\ 7 ‘ Into: egal world” connecting legal fraternityTax is compulsory collection of money by the Government for public purpose. Taxes are levief by governments on their citizens to generate the revenue to be used for the welfare of public, to rape th standard of living of its citizens and to boost the economy of the country. XII -FINANCE, PROPERTY, CONTRACTS AND SUITS( Art. 264 — 300).Including GST 279A GST Council.] which confers the power on the Central and State Governments to levy taxes. Therefore, o tax can be levied except by the authority of law. All taxes levied within India must be backed by law pdssec by the Parliament or the State Legislature. 1 Types of Tax Taxes are of two distinct types-direct and indirect taxes. The difference lies in their implementatid ‘When tax is imposed by the Government on a person and he pays it from his own pocket, such tax|fs known as direct tax. For example, income tax, wealth tax, Corporate tax etc. However, when tax\[s imposed by the Government on a person and he does pay it from his own pocket rather than collecting from other person, such tax is known as indirect tax. For example,Goods and Service Tak (GST) ete. Central Taxes Replaced by GST- Additional duties of excise O Central Excise Duty DExcise duty levied under Medicinal & Toiletries Preparation Act UService Tax O Surcharges & Cesses OCentral Sales tax At the state level below mentioned taxes have been replaced by GST- O State VAT/Sales Tax O Central Sales Tax O Purchase Tax (Entertainment Tax(Other than those levied by local bodies) O Luxury Tax O Taxes on lottery, betting & gambling O Surcharges & Cessesalthough GST"s motto is “One Nation One Tax”. Yet there are some taxes which are not coverdd under GST such as- Taxes Not Covered by GST O Property Tax & Stamp Duty D Electricity Duty DExcise Duty on Alcohol O Basic Custom Duty U Petroleum crude, Diesel, Petrol, ATF & Natural Gas HISTOR ONC OME ERNE tes In the year 1860, the tax was first introduced in India by Sir James the losses sustained by the government due to the Military Mutiny of 1857. In the year 1918, This Act remained in operation up to the assessment year 1961-62 with several amendments. In discussion with the Ministry of Law finally the Income Tax Act, 1961 has been passed. The Income Tax Act 1961 was brought inte force from 1st April 1962. From the year 1962 many amendments\pf far reaching nature were made in the Income Tax Act by the Union Budget each year. 1. History of Income-tax in India in the Ancient times In India; the systenrof direct taxation camre-intotorce in one form or another even from ancidnt times. There are references has been made to both in Manu Smriti and Arthasastra to a diversit| of tax measures. The thorough analysis provided by Manu Smriti and Arthasastra on the subject clearly showed the existence of a considered taxation system, even in ancient times. Not just this, also t¥xes were imposed on various classes of individuals like actors, dancers, singers and even dancing gills. Taxes in the ancient times were payable in the shape of gold-coins, cattle, grains, raw materials nd also by providing personal service. O Manu Sm The Manusmrtiis the earliest and predominant source of income tax provisions. Manusmrti givps emphasis to the strategic imposition as well as regulation of income tax on the subjects. According to it, taxation must not be a painful experience for the subjects. The taxation must be right enough fhat it could fulfill a reasonable revenue target in addition to feels right towards the masses. The Incdne Tax provisions as given by the Manusmrti are: a) Traders would pay 20% of Income b) Artisans would pay 20% of Income©) Agriculturists would pay1/6, 1/8, or 1/10 of the value of total production. The rates differ according to the circumstances influencing crop production. Moreover, the tradfrs and artisans were obligatory to pay Income tax in the form of gold or silver. OArthashastra The Arthashastra is one more prominent source of taxation laws as well as provisions in India. The duty of tax collectors have been pre-determined in the book. Also, the schedule of every paymdnt, due dates of payment, quantity, and type of commodities accepted were also encoded. Furthernfore, the book also mentioned the taxation for export and import of merchandises, toll taxes, ete. The Income Tax provisions as stated by the Arthashastra are; a. Agriculturists would pay 1/6 of produce as a flat rate for land taxation b. The rich would pay higher taxes, and less privileged were levied with lower taxes c. Rule of the book with limited flexibility towards tax collectors 2, During British Era O The Income Tax Act of 1860 The mutiny of 1857 through Indian soldiers of the British army caused huge losses towards the British government of that time. The Income Tax Act was presented in the year 1860 in ordelf to meet the losses experienced as a consequence of mutiny. The Act of 1860 