Taxation in India (Tax Structure in India) Chapter-17

 What is Direct Tax?

 It is a tax levied directly on a taxpayer who pays it to the Government and cannot pass
it on to someone else.
 Progressive in nature as higher income earners pay high tax and low-income earners
pay low tax.
 It has a non-inflationary effect.
 Examples:
(i) Income Tax: It is imposed on an individual who falls under the different tax
brackets based on their earnings or revenue and they have to file an income tax
return every year after which they will either need to pay the tax or be eligible
for a tax refund.
(ii) Corporate Tax: Companies incorporated or having operations in India have to
pay tax to the government. They need to pay tax on the profits earned from the
business. Unlike, income tax slab rates of individuals, the companies have to
pay tax at flat rates prescribed by the government.
(iii) Capital Gains Tax: The capital assets of an individual refer to anything
owned for personal use or for the purpose of an investment. For businesses, the
capital asset is anything that can be used for more than a year and is not
intended to be sold or liquidated during the course of business operation.
The capital gains tax is imposed on the income derived from the sale of
investments or assets. On the basis of the holding period, capital tax is
categorised under short-term gains and long-term gains. The formula to
calculate the capital gains is:
Capital Gains = Sale Value – Purchase Value
(iv) Poll Tax: In India, Poll Tax is similar to the road tax on vehicles, but it should
be noted that this tax is not very popular here. However, in the year 2002, it
was decided by the Minister for Transport that the Poll Tax on all-India tourist
vehicles entering the state of the Jammu and Kashmir would be Rs. 2,000 per
day per vehicle.
(v) Personal Property Tax: A personal property tax is a tax levied by state or
local governments on certain types of assets owned by their residents.
Types of Property:
(a) Land– In its most basic from, without any construction or improvement.
(b) Improvements made to land– this includes immovable manmade creations
like buildings and godowns.
(c) Personal Property– This includes movable man-made objects like cranes,
cars or buses.
(d) Intangible Property– In the form of licenses, patents, etc.
(vi) Securities Transaction Tax (STT): STT is a tax levied while dealing with
securities listed on a recognised stock exchange. It is an amount that is levied
over and above the trade value, and hence, it increases the transaction value.
 Taxation in India (Tax Structure in India) Chapter-17
(vii) Minimum Alternative Tax (MAT): MAT is imposed on “zero tax
companies”, which typically refer to companies that declare little or no income
in order to save tax.
(viii) Fringe Benefit Tax (FBT): The FBT tax is imposed on the fringe benefits like
drivers and maids provided/paid for by companies to their employees.
(ix) Dividend Distribution Tas (DDT): An amount that is declared, distributed or
paid as dividend to the shareholders by a domestic company is taxed under the
Dividend Distribution Tax. It is applicable to domestic companies only.
Foreign companies distributing dividends in India do not pa).
(x) Banking Cash Transaction Tax: It is a type of Direct Tax which was levied
(from 2005 to 2009) on cash transactions exceeding a specific amount from the
bank by a customer. It was 0.1%. Again, Tax Administration Committee
headed by Parthasarathi Shome had also recommended reinstating the BCTT in
2014.
(xi) Double Tax Avoidance Agreement (DTAA): The Double Taxation
Avoidance Agreement or DTAA is a tax treaty signed between India and
another country ( or any two/multiple countries) so that taxpayers can avoid
paying double taxes on their income earned from the source country as well as
the residence country. At present, India has double tax avoidance treaties with
more than 80 countries around the world. The rates range from 7.50% to 15%.
(xii) Tax Incentives: Tax incentives are exclusions, exemptions, or deductions from
taxes owed to the government. There are different types of incentives, such as–
Tax exemption, Tax reduction, Tax refund and rebate and Tax credit.
 What is Indirect Tax?
 It is a tax levied by the Government on goods and services and not on the income,
profit or revenue of an individual and it can be shifted from one taxpayer to another.
 Regressive in nature as poor or rich has to buy product on the price with same tax
levied.
 It has inflationary as it increases the price of goods and services.
 Example:
(i) GST
(ii) Custom Duty: It is an Import duty levied on goods coming from outside the
country, ultimately paid for by consumers and retailers in India.
(iii) Central Excise Duty: This tax was payable by the manufacturers who would
then shift the tax burden to retailers and wholesalers.
(iv) Service Tax: It was imposed on the gross or aggregate amount charged by the
service provider on the recipient.
(v) Sales Tax: This tax was paid by the retailer, who would then shift the tax
burden to customers by charging sales tax on goods and service.
(vi) Value Added Tax: It was collected on the value of goods or services that were
added at each stage of their manufacture or distribution and then finally passed
on to the customer.
 Taxation in India (Tax Structure in India) Chapter-17
(vii) Anti-Dumping Duty: Anti-dumping duty is a tariff imposed on imports
manufactured in foreign countries that are priced below the fair market value
of similar goods in the domestic market.
(viii) Excise Duty: Excise duty is a kind of indirect tax charged on the sale of certain
products. The customer does not pay excise duty directly to the authorities, but
it is added to the cost of the product by the producer or merchant and then
passed on to the consumer by way of increased prices.
Types of Excise Duty:
(a) Basic Excise Duty:
(b) Special Excise Duty:
(c) Education Cess on Excise Duty:
(d) Natural Calamity Contingent Duty:
(e) Excise Duty in Case of clearance by Export Oriented Units:
(f) Duties under other Acts:
(g) Additional Duty on Goods of Special Importance:
(h) Additional Customs Duty commonly known as Countervailing Duty
(CVD):
(i) Additional Duty on Mineral Products:
(j) Duty on Medical and Toilet Preparations:
(k) Special Additional Duty of Customs:
(ix) Entertainment Tax:
(x) Entry Tax:
(xi) Luxury Tax:
(xii)

