Introduction – Indian Taxation System for Banking
“No income is taxed twice. No expense is given the benefit twice.”
The origin of the word ‘Tax’ is from ‘Taxation’ which means an estimate. Tax is a payment compulsorily collected from individuals or firms by the government.
- A direct tax is levied on the income or profits of an individual or the company. For e.g. income tax, corporate tax, wealth tax, etc.
- An indirect tax is levied on manufacturing and sale of goods and services. For e.g. excise duty, customs duty, sales tax, etc.
Functions of Funds Collected from Taxation – Indian Taxation System for Banking
India has a well-developed tax structure. Being a federal country, the authority to levy taxes is divided between the central and the state governments. Taxation has always played an important role in the formulation of government’s economic policy. The few functions of funds collected from Taxation are as follows:
- Military defense
- Enforcement of law and order
- Redistribution of wealth
- Economic and social infrastructure
- Social welfare
- Social security measures
Taxation policy in a developing country like India can play an important part to the following:
- Raise resources for growth
- Bring in reduction in inequalities
- Direct growth in backward regions
- Reduce consumptions of luxury goods
- Direct investment into small-scale sector
- Promote savings etc.
Since 1991, the tax system in India has undergone substantial rationalization – reduced rates and slabs and better administration. The government of India’s tax receipts was growing healthily because a drive has been mounted to bring more people to pay income tax with a proper investigation.
Indian Taxation System for Banking – Direct Tax & Indirect Tax
Indirect Tax is like an across – the – board consumption tax, that hits the poor more than the rich. As the poor devote a higher share of their incremental income to consumption, a greater share of their income is spent on taxes than the rich whose consumption to income ratio is lower. This lowers the overall demand in the economy and the economic growth suffers. Indirect taxes, such as excise, customs, sales and service taxes, have to be paid regardless of a company’s profitability.
In contrast, Direct Taxes such as personal income taxes are progressive, with higher earners paying more than those at the lower end of the pyramid. And, a majority escapes the tax as their income is below the threshold level. Businesses, on the other hand, pay corporate income taxes only if they make profits and enjoy tax breaks for investment in the form of a rebate on depreciation allowances and interest payments. This encourages capital expenditure that helps the economy to grow faster. Moreover, Direct taxes are tougher and costlier to collect.
An efficient tax system aids economic growth, while infirmities in the taxation system hurt investments and growth.
Tax Reforms in India – Indian Taxation System for Banking
Since the beginning of the last decade as a part of the economic reforms programme, the taxation system in the country has been subjected to consistent and comprehensive reform.
On the Direct Tax front, the reforms are the following:
- Reduction and rationalization of rates
- Simplification of procedure
- Strengthening of administration
- Widening of tax base
- Exemptions are gradually being withdrawn
- MAT was introduced for the zero tax companies
On the Indirect Tax front, the reforms are the following:
- Reduction in peak tariff rates
- The number of slabs has come down drastically
- VAT is introduced
Goods and Services Tax (GST) – Indian Taxation System for Banking
GST is a multi-point sales tax with set off for tax paid on purchases of inputs. There is no cascading (tax on tax) effect, the tax is levied on the value added and on the consumption only. India introduced VAT at the state level in 2005. The earliest form was however taken in 1986 in the form of Mod vat – modified VAT.
Rationale for the GST
- Eliminating a multiplicity of existing indirect taxes would simplify the tax structure, broaden the tax base, and create a common market across states and centrally administered districts.
- Increased compliance and fewer exemptions to GST would lift India’s federal tax – to – GDP ratio.
- GST would lower the average tax burden for companies that now pay ‘cascading’ taxes.
- GST would boost economic growth and increase exports.
- GST would reduce production costs which will make exporters more competitive.
- Black money and evasion will reduce as GST is transparent.
Proposed income-tax slabs for FY 2017-2018 (Assessment year 2018-19) announced in Budget 2017
Many countries in the world have a single unified GST system i.e. a single tax applicable throughout the country. However, in federal countries like Brazil and Canada, a dual GST system is prevalent whereby GST is levied by both the federal and the state or provincial governments. In India, a dual GST is proposed whereby a Central GST and a State GST will be levied on the taxable value of every transaction of supply of goods and services.
Few Terminologies Related to Taxation – Indian Taxation System for Banking
- Tax – Incidence: It shows the entity on which tax is imposed. It is on the companies and the burden may be on the consumer.
- Tax – Burden: It means those who actually pay taxes – from whom tax is collected.
- Tax Base: The value of goods, services and incomes on which tax is imposed.
- Tax Rate: It indicates how much tax is due from each source.
- 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.
- Hidden Taxes: They are taxes that are concealed in the price of articles that one buys.
- Proportional Tax: The tax as a percentage of income is constant overall income levels.
- Progressive Tax: The tax as a percentage of income rises as the income rises.
- Regressive Tax: The tax as a percentage of income falls as the income rises.
- Specific Duty: Weight or quantity or the number is the basis for taxation.
- Ad Valorem: Tax levied on the basis of value.
- Compound duties: They are a combination of value and other factors based on which tax is imposed
- Excise Duty: It is a tax on manufacture.
- Customs Duty: When goods are imported or exported, customs duty is imposed and collected by the Union Government.
- 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 poverty lines.
- Pigovian Tax: It is imposed on bodies that have a negative externality.
- Octroi: Tax on the entry of goods into a local area.
- Tax Buoyancy: It refers to the percentage change in tax revenue with the growth of national income.
- Tax Elasticity: It refers to the percentage change in tax revenue in response to the change in tax rate and extension of coverage.
- Tax Stability: It means no frequent changes and continuity of policy in a predictable and transparent manner.
- Tobin Tax: It is a worldwide tax on all foreign exchange transactions.
- Minimum Alternative Tax: Minimum Alternate Tax (MAT) is a tax payable by companies and falls under the indirect tax category. MAT is a way of making companies pay a minimum amount of tax. It is applicable to all companies except those engaged in infrastructure and power sectors.