Introduction to Taxation

Subject: Taxation

Topic: Advantages Of Direct Taxes & Impacts Of Indirect Taxes on Corporate sector

By: Vrushika Sheth

Introduction on Tax

To tax (from the Latin taxo; "I estimate") is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many administrative divisions. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid labour).

A tax is a "pecuniary burden laid upon individuals or property owners to support the government. A payment exacted by legislative authority." A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government whether under the name of toll, tribute, tall age, gable, impost, duty, custom, excise, subsidy, aid, supply, or other name."

A fee charged ("levied") by a government on a product, income, or activity. If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax. The purpose of taxation is to finance government expenditure. One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning. Since public goods and services do not allow a non-payer to be excluded, or allow exclusion by a consumer, there cannot be a market in the good or service, and so they need to be provided by the government or a quasi-government agency, which tend to finance themselves largely through taxes.

Basically, tax can be classified into two broad categories:
1. Direct Tax
2. Indirect Tax

1. Direct Tax
A direct tax is a tax paid by a person on whom it is legally imposed. In direct tax, the person paying and bearing tax is the same. It is the tax on income and property. Examples of direct taxes are:
* Income Tax
* Vehicle Tax
* Expenditure Tax
* Property Tax
* Interest Tax
* Gift Tax etc.

2. Indirect Tax
An indirect tax is a tax imposed on one person but partly or wholly paid by another. In indirect tax, the person paying and bearing tax is different. It is the tax on consumption or expenditures. Examples of indirect taxes are:
* VAT
*Entertainment Tax
* Excise Duty
* Sales Tax
* Hotel Tax
* Import and Export Duty etc.

Merits of Direct Taxes

1. Equity
There is social justice in the allocation of tax burden in case of direct taxes as they are based on the principle of ability to pay. Persons in a similar economic situation are taxed at the same rate. Persons with different economic standing are taxed at a different rate. Hence, there is both horizontal and vertical equity under direct taxation. Progressive direct taxation can reduce income inequalities and bring about adequate social & economic justice.For example, in the Indian Budget of 2007, individual with an income of upto Rs. 1, 10,000 are exempted from payment of income tax and in the case of women tax payer, the exemption limit is Rs. 1, 45,000.
2. Certainty
As far as direct taxes are concerned, the tax payer is certain as to how much he is expected to pay, as the tax rates are decided in advance. The Government can also estimate the tax revenue from direct taxes with a fair accuracy. Accordingly, the Government can make adjustments in its income and expenditure.
3. Relatively Elastic
The direct taxes are relatively elastic. With an increase in income and wealth of individuals and companies, the yield from direct taxes will also increase. Elasticity also implies that the government's revenue can be increased by raising the rates of taxation. An increase in tax rates would increase the tax revenue.
4. Creates Public Consciousness
They have educative value. In the case of direct taxes, the taxpayers are made to feel directly the burden of taxes and hence take keen interest in how public funds are spent. The taxpayers are likely to be more aware about their rights and responsibilities as citizens of the state.

5. Economical
Direct taxes are generally economical to collect. For instances, in the case of personal income tax, the tax can be deducted at source from the income or salaries of the individuals. Therefore, the government does not have to spend much in tax collection as far as personal income tax is concerned. However, in the case of indirect taxes, the government has to set up elaborate machinery to collect taxes.
6. Anti-inflationary
The direct taxes can help to control inflation. During inflationary periods, the government may increase the tax rate. With an increase in tax rate, the consumption demand may decline, which in turn may reduce inflation.
7. Productive Another virtue of direct taxes is that they are very produc­tive. As a community grows in numbers and prosperity, the return from direct taxes expands automatically. The direct taxes yield large revenue to the State.
8. A Means of Developing Civic Sense In the case of a direct tax, a person knows that he is paying a tax; he feels conscious of his rights. He claims the right to know how the Government uses his money and approves or criticizes it. Civic sense is thus developed. He behaves as a responsible citizen.

Demerits of Direct Taxes

1. Tax Evasion
In India, there is good amount of tax evasion. The tax evasion is due to High tax rates, Documentation and formalities, Poor and corrupt tax administration. It is easier for the businessmen to evade direct taxes. They invariable suppress correct information about their incomes by manipulating their accounts and evade tax on it. In less developed countries like India, due to high rate of progressive tax evasion & avoidance are extensive and led to rise in black money.
2. Arbitrary Rates
The direct taxes tend to be arbitrary. Critics point out that there cannot be any objective basis for determining tax rates of direct taxes. Also, the exemption limits in the case of personal income tax, wealth tax, etc., are determined in an arbitrary manner. A precise degree of progression in taxation is also difficult to achieve. Therefore direct taxes may not always fulfill the canon of equity.
3. Inconvenient
Direct taxes are inconvenient in the sense that they involve several procedures and formalities in filing of returns. For most people payment of direct tax is not only inconvenient, it is psychological painful also. When people are required to pay a sizeable part of their income as a tax to the state, they feel very much hurt and their propensity to evade tax remains high. Further everyone who is required to pay a direct tax has to furnish appropriate evidence in support of the statement of his income & wealth & for this he has to maintain his accounts in proper form. Direct tax is considered inconvenient by some people because they have to make few lump sum payments to the governments, whereas their income receipts are distributed over the whole year.
4. Narrow Coverage
In India, there is a narrow coverage of direct taxes. It is estimated that only three percent of the population pay personal income tax. Due to low coverage, the government does not get enough funds for public expenditure. Estate duty & wealth tax are equally narrow based and thus revenue proceeds from these taxes are invariably small.