 Different Methods of Taxation / Tax Mechanism
1. Progressive Taxation:
 A progressive tax increases the tax rate as individuals increase their income.
 This tax system is designed to be more equitable so that the tax burden is placed on
those that can afford it.
 Indian income tax is a typical example of it.
2. Regressive Taxation:
 A regressive tax system is where a person earning a higher income pays a smaller
proportion of their income in taxes than a person with a lower income.

3. Proportional Taxation:
 Proportional tax is the taxing mechanism in which the taxing authority charges the
same rate of tax from each taxpayer, irrespective of income.
 Since the tax is charged at a flat rate for everyone, whether earning higher income or
lower income, it is also called flat tax.
 Generally, this mode is used as a complementary method with either progressive or
regressive taxation. If not converted into proportional taxes, every progressive tax will
go on increasing and similarly every regressive tax will decrease to zero, becoming
 Taxation in India (Tax Structure in India) Chapter-17
completely a futile tax methods. That is why every tax, be it progressive or regressive
in nature, must be converted into proportional taxes after a certain level.
 What is Tax Equity?
 Tax equity is the concern about the fairness of how the tax burden is distributed.
 Economists suggest inclusion of two elements in the tax system to make it fair namely:
(i) Horizontal equity: Horizontal equity is the idea that people with a similar
ability to pay taxes should pay a similar amount of taxes.
(ii) Vertical equity: Vertical equity means that people who can afford to pay more
in taxes should pay more in taxes.
 What is Double Dividend of Tax?
 The ‘double dividend’ hypothesis is the notion that environmental tax revenues could
finance reductions in preexisting taxes and that this could generate an additional or
‘double’ benefit: one benefit from environmental improvement and a second from
lowering distortions from preexisting revenue-motivated taxes.
Methods of Government Expenditure
 Similar to the methods of taxation the modes of government expenditure are also of three types:
1. Progressive Expenditure:
2. Regressive Expenditure:
3. Proportional Expenditure:

