• What is tax?

• How to be taxed? Benefit principle and ability to pay principle

• What is the general nature of indirect tax? Incidence

• What are the factors that decides the general nature of indirect tax?
Elasticity, Price, Time, Cost, Nature of Tax, Market Form

• What’s our basic taxation dream? Theory of Optimal taxation: Fiscal

Neutrality,
• Equity, certainty, principle of evidence and principle of administrative
efficiency
TAXATION IN INDIA: HISTORICAL DEVELOPMENT

• ANCIENT TAXATION SYSTEM from 2nd century to 18th century

• TAXATION DURING PRE INDEPENDENCE PERIOD: 1860, 1886, 1918 AND 1922

• GOVERNMENT EXPENDITURES: Functional, Economic, Cross And Accounting

 TAXATION TIMELINE
TIME PERIOD INDIA WORLD

2ND ARTHASHASTRA
CENTURY

3RD MAURYAN PERIOD

CENTURY

16TH TO MUGHAL PERIOD • BENEFIT PRINCIPLE

19TH • ABILITY TO PAY
CENTURY PRINCIPLE
19TH -20TH PRE INDEPENDENCE • THEORY OF OPTIMAL
CENTURY PERIOD: Income Tax Act,
1860- Income Tax Act,
POST INDEPENDENCE:
1886-Income Tax Act,
Income Tax Act, 1961
ARTHASHASTRA PERIOD

COLLECTOR GENERAL CALCULATED THE EXPENDITURE AND

COLLECTED REVENUE ACCORDINGLY: collector general’s function was to
Understand the expenditure, Collect revenue, upkeep government, credit the revenue to
treasury, prepare plan for profitable works ,decide fines and examination of accounts

THE VARIOUS EXPENDITURES FOR THE GOVERNMENT

Worshiping Of Gods, Establishment Of Messengers, maintaining Store Houses,

Armoury, Warehouses, Manufactories, Infantry, Cavalry, Storage Of Firewood.

INCOME SOURCE OF PUBLIC

Forts, Country Parts, Mines, Buildings, Gardens, Forests, herds of cattle, and
roads of traffic.

FORMS OF GOVERNMENT REVENUE

Capital, Share, Premium, taxes from salary, taxes from gains of business and
Profession, Fees, Cess and fines.
MAURYAN PERIOD:

PROPORTIONAL SYSTEM OF TAXATION WAS FOLLOWED

MUGHAL PERIOD:

TAX ON CULTIVATION, TAX ON CATTLE, TAX ON HOUSE AND POLL

TAX FOR NON- MUSLIMS (TO HAVE EQUAL RIGHTS WITH MUSLIMS)

IN PARALLEL, VARIOUS THEORIES OF TAXATION DEVELOPED IN

OTHER JURISDICTIONS

• BENEFIT PRINCIPLE
• ABILITY TO PAY PRINCIPLE
• THEORY OF OPTIMAL TAXATION
• ADAM SMITH’S CANONS OF TAXATION
According to ADAM SMITH there are four following maxims with regard to
taxes in general

1. The payment of taxes should be based on the ability to pay principle.

2. The tax which each individual is bound to pay ought to be certain, and not
arbitrary. He must be certain about the quantity manner and time.

3. Every tax ought to be levied at the time, or in the manner, in which it is

most likely to be convenient for the contributor to pay it

4. Tax collection process must be feasible for the contributor and it must go
to public treasury- for that they should set up only necessary tax offices,
payment should not be a burden, forfeitures and penalties should be in
proportion to the crime so committed and everyone must be willing to pay
taxes, it should not be burdensome.

Four Canons of taxation so developed are Equality, Certainty, Convenience

and Economy
Income Tax Act Significant Features

1860 • 4 schedules of Income

• Tax collection by land
revenue officers
1886 • Revised schedules of Income
• Exemption from tax
provisions
1918 • Act repealed schedules and
introduced Income Heads
• Income tax filing was made
mandatory
1922 • Tax collection by central
government
• Step system to slab system:
progressive taxation
1961 • ???
PRE INDEPENDENCE PERIOD

The period marked the rise of East India Company and

followed by the military mutiny of 1857

Acute financial crisis because of the mutiny

Pre Independence finance minister James Wilson

presented India’s first Union Budget in 1860.