was applied for a beria: 5 years and quashed accordingly. The main features of the Income Tax Act 1860 are; a. Exemption of earnings from agriculture produce from taxation b. Premiums payable for Life Insurance were exempted from Taxation c. Hindu Undivided Family were addressed as a separate taxable unit O The Income Tax Act of 1918 The Income Tax Act oF TTS made some major changes in the income tax system. For the very fifst time, the receipts and deductions of casual or non-occurring nature were also incorporated unde] the computation of taxable incomes. The prominent features of the Income Tax Act 1860 are as followed; a) The receipts of non-re-occurring nature happened during business or professional operations were also incorporated in computing net income. b) Deductions of non-re-occurring were incorporated in computing taxable income O The Income Tax Act of 1922The income tax of 1922 was the most noteworthy milestone in the history of the income tax system in India. The Act is accredited to represent the primary organized income tax structure in India. The Act of 1922 furnished the much-required flexibility in the taxation system of India for Income Tax. Furthermore, it placed a proper system of tax administration in India that continued to be in function for the next 40 years. The features of the income tax act 1922 are; a) The rate of taxes was decided as per the budgetary requirements of the prevailing period b) Amendments in the Act was no longer a necessity to make changes in the rate of tax imposition Tax Mechanism After independence The Income Tax Act of 1922 was the leading book for income tax in India until 1962. The Act then experienced many amendments ever since its enactment. Though, a new act, the Income Tax Act of 1961, has been enacted by the government in the year 1964-The history of income taxin-indiaarrivedinranenperiod after enactment of the same. The Act of 1961 is the governing Act for income tax India till now. The income tax rules of 1962 followed the Act. The features of the Income Tax Act 1961 are as follows; a. Income tax was levied on income under five heads, they are; © Income from earnings © Income from business and profession © Income in the form of capital gains o Income from house property o Income from other sources b. A system for revenue audit was presented for the first time to compute taxes in India je evaluation DRMENTRE FRENCIEY IPED TO PiGED me mcome tax officers ———— re Ina coiftextontrere many governments have to cope with less revenue, increasing expenditures and resulting fiscal constraints, raising revenue remains the most important function of taxes, which serve as the primary means for financing public goods such as maintenance of law and order and public infrastructure. 1. Neutrality Taxation should seek to be neutral and equitable between forms of business activities. A neutral fax willdistortion, and the corresponding deadweight loss, will occur when changes in price trigger different changes in supply and demand than would occur in the absence of tax. In this sense, neutrality also entails that the tax system raises revenue while minimising discrimination in favour of, or against, any particular economic choice. This implies that the same principles of taxation should apply to all forms of business, while addressing specific features that may otherwise undermine an equal and neutral application of those principles. 2. Equity Equity is also an important consideration within a tax policy framework. Equity has two main elements; horizontal equity and vertical equity. Horizontal equity suggests that taxpayers in similar circumstances should bear a similar tax burden. Vertical equity is a normative concept, whose definition can differ from one user to another. According to some, it suggests that taxpayers in better circumstances should bear a larger part of the tax burden as a proportion of their income. 3. Efficiency Compliance costs to business and administration costs for governments should be minimised as far as possible, 4, Certainty and simplicity Tax rules should be clear and simple to understand, so that taxpayers know where they stand. A simple tax system makes it easier for individuals and businesses to understand their obligations and entitlements. As a result, businesses are more likely to make optimal decisions and respond to intended policy choices. Complexity also favours aggressive tax planning, which may trigger deadweight losses for the économy. 