1. 1 Income Tax

2. Overview 2 Purpose of Taxes; Raising revenues for administration of the nation states; To provide basic public and semi-public goods (like roads, etc.) to the citizens; and To maintain internal security and provide justice to its citizens.

3. Overview 3 In times of war and in times of natural calamities, additional taxes were imposed on the citizens to cover the cost of war or to provide succor to people affected by the natural calamities or to rebuild infrastructure damaged by war or by natural calamities. Taxes have been the main source of revenue for nations to raise public finances.

4. Overview 4 Based on the administration of tax system and the system of collection of taxes, the taxes can be broadly classified into two types; Direct Taxes are those taxes which are demanded from the very person who it is intended or desired should pay it. Indirect Taxes are those taxes which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another.

5. Overview 5 Taxes are unilateral payments by citizens to its Government for which there is no quid pro quo. In modern day nation- states, taxes are imposed on the basis of a rule of equity and that the rule may be the principle of ability to pay taxes. The best method to to determine the principle of ‘ability to pay’ is the income and consumption of a citizen.

6. Overview 6 During this session we will cover: Tax structure; Characteristics of good tax structure; Distribution of taxation powers between the Union and States in India;

7. Tax structure 7 Taxes are levied on income of citizens and on consumption of citizens. Taxes levied on the income of citizens are ‘Direct Taxes’ as the incidence of tax and tax payer is the same person. Income Tax, Wealth Tax, Corporation Tax are some of the examples of direct taxes.

8. Tax structure 8 Taxes on commodities, is essentially a tax on consumption. It is a form of ‘Indirect Tax’ as the tax payer (producer or trader) and the ultimate bearer of tax (consumer) are two different persons. Excise Duty, Import Duty, Sales Tax etc. are the examples of indirect taxes.

9. Tax Structure 9 Taxes are compulsory payments for which there is no quid pro quo. The obligation to pay taxes tends to alter the affected individual’s economic behaviour. All economic agents (producers of goods and services) have to make certain major decisions, namely, what to produce or what employment to seek, where to produce and how to produce (what factors of production to use and in what proportion to combine them) and taxes affect their decisions.

10. Tax Structure 10 Taxes also affect economic incentives; willingness to work and earn, willingness to save, willingness to take risk, etc. Very high rates of personal income tax can alter the choice between work and leisure, between savings and consumption and between risky and safe investments or occupations.

11. Tax Structure 11 Taxes on commodities are intended to be taxes on consumption, because the ultimate aim is to reach the consumption of individuals. Commodity taxes can be divided on domestically produced goods and services and those on imports.

12. Tax Structure 12 Commodity taxes on domestically produced goods take the form of ‘Excise Duty’. Another commonly levied indirect tax on commodities is the ‘Sales Tax’. It is a tax levied at any stage in the chain of transactions through which commodities may pass, i.e. from production o retail.

13. Indirect Taxes 13 An ‘Origin Based’ tax is one which is levied and/or collected and retained by the jurisdiction of production, a ‘Destination Based Tax’, on the other hand is levied and/or collected and retained by the importing jurisdiction.

14. Indirect Taxes 14 A ‘Cascading Tax’ is one which effectively falls on inputs at every stage and thereby increases the cost of production. For example if a cascading sales tax regime is in place where the tax is levied at each and every stage of transaction without factoring the tax paid at earlier stages of transaction. Such a tax tends to create distortions through altering the degree of vertical integration.

15. Indirect Taxes 15 A ‘Non-cascading Tax’ on the other hand takes care of and factors in the taxes paid on the inputs at various stages of production. It is more transparent and the consumer or the ultimate user is sure bout the tax element included in the sales price.

16. Characteristics of good tax structure 16 To mention only the major characteristics, the tax system should be fair or equitable; it should cause the least possible harmful effects on the economy and to the extent possible promote its growth; it should be simple both for administration and compliance; and it should be income elastic.

17. Tax jurisdiction in India 17 Constitution of India (Article 1(1) describes that ‘India shall be a Union of States’. India is also a Union of States. The existence of States within the Union and existence of Panchayati Raj Institutions within the States give India a ‘Quasi Federal Character’.

18. Tax jurisdiction in India 18 For efficient governance with least overlap and least friction between the Union and the States and between the States themselves, the Constitution of India has prescribed, in detail, the manner of allocation of revenue resources between the Centre and the States.