5. Affects Capital Formation
The direct taxes can affect savings and investment. Due to taxes, the net income of the people gets reduced. This in turn reduces savings. Reduction in savings results in low investment. The low investment affects capital formation in the country.
6. Effect on Willingness and Ability to Work
Highly progressive direct taxes reduce people's ability and willingness to work and save. This in turn may have a negative impact on investment and productive capacity in the economy. If tax burden is high, people's consumption level gets adversely affected and this has an impact on their ability to work and save. High taxes also discourage people from working harder in order to earn and save more.
7. Sectoral Imbalance
In India, there is Sectoral imbalance as far as direct taxes are concerned. Certain sectors like the corporate sector is heavily taxed, whereas, the agriculture sector is 100% tax free. Even the large rich farmers are exempted from payment of personal income tax.

Conclusion On Direct Taxes
In direct tax burden of tax cannot be shifted. The disadvantages of direct taxation are mainly due to administrative difficulties and inefficiencies. The extent of direct taxation should depend on the economic state of the country. A rich country has greater scope for direct taxation than a poor country. However, direct taxation is an important aspect of the modern financial system.

Taxation of Corporate Sector
Company whether Indian or foreign is liable to taxation, under the Income Tax Act, 1961. Corporation tax is a tax which is levied on the incomes of registered companies and corporations.
A Company means:-
Any Indian company, or
Any corporate body, incorporated by or under the laws of a country outside India, or
Any institution, association or a body which was assessed as a company for any assessment year under the Income Tax Act,1922 or was assessed under this Act as a company for any assessment year commencing on or before April 1, 1970,or
Any institution, association, or body, whether incorporated or not and whether Indian or Non-Indian, which is declared by a general or special order of the Central Board of Direct Taxes to be a company.
Companies in India, whether public or private are governed by the Companies Act, 1956. The registrar of companies and the company law board administers the provisions of the Act.
However, for the purpose of taxation, companies are broadly classified as:-
Domestic company [Section 2(22A)]:- Means an Indian company (i.e. a company formed and registered under the Companies Act,1956) or any other company which, in respect of its income liable to tax, under the Income Tax Act, has made the prescribed arrangement for declaration and payments within India, of the dividends payable out of such income. A domestic company may be a public company or a private company.

Foreign company [Section 2(23A)]:- Means a company whose control and management are situated wholly outside India, and which has not made the prescribed arrangements for declaration and payment of dividends within India.

Impacts of Indirect Taxes on following industries of corporate sector
Indirect taxes pervade every area of a company’s business. Their impact on material and product costs, cash flow, profitability and, ultimately, on shareholder value is an important element to stay ahead in competition.
The increase of the indirect tax share in the economy has a number of important implications, including an increasing impact on businesses: higher tax rates cause more severe consequences in the case of non-compliance and mistakes.
Non-recoverable indirect taxes raise the costs of doing business, make production more expensive and call for increased efficiency to make up for the increased costs. For governments, as indirect tax income becomes more important, so does effective enforcement.
The fight against fraud and the monitoring of taxpayers becomes more pressing. Also there is greater need to address the distortions in indirect tax systems because their detrimental effects weigh more profoundly.

READYMADE GARMENTS
Services Sector
Going typical with the trend of widening the services that can be taxed, the Finance Minister has proposed a number of measures. The industries that now will come under the services tax net are;
I. Hotel with tariffs above Rs.1000 per day
II. Air-conditioned restaurants that serve liquor
III. Hospitals which have over 25 beds and central air-conditioning
IV. Insurance products that have an element of investment
V. Legal and arbitration services offered by companies and individuals
Air tickets which are already under the service tax will be changed higher going forward.

Impacts of Indirect Taxes on following

VACATIONS
The dual rate structure which capped the service tax at Rs 150 on domestic flights and Rs 750 on international flights for an economy class ticket has been replaced by an ad valorem, or 'according to value, rate of 12 per cent.
This will make flying costlier. A service tax calculated on 30 per cent value of the fare will also be charged from passengers on rail tickets of first-class and air-conditioned coaches.
Also, the 50 per cent abatement (percentage of value on which tax is exempt) available to hotels, guest houses, inns, etc. for lodging has been reduced to 40 per cent.

INSURANCE
The increase in the service tax from 10.3 per cent to 12.36 per cent will increase the premiums across the board for all those buying insurance. For insurance policies that come with an investment component, the first year premium will now be taxed at the rate of 3 per cent as opposed to 1.5 per cent earlier.

CARS
Basic customs duty on imported cars valued in excess of $40,000 (approximately Rs 2 crore) and cars with engine capacity exceeding 3,000cc for petrol and 2,500 cc for diesel has been increased from 60 per cent to 75 per cent.
Excise duty on petrol-driven cars with length exceeding 4,000 mm and engine capacity under 1,200 cc is being increased from 22 per cent to 24 per cent, while that on cars with engine capacity exceeding 1,500 cc will be 27 per cent.

JEWELLERY
The basic customs duty on standard gold and platinum bars has been doubled from 2 per cent to 4 per cent and non-standard from 5 per cent to 10 per cent.
The excise duty on refined gold has been raised from 1.5 per cent to 3 per cent. A basic customs duty of 2 per cent has also been imposed on cut and polished gemstones.

TOBACCO AND CIGARETTES
Cigarettes above 65mm will now attract a 10 per cent ad valorem duty on 50 per cent value of the retail sale price.
The excise duty on chewing tobacco and related products such as pan masala and gutka has also been increased.

DIGITAL CAMERAS
A 10 per cent customs duty has been imposed on digital cameras that record videos of certain specifications.

TELEVISION SETS
LCD and LED TVs with screen size of 20 inch and above have been relieved from paying any excise duty.

BRANDED GARMENTS
The excise duty abatement has been increased from 55 per cent to 70 per cent.

FOOTWEAR
The excise exemption on footwear has been enhanced from Rs 250 per pair to Rs 500 per pair.

Thank you…..