Taxation in India

Sources of Public Revenue

Public Revenue refers to the resources raised by the Government for the purpose of fulfilling various functions aimed at maximising economic and social welfare.

Sources of Public Revenue

• Tax Revenue: Direct Tax, Indirect Tax
• Non Tax Revenue: Grants & Gifts, Commercial Revenue, Administrative Revenue (Fees, Fines & Penalties, Special assessments, Escheats)

Tax Revenue

A tax is a burden levied on people in order to generate revenue for the government. It is not a voluntary contribution but a payment that is enforced by the various authorities.

A tax is a compulsory payment to the government. There is no quid-pro-quo between tax payers and the Government. In other words, the tax payers cannot claim any specific benefit in return for paying the tax. There are two types of tax:

Direct taxes
A