Introduced the Income Tax Act of 1860

Included 4 schedules of income:
• income from landed property
• Income from professions and trade
• Income from securities, annuities (savings, mortgage,
insurance) and dividends (received by shareholders
upon profit of a company)
• Income from salaries and pensions
Administration of tax was left in the hands of the land
revenue officers

Income tax act 1860 lapsed in the year 1865 and was
replaced by the license tax system on profession and
trade wherein a fee was paid to the government for the
privilege of being licensed to do something ( medical
practise, liquor license) etc.

Income Tax Act 1886. (4 Schedules)

• Income from salaries pensions and gratuities
• Income from net profit of companies
• Interest on the securities of government of India
• income from other sources like income from Hindu
undivided family, income from learned profession,
manufacturing, construction, income from commerce,
trade and income from property or other taxable
estates
Certain source of income were exempted from taxation:

Foreign consuls and consular employer’s offices whose salary was less
than 500, inhabitants of specific territories, hills, tribal regions,
railway, shipping and indigo companies, agricultural income, property
devoted to charitable and religious purposes, savings up to one sixth
of the total income etc. were exempted from taxation.

Income Tax Act of 1918

Act repealed the schedules of 1886 Act and included total income tax
heads
6 Heads:
Income from salary
Income from interest on securities
Income from house property
Income from business
Income from professional earnings
Income from other sources
Income tax filing was made compulsory under the act

Later on government of India Act1919 replaced 1918 act and Income

tax Act 1922 was introduced

Income Tax Act 1922

Administration of income tax by central government

Separate annual finance act
Administration of income tax transferred from revenue department
to income tax officers
Laid foundation of proper system of administration
Step system of taxation changed to slab system- progressive taxation
upon each slab

Step system: tax for 10000 income=5% and above 10000 10%. So even
if the income was 10050 he will be taxed at 10%

Slab system: up to 2.5 lakh no tax, above 2.5 and 5 lakh-5%,

5lakh and 10lakh-20% and above 10 lakh 30% tax will be levied.
Changes during the years
1882: 4 schedules of income, administration by land revenue officers

1886: 4 new schedules of income, exemption from taxation

provision, hindu undivided family treated as a distinct taxable entity

1918: replaced schedules with income tax heads, income tax made
compulsory

1922: central government administration, separate annual finance

act, income tax officers, step system to slab system

INCOME TAX ACT 1961.!!!

GOVERNMENT EXPENDITURES
 GOVERNMENT EXPENDITURES

• GENERAL SERVICE EXPENDITURE

FUNCTIONAL
• SOCIAL SERVICE EXPENDITURE
EXPENDITURE
• COMMUNITY SERVICE EXPENDTURE

ECONOMIC • CAPITAL LAYOUT EXPENDITURE

EXPENDITURE • EXPENDITURE FOR GOODS AND SERVICES

CROSS • SOCIAL REFORM EXPENDITURE

EXPENDITURE

• REVENUE AND CAPITAL EXPENDITURE

ACCOUNTING • DEVELOPMENT AND NON DEVELOPMENT EXPENDIT
EXPENDITURE • PLAN AND NON PLAN EXPENDITURE
 CLASSIFICATION OF GOVERNMENT EXPENDITURE

(i) Functional Classification or Budget Classification: based on

functions(GENERAL SERVICES, SOCIAL SERVICES, COMMUNITY)

(ii) Economic Classification: are based on economic activities (PURCHASE

AND SPENDING)

(iii)Cross Classification: combined functional and economic activities

(COMBINED ACTIVITIES)

(iv) Accounting Classification: based on revenue and capital (GRANTS AND

SUPPORT FOR THE STATES AND )
FUNCTIONAL CLASSIFICATION IS FURTHER CLASSIFIED
INTO

SECTORAL HEAD:

• GENERAL SERVICES- Major Head (Function): Hospitals, Minor

Head (programs): eye hospital and Subhead (activities, schemes): free
eye checking for the poor

• SOCIAL SERVICES- Major Head (Function): medical relief, Minor

Head (programs): medical relief for children and Subhead (activities,
schemes): nutritional check up, dental check-up etc.

• COMMUNITY SERVICES- Major Head (Function): housing,

Minor Head (programs): residential colonies and Subhead
(activities, schemes): independent housing and latrine facilities
ECONOMIC CLASSIFICATION CONSIST OF

CAPITAL LAYOUTS: Purchase And Establishment of PPE: Property,

Plant And Equipment

SPENDING FOR GOODS AND SERVICES: Roads, Highways,

Sanitation, School, Electricity, Education Environment Protection, Fire
Protection, Street Lights etc.