19. Tax jurisdiction in India 19 According to the Constitution, the functions and financial powers of the government have been divided into Central and State spheres, together with concurrent areas. Keeping in view the importance of uniform development of the country and for making India into a vast single market with a single tax structure and tax rate so that inter-regional tax distortions are avoided, the framers of Constitution gave most of the financial powers and major taxation powers to the Union Government.

20. Tax jurisdiction in India 20 In order that States are not starved of funds for development and governance of their states, the Constitution also provides for taxation jurisdiction of States and sharing of tax revenues between the Centre and the States in various forms and provides for a system of grants-in-aid from Centre to the States. The Centre has been given those resources which have national or inter-state base and the same has been the constitutional approach for the division of the functions between Centre and the States.

21. Tax jurisdiction in India 21 The ‘Seventh Schedule of the Constitution of India’ lays down the respective functions and financial resources for the Centre and the States in the country. It consists of three lists:

22. The Union List 22 Consists of 97 entries and contains the following sources of tax revenue for the Central Government: Taxes on Income other than agricultural income; Corporation Tax; Customs Duties; Excise Duties except on alcoholic liquors for human consumption and opium and other narcotics;

23. The Union List 23 Taxes on capital value of assets; Estate Duty other than on agricultural land; Stamp Duty in respect of certain financial documents; Taxes other than stamp duty on transactions in stock exchanges and futures market; Taxes on inter-state sale of goods;

24. The Union List 24 Taxes on sale and purchase of newspapers and on advertisements published in them; Taxes on goods and passengers carried by railways sea or air, taxes on railway fare and freight; Taxes not specifically enumerated in the State list and the concurrent list.

25. The State List 25 Consists of 66 entries and contains the following sources of tax revenue for the State Government: Land Revenue; Taxes on agricultural income; Duties in respect of succession to agricultural land; Estate Duty in respect of agricultural land;

26. The State List 26 Taxes on lands and buildings; Taxes on mineral rights subject to any limitation imposed by Parliament by law relating to mineral development; Excise Duty on alcoholic liquors and narcotics; Taxes on entry of goods into local area; Taxes on consumption and sale of electricity; Taxes on sale or purchase of goods other than newspapers;

27. The State List 27 Taxes on advertisements other than those inserted in newspapers; Taxes on goods and passengers carried by road on inland water transport; Taxes on vehicles; Taxes on animals and boats;

28. The State List 28 Tolls; Taxes on professions, trade, calling and employment; Taxes on luxuries, including entertainment, betting and gambling; Stamp Duty on documents, other than those which are subject to duty by Central Government;

29. Concurrent List 29 This list consists of concurrent powers of States and the Centre in certain areas of governance. No major source of tax revenue is included in this list.

30. Powers of States 30 Article 286 of the Constitution forbids the levying of any tax by States on: Imports into and exports from the territory of India; Inter-state trade; and Sale of goods declared by Parliament by law to be essential for the life of the community.

31. Distribution of Tax Revenues 31 Constitution mentions about such duties which are levied by the Union Government but are collected and appropriated by the States. These include the stamp duties and excise duties on medicinal preparations containing alcohol or narcotics.

32. Distribution of Tax Revenues 32 Article 269 of the Constitution provides for a second group of taxes which are levied and collected by the Central Government but are assigned to the States within which they are leviable in accordance with such principles of distribution as may be laid down by the Parliament. These comprise of succession and estate duties in respect of property other than agricultural land, etc.

33. Distribution of Tax Revenues 33 Thirdly there is an important category of taxes on income (other than agricultural income) which under Article 270 of the Constitution are levied and collected by the Central Government but are distributed between the Union and the States in a prescribed manner.

34. Distribution of Tax Revenues 34 Fourthly there is a class of taxes comprising of Union Excise Duties which are levied and collected by the Union Government but may be distributed between the Union and the States.

35. Distribution of Tax Revenues 35 Finally there is a fine balancing element in the whole scheme of financial relationship between the Union and the States. Constitution under Article 275 provides for the payment of grants-in-aid by the Central Government to the State Governments.

36. Distribution of Tax Revenues 36 Local Bodies, like the Panchayati Raj Institutions, have not been given constitutional powers to levy taxes. Their taxation powers are those that have been delegated by the State Government to them and, in most cases, include Octroi on entry of commodities into their local area and taxes on property. They are also given grants-in-aid by the Central Government and/or by the State Government to enable them to meet the expenditure obligations on responsibilities devolved upon them.