Introduction to Taxation Flashcards
(29 cards)
Purpose of taxation
Revenue and Market Regulation (Correction of market and human behavior)
Constitutional Authority to levy taxes
Article 265 - Taxes not to be imposed save by authority of law. As per division of subject matter under Schedule VII.
Economic Disparity and Taxation
- There is massive concentration of wealth** in the hands of the rich, plus in certain regions (as pointed out by SEBI) → economic disparity.
Taxes are, in a way, a tool to overcome this issue — taxes are collected from people or regions which have more concentrated wealth and use it for people or regions who do not have much wealth → Robin Hood?
Thus, the policies on taxes try to bridge the gap between rich and poor. All of this is based on the premise that economic backwardness is related to social backwardness. Hence, if economic backwardness is overcome, then it also helps in overcoming social backwardness.
Taxation and Consumer behaviour
Governments can use taxes to correct market failure caused by externalities, which are costs or benefits that are not reflected in the market price of a good or service. For example, a tax on carbon emissions can help to correct the market failure caused by the negative externalities of pollution, similarly, sin tax, in the form of a tax on goods such as cigarettes can be used to discourage market behaviour that has negative effects on public health.
Sources of Public Finance
Carrying on businesses (but ethical limitations as the state’s primary function is not to generate profits)
Natural Resources Exploitation (gulf countries don’t have to impose tax because dependant on oil etc, but can’t be applied to India.) Also, PSUs require heavy investments.
Donations and Grants (always have a hidden agenda)
Borrowings or loans
Fines or penalties or confiscations
Escheat (random, not constant)
Fees (fees cannot be more than expenditure, so they do not carry a profit motive)
Tax
Printing of Currency
Wars
Income from investments
Big Cats Don’t Eat Fine Fish, Instead Now Prefer Tasty Worms.
Borrowings as a source of public finance
External borrowing carries risk of currency fluctuations as the borrower has to repay loan in the same currency borrowed which can change value.
Borrowing capacity determined by
Cash Reserves and current ratios - Savings capacity. A country can only borrow after utilising savings.
What is tax
- Compulsory Levy
- By sovereign authority
- as part of common burden
- without any direct benefit
- authorised by law
- backed by sanction
No direct benefit
Taxpayers are not entitled to any guaranteed benefits for their contributions, funds collected are earmarked for public purposes at large.
Kinds of taxes
Direct Tax
Indirect Tax
What is direct tax
Where the burden of tax cannot be shifted. One where both the burden and the incidence of tax falls on the same person. progressive in nature where the taxation depends on economic ability to pay.
Examples of direct tax
Income tax, securities transaction tax, fringe benefit tax, wealth tax, expenditure tax
Indirect tax
Burden of taxation can be shifted. A person has tax to pay to the government, but the incidence of tax is borne by someone else, not directly impacting the buyer
Fringe benefit tax
FBT tax on employer in exchange for benefits provided to his employees other than salary such as transport, health, insurance and entertainment expenses. It has not been abolished, benefits may be charged to employee. They are taxed on the expenditure of the employer and not on the income of the employee.
What are the compensatory taxes
Levied by states as part of taxation powers. Intended to ensure that states provide improved facilities to the trading community.
Case about excess compensatory tax
Rajasthan Automobile transport case
What are the compensatory taxes
GST, Duty, Surcharge, Cess, Fees
What is a duty
taxation levied on certain goods, services or other transactions that are imported and exported.
Tax on the value of goods and services.
Divisible pool goes to centre and state.
What is a surcharge
Tax on tax, taxing method to raise additional revenue for general purposes. Not divisible. Article 271
What is a cess
Additional tax on taxes that is imposed for specific reasons. Not part of divisible pool.
Fees
Necessarily involves quid pro quo, but degree and quantum may vary.
Tax v Fees
Artificial construct created because there are differing legislative competences. Article 265 mentions that no tax shall be levied except by authority established by law. A tax has to be backed by statute, but for fees a statute is not necessary.
No taxation without representation
Introduced in america, boston tea party, imposition of taxes on tea. now there needs to be representation to levy taxes.
Money Bill
A money bill or finance bill (Article 110) is used to enact tax laws. If a bill contains provisions only pertaining to a) taxes or b) borrowings, it would be a money bill.