Value Added Tax

 Value Added Tax is levied in multiple stages of the production of goods and services and comes
under the purview of various state governments. Hence, VAT in India might slightly differ from
one state to another.
 The process of collection of VAT can be safely categorized into two broad heads based on the
method of collection of value added tax.
 Account-based collection of VAT: Under this tax is calculated on the value added.
Value added is calculated as the difference between revenues and allowable purchases.
 Invoice-based collection of VAT: Under the invoice-based VAT collection, sale
receipts or invoice is used to compute the corresponding VAT. Most countries in the
world today use the invoice-based method of VAT collection.
 Accrual-based collection of VAT: Accrual-based collection matches the revenue with
the period during which it is earned and matches the cost of raw materials and
expenses to the time during which they were made.
 Cash-based collection of VAT: Emphasis is laid on the cash that is being handled
instead of whether all the bills are paid. Whenever a payment is received, that date is
recorded as the date of receipt of funds.
 VAT in India is categorized under 4 heads which are as follows:
(i) NIL: Levied on items that are basic and sold in the unorganized sector. Ex: Khadi, Salt,
etc.
(ii) 1%: Usually charged on relatively expensive items. Ex; Gold, Silver, Precious stones,
etc.
 Taxation in India (Tax Structure in India) Chapter-17
(iii) 4-5%: Charged on certain items that are used on a daily basis. Ex; cooking oil, tea,
medicines etc.
(iv) General: Charged 12-15% on mainly luxury items such as cigarettes, alcohol, etc.
 VAT is actually calculated as the difference between input tax and output tax.
 VAT = Output Tax – Input Tax.
 Taxes Charged by the Central Government:
 GST, Income tax, Custom duty, Excise duty (applied on Petroleum crude, High-speed
diesel, Petrol, Natural Gas, Aviation turbine fuel, Tobacco and tobacco products),
Corporation Tax,
 Taxes Charged by the State Governments:
 GST, Electricity Duty, VAT, Sales Tax, Entertainment Tax, Toll Road Tax,
Professional tax, Octroi duty, Stamp duty, Luxury tax and Capital Gains Tax.
 What is CENVAT?
 CENVAT is an adaptation of VAT, which came into force in the country in 1986 in
the form of MODVAT (Modified Value Added Tax). This MODVAT was converted
into CENVAT in the early 2000’s with no major changes in its implementation or
execution. Today, MODVAT isn’t used as a term and CENVAT is the tax charged by
the Central government on products or services at different levels of manufacture.
 Difference between VAT and CENVAT?
VAT CENVAT
Collecting Authority Respective state Central government
government in which
transaction occurs
Implementing Agency State Commercial Tax Central Board of Excise
Departments and Customs
Credit Available VAT credit CENVAT credit
Nature of Tax Sales (within a state) Excise/Service
Purpose Prevent duplication of tax To prevent cascading
taxing effect
Rates Varies from state to state Varies according to the raw
depending on the product material
Applicability To be paid on value added Applicable on the inputs
to a commodity or for a (raw materials) used to
service provided produce a product.