CROSS CLASSIFICATION includes expenditure for social reform

activities like Education, Labour welfare, family planning, loans etc.
ACCOUNTING CLASSIFICATION CONSIST OF

REVENUE AND CAPITAL EXPENDITURES: grants given to state

government and capital loans and advances given to state government

DEVELOPMENTAL AND NON DEVELOPMENTAL

EXPENDITURES: Developmental includes promotion of backward
communities, Non Developmental includes- General Services

PLAN AND NON PLAN EXPENDITURES: plan expenditures include

expenditures incurred by central government on programmes and non plan
expenditures include subsidy, pension and internal security expenditures.
What is taxable capacity?

The term taxable capacity refers to the maximum capacity of the burden of
tax that
a country can bear and contribute to the expenses of the national exchequer
during
normal and abnormal situation.

Sir Josiah Stamp: - ―Taxable capacity is that maximum amount which the
community is in a position to bear towards the expenses of public
authorities
without having a really unhappy and down-trodden existence and without
dislocating the economic organization too much”

It is the optimum tax ability of a nation, the maximum amount of taxation

that can
be raised and spent on the economic welfare in that community".

• maximum amount which a nation can contribute

• To support of the government
Importance of taxable capacity

It helps the country estimate the amount of money it could collect by way
of taxation to meet with the expenditures so formulated

It helps the country to mobilize revenue from different sources.

It shows the participation of each section to share in the provide of

government revenue.

It helps to the government to develop the economy of the country as a

whole.

It helps the country to identify those taxes that are very harmful and
highly detrimental to the state
Factors that influence Taxable Capacity

Size of population: national income is greater than rate of growth- per capita
income
Increases- so taxable capacity also increases. If rate of growth is greater than
national
Income then per capita income decreases, taxable capacity decreases

The distribution of national income: if there is an unequal distribution of

wealth in
The country, then the taxable capacity of the nation will be more.

Standard of living of people: Standard of living will be directly proportional

to the
income. So if more the income, more will be the standard of living and hence
he can
Contribute more as tax to the nation, thereby increasing the taxable capacity

Purpose of taxation: if taxation is for the purpose of fulfilling the necessary

expenditures
Of government thereby raising the standard of living of the people, the
wiliness to pay
Administrative efficiency: if collection machinery is efficient and
simple, tax filing will be efficient and tax evasion will be low thereby
increasing the taxable capacity

Economic situation: during a depression period, the taxable capacity of

a nation as a whole will be low

Political situation: A stable government and peaceful conditions have a

favorable effect on the taxable capacity of a country, tax yield is low
where the government is unstable or where the government is
undemocratic.

Effect of inflation: If the country is in grip of inflation, purchasing

power of people is reduced, taxable capacity of nation shrinks
considerably. But if value of money is high and country is not faced with
unemployment, then taxable capacity of people is quite high.
Measurement of tax capacity:- The taxable capacity mostly depends
upon the national dividend and national income.

There are two methods available for measuring taxable capacity and
they are

1- The personal or aggregate income method:- Under this method,

all the income of all individuals are added, that is income from land,
building, profits from business enterprises, income from employment
to get the national income if the national income increase the
taxable capacity increases and vice versa.

2- The production method:-This method, the net produce in terms of

money from various sources is estimated and added up. The produce
from agriculture, industry and trade, is estimated in term of money
and is added to get the national dividend. If net production increases,
taxable capacity also increases and vice versa.
The absolute taxable capacity

The absolute taxable capacity indicates the amount of money or the

proportion of national income that can be taken away by the
government from people in the form of taxes without producing
unfavorable effects. The concept of absolute taxable capacity is not to be
assumed as a constant entity.

Relative taxable capacity

The relative taxable capacity refers to the proportion in which two or more
community can contribute in the form of taxes in order to meet some
common expenditure. In other words, relative taxable capacity of the
community to contribute to some common expenditure in relations to
the capacities of other communities.

Basis for direct and indirect taxation

A stable economy demands taxation

Theories substantiate the manner in which tax should be levied

Shifting and incidence explains the practical aspects of taxation and differentiate
direct and
Indirect taxation

Theory of optimal taxation and canons of taxation explains the ideal nature of taxation

Historical discourse explains the effort put forth by the Indian economy

All forms of government expenditures explains and mandates the need of revenue for
the
Government

The taxable capacity of the nation decides the nature and margin of direct and
indirect taxation
that has to Applied.