5. Effectiveness and fairness: Taxation should produce the right amount of tax at the right time, while avoiding both double taxation and unintentional non-taxation. In addition, the potential for evasion and avoidance should be minimised. Prior Biscussions in the Technical Advisory Groups (TAGs) considered that if there is a class of taxpayers technically subject to a tax, but are never required to pay the tax due to inability to enforce it,current revenue needs of governments while adapting to changing needs on an on-going basis. This means that the structural features of the system should be durable in a changing policy context, yet flexible and dynamic enough to allow governments to respond as required to keep pace with technological and commercial developments, taking into account that future developments will often be difficult to predict. GOVERNMENT FINANCIAL (FISCAL) POLICY I, Fiscal Policy Meaning Fiscal Policy refers to the use of government spending and tax policies to affect macroeconomic conditions, particularly employment, inflation, and macroeconomic variables such as aggregate demand for goods and services. These actions are primarily intended to stabilize the economy. Everything relating to the government"s income and expenditures is covered under Fiscal Policy. The most significant aspects of the economy are addressed through fiscal policy measures, which range from budgeting to taxation. IL, Fiscal Policy Components The three components of fiscal policy in India are as follows - A. Government Receipts B. Government Expenditures C. Public Accounts of India ‘1. Government Receipts These government receipts take into account the government's income, which has been achieved through the collection of taxes, interest, and the revenue produced by investments, cess, and othe! forms of revenue the nation has generated. This represents the total funding received by the government from all sources. There are two types for government receipts. O Capital Receipts All government payments that increase liabilities or decrease assets are considered capital receip|s. These funds are used by the governments to run smoothly. Loans taken by the general public, so foreign governments, and the Reserve Bank of India make up the majority of capital receipts. Revenue Receipts The receipts that do not create any liabilities and do not lead to a claim on the government are call revenue receipts. These revenue receipts are non-redeemable and can be classified into two categories, namely: tax revenue and non-tax revenue. Tax revenues are the vital components of revenue receipts that have been bifurcated for the long term into direct taxes, enterprises, and indirget taxes such as customs duties, excise taxes, and service tax. Non-tax revenues, on the other hand, drethe recurring income that is earned from sources other than taxes by the government like Fees, permits and License etc 2. Government Expenditure Government expenditure is all expenditure made by government to run the country or a state. The government expenditure is divided in to two parts these are as follows- O Revenue expenditures They are one-time costs that are incurred now or usually within a year. Revenue expenditure are essentially the same as operating expenses since they cover the charges necessary to cover Jhe government’s continuing operational costs (OPEX). regular costs for upkeep and repairs on sfate- owned property. Unlike most capital expenditures, which are one-time costs, they are ongoif{g expenses. An illustration would be paying for electricity, rent, employee salaries, and governfnent owned property taxes. O Capital Expenditure Investments made by the government in capital to run or grow its operations and bring in spore money. Purchasing long-term assets, such as equipment, and purchasing fixed assets, whibh ar tangible assets. Therefore, compared to revenue expenditures, capital expenditures are frdquet bigger sums. An illustration would be the acquisition of manufacturing equipment, commefcial purchases, other government expenditures like furniture, infrastructure investment, etc. 3. Public Accounts of India (Public Debt) Whamnrthe overnMENtis Only ActINg aS a banker in a transaction, the Public Account of Ind) records the flows for those transactions. According to Article 266(2) of the Constitution, thjs fur was established. It takes into consideration flows for transactions in which the government offly serves as a banker. Examples include minor savings, provident funds, etc. This money doesn} belong to the government; instead, they must be returned to their original owners at some pdfnt. Consequently, the Parliament is not required to authorize spending from the public account. Fiscal Policy Objectives Price Stability This policy primarily controls the absolute regulation of prices for all goods or things. It regulftes prices while the nation is through an economic crisis and keeps them steady during an inflatiqnary time; as a result, it regulates prices throughout the nation. By regulating the supply of essential goods and services, the government supports price stability) As < result, it invests money in rationing and stores with reasonable prices and a sufficient supply offfood grains. Additionally, it provides subsidies for utilities like transportation, water, and cooking fas, keeping their prices low enough