Raja Chelliah Committee

 The Government appointed a Tax Reforms Committee under Prof Raja Chelliah to lay out
agenda for reforming India’s tax system. This TRC came up with three reports in 1991, 1992
and 1993 with several measures, which can be summarized in these points:
1. Reforming the personal taxation system by reducing the marginal tax rates.
2. Reduction in the corporate tax rates.
3. Reducing the cost of imported inputs by lowering the customs duties.
 Taxation in India (Tax Structure in India) Chapter-17
4. Reduction in the number of Customs tariff rates and its rationalization.
5. Simplifying the excise duties and its integration with a Value-Added Tax (VAT) system.
6. Bringing the services sector in the tax net within a VAT system.
7. Broadening of the tax base.
8. Building a tax information and computerization.
9. Improving the quality of tax administration.
Vijay Kelkar Committee
 Kelkar committee to evaluate PPP in India was a committee set up to study and evaluate the
extant public-private partnership (PPP) model in India.The committee was set up by India's
central government and headed by Vijay Kelkar. The committee was set up following 2015
Union budget of India by the then finance minister of India Arun Jaitley. It comprised 10
members. The committee submitted its recommendations to Jaitley on 19 November 2015.
 Key recommendation of the committee:
 Banks and other financial institutions be allowed to issue zero-coupon bonds.
 The number of banks in a consortium be restricted.
 Banks develop improved capabilities for risk assessment and appraisal.
 Specific guidelines for encashment of bank guarantees.
 PPP should only be used for large projects.
 Contracts need to focus more on service delivery instead of fiscal benefits.
 Better identification and allocation of risks between stakeholders
 Prudent utilization of viability gap funds where user charges cannot guarantee a robust
revenue stream.
 Improved fiscal reporting practices and careful monitoring of performance.
 Given the urgency of India’s demographic transition, and the experience India has
already gathered in managing PPPs, the government must move the PPP model to the
next level of maturity and sophistication.
 Cost effectiveness of managing the risk needs to be evaluated.
 An Infrastructure PPP Adjudication Tribunal (“IPAT”) chaired by a Judicial Member
(former Judge SC/Chief Justice HC) with a Technical and/or a Financial member,
where benches will be constituted by the Chairperson as per needs of the matter in
question.
 Projects that have not achieved a prescribed percentage of progress on the ground
should be scrapped. Re-bid them once issues have been resolved or complete them
through public funds and if viable, bid out for Operations and Maintenance.
 Sector specific institutional frameworks may be developed to address issues for PPP
infrastructure projects.
 Umbrella guidelines may be developed for stressed projects that provide an overall
framework for development and functioning of the sector specific frameworks.
 Unsolicited Proposals ("Swiss Challenge") to be discouraged to avoid information
asymmetries and lack of transparency.
 Amend the Prevention of Corruption Act, 1988 to distinguish between genuine errors
in decision-making and acts of corruption.
 Taxation in India (Tax Structure in India) Chapter-17
 Set up an institution for invigorating private investments in infrastructure, providing
guidance for a national PPP policy and developments in PPP.
 An institutionalized mechanism like the National Facilitation Committee (NFC) to
ensure time bound resolution of issues.
 Ensure adoption of principles of good governance by the Special Purpose Vehicle
(SPV).
 Discourage government participation in SPVs that implement PPP projects unless
strategically essential.
 Ministry of Finance to allow banks and financial institutions to issue Zero Coupon
Bonds which will also help to achieve soft landing for user charges in infrastructure
sector.
 Encourage use of PPPs in sectors like Railways, Urban, etc. Railways to have an
independent tariff regulator.
 Set up an institute of excellence in PPP to inter alia guide the sector, provide policy
input, timely advice and undertake sustainable capacity building.
 Ensure integrated development of infrastructure with roadmaps for delivery of
projects.

Goods and Service Tax (GST)

 After studying the Kelkar Committee report, the Government in 2006 decided to introduce the
new tax since the financial year 2010–11.
 Lack of consensus between the centre and states kept the process delayed.
 Finally, the Constitution (101st Amendment) Bill, 2016 was cleared by the Parliament by early
August 2016—paving the way for its implementation.
 The new federal indirect tax GST was enforced by the Government on July 1, 2017.
 The major features of GST are as given below:
 Central Taxes subsumed under GST: Central Excise Duty; Duties of Excise
(Medicinal and Toilet Preparations); Additional Duties of Excise (Goods of Special
Importance); Additional Duties of Excise (Textiles and Textile Products); Additional
Duties of Customs (commonly known as Countervailing Duty i.e., CVD); Special
Additional Duty of Customs (SAD); Service Tax; and Central Surcharges and Cesses
so far as they relate to supply of goods and services.
 State taxes subsumed under GST: State VAT; Central Sales Tax; Luxury Tax; Entry
Tax (all forms); Entertainment and Amusement Tax (except when levied by the local
bodies); Taxes on advertisements; Purchase Tax; Taxes on lotteries, betting and
gambling; and State Surcharges and Cesses so far as they relate to supply of goods and
services.
 Keeping in mind the federal structure of India, there will be two components of GST
— Central GST (CGST) and State GST (SGST)—both Centre and States levying GST
across the value chain on every supply of goods and services. States will assess 90 per
cent of assessees with annual turnover below ₹1.5 crore while remaining 10 per cent
by the centre. For taxpayers with over ₹1.5 core turnover, the split is 50:50 between
the centre and states.
 Taxation in India (Tax Structure in India) Chapter-17
 On inter-sate transactions of goods and services an ‘Integrated GST’ will be levied. On
intra-state transactions of goods and services CGST and SGST will be levied.
 Bands of rates (in per cent) of goods under GST shall be 5, 12, 18 and 28 and in
addition there would be a category of exempt goods. Further, a cess would be levied
on certain goods such as luxury cars, aerated drinks, pan masala and tobacco products,
over and above the rate of 28 per cent (for payment of compensation to the States).
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