. Ownership of a motor vehicle other than a two wheeler
  2. Occupation of any category of immovable property as may be notified by the CBDT
  3. Incurred expenditure on foreign travel by himself or in respect of any other person. Travel to Bangladesh, Pakistan, Bhutan, Nepal, Maldives, Sri Lanka and Saudi Arabia for hajj or china on pilgrimage to Manasarover are excluded.
  4. Holder of a credit card other than an add on card
  5. Member of a club where entrance fees charged is Rs.25000 or more
  6. Expenditure of Rs.50000 or more during the PY towards consumption of electricity.
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