for regular people to afford.2. Complete Employment few ways to do this. 3. Economic Growth development, including roads, bridges, railways, schools, hospitals, water and electricity supplips, telecommunications, and so forth. CHARACTERSTICS OF TAXES 1. Tax is compulsory — A tax is imposed by law. So tax is compulsory payment to the governments from its citizens. Tax fs duty from every citizen to bear his share for supporting the government. The tax is compulsory payment; refusal or objection for paying tax due leads to punishment or is an offence of the courflof law. 2. Tax is contribution - Contribution means in order to help or provide something. Tax is contribution from members q community to the Government. A tax is the duty of every citizen to bear their due share for sugport to government to help it to face its expenditures. 3. Tax is for public benefit — Tax is levied for the common good of society without regard to benefit to special individual. Government proceeds are spent to extend common benefits to all the people such as natural disafter - like floods, famine - defence of the country, maintenance of law and establish infrastructure ahd order. Such benefits are given to all people.4, No direct benefit - Government is compulsorily collecting all types of taxes and does not give any direct benefits to the tax payer for taxes paid. Tax is different from another government charges which may give direft benefits to payers such as prices, fees, fines etc where the direct benefits are available. Taxes fre fc common benefits to all the members of the society. 5, Tax is paid out of income of the tax payer — Income means money received, especially on regular basis, for work or through investment. Taxis, paid out of income as long as the income becomes realized, here the taxis imposed. Income owper has profit from any business, so he should pay his share for support to the government. 6. Government has the power to levy tax — Governments are practicing sovereign authority upon its citizens through levying of taxes. Only Govt. can collect tax from the people. Tax is transferring resources from the private sector to the public sector, TAX STRUCTURE IN INDIA A. Constitution of India The roots of every law in India lies in the Constitution, therefore understanding the provisionspbf Constitution is foremost to have clear understanding of any law. Let us first understand what jf talk about tax: a Article 265- No tax shall be levied or collected except by the Authority of Law. Qo Article 246- Distributes legislative powers including taxation, between the Parliament of Indi: and the State Legislature. ‘dchedule VII- Enumerates powers under three lists Union List — Powers of Central Government D Legislative List- Powers of State Government O Concurrent List- Both Central and state Government have powers, in case of conflict; law made-by-Union-Gevernment prevails B. Based on Tax System In India we divided Tax system into 2 parts namely direct and indirect tax. dg Direct Taxes: Taxes which are directly levied on Income of the person and its burden cannot be shifted; for example Income Tax. Indirect Taxes: Indirect taxes are imposed on price of goods or services. Person paying the indirect tax can shift the incidence to another person; for example GST or Customs DutyTypes of Taxation + Cont of cotton sow nom DIRECT INDIRECT | pic essere) tacoma Tex ost ‘het ae automate ‘corporation Tax ane Capita Gina Tax acne Duties peaviions Tax MODIS Discvantages ‘cise Duties dncourseed + ttatonary/Oetionary (santana becomes sNotequtable problem) Hara pred eld 1 Tax evaion ries (eased on sisumptans ot onmumer ween) C. Administration of Taxes direct Tax The Central Board of Revenue or Department of Revenue is the apex body charged with the administration of taxes. It is a part of Ministry Of Finance which came into existence as a result ofthe Central Board of Revenue Act, 1924, Initially the Board was in charge of both direct and indirdct taxes. However, when the administration of taxes became too unwieldy for one Board to handle] the Board was split up into two, namely the Central Board of Direct Taxes (CBDT) and Central Board #f Excise and Customs (CBEC) with effect from 1 January 1964. Board of Direct Taxes the Centipl Board of Direct Taxes (CBDT) provides essential inputs for policy and planning of direct taxes: India and is also responsible for administration of the direct tax laws through Income Tax Department. Thdirect Tax GST Council A GST Council consisting of representatives from the Centre as well as State has ban formulated under the GST Law of indirect taxes. The Council will make recommendations to the Union and the States on Goods and Service Tax laws, on any other matter relating to GST. Till dafe, numerous conclusive meetings of GST Council have been undertaken. Decisions have been taken regarding rates, Composition Scheme, exemption schemes to North-Eastern and hilly areas, compensation method for loss of revenue to states etc. Rules regarding return, refund, registration, payment, invoicing and the like have been finalized by the same. However, various other issues|knd modalities regarding the GST are constantly being discussed at the GST Council Meetings for smoothening the law and making it easy to implement for society at large. DIFFERENCE BETWEEN DIRECT AND INDIRECT TAXESPoint of difference Direct Tax Indirect Tax Incidence & Impact, ‘tax is said to be direct when impact and incidence of a tax are on one and same person. impact of tax is on one person and Incidence on the another, the tax is called indirect Direct taxis imposed on the individual ‘organisation and burden of tax cannot be shifted to others. Indirect tax Is imposed on commodities and allows the tax burden to shif. Viability of payment Direct taxes are lesser burden then Indirect taxes to people as direct taxes are based on Income eaming ability of people. Indirect taxes are bore by the consumers of commodities and services Irrespective of financial ability as the MRP Includes all taxes. ‘Administrative viability Penalty “The administrative cost of collecting direct taxes is more and Improper administration may result in tax evasion Tis levied on the assessee. Cost of collecting Indirect taxes is very less as indirect taxes are wrapped up in prices of goods and services and cannot be evaded. Itis levied on supplier of Goods & Services. DIFFERENCE BETWEEN TAX AND FEE 1. Definition: A tax represents money — that a government charges an individual or business when they perform a particular action or complete a specific transaction. Taxes are levied in the greater intered iS of the country. 2. Measured: This tax is often assessed as a percentage of the amount of money involved in the transaction. 3. Levy collection: 4 tax is a levy collected for general government services. It is a way to generate revenue by Govt. 4, Administration and Application: Your taxes may pay the salary of a teacher, police officer or bureaucrat. They may help pave a road or build a school. They may finance the running of the loca sewage-treatment plant. 5, Example: A tax is applied on the income that a person makes during a year. In addition, a taxis offen pieced on the sale of goods. income tax, gift tax, wealth tax, VAT, etc. are examples of tax. Fee 1. Definition: A fee is related to a tax in that itis also a charge paid to the government by individuals} or by a business. Fees are mostly imposed to regulate or control various types of activities. 2, Measured: The fee rate is directly tied to the cost of maintaining the service. Money from the fee i generally not applied to uses other than to provide the service for which the fee is applied.3. Levy collection: A fee is a levy collected to provide a service that benefits the group of people fro which the money is collected. It is charged for services rendered by an individual /Company/Professionals. 4. Administration and Application: A fee is assessed for an exacting service, and the money collecte4 is usually earmarked for that service. The fee that you pay for inspecting your assets every other year probably goes directly to cover the costs 5, Example: However, a fee is specifically applied for the use of a service. For example, a governmen may charge a fee to visit a park. Stamp fee, driving license fee, Govt. registration fee, etc. are examples of Fee. Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, AIR 1963 St 966. This case was the first major case to discuss the difference between a tax and a fee was Commissiaher, t Supreme Court held that a levy isa fee when, firstly, the amount raised through the levy correlates to expenses incurred by the government in rendering a service. Hence, there must be an element of quid p quo. Secondly, the funds collected must not be merged with the Consolidated Fund and must be ealfmark specifically for the expenditure incurred by the government in rendering the services. DIFFERENCE BETWEEN TAX AND CESS Sr. Subject Tax Cess No T. Definition ‘A mandatory fee charged by a Tethnically, 1s just another word for tax government on a product, income, of The term might be used in regard to a activity. specific type of tax. Purpose To generate revenue for the government To generate revenue for the government Direct Tax — tax levied directly on ersonal or corporate income pe p ually used in regard to Local tax and/or Land and Property tax. Indirect Tax ~ tax levied on the price a good.or serviThe termis still frequently used in a few countries including Britain, Ireland, to The word is used all over the world ard indicate a local tax, Scotland, to indicate a inall manners to refer to any type of t land tax, and India, applied as a suffix toa ax. indicate a category of tax such as ,property- cess! 5. |Purpose _| To generate revenue for the government To generate revenue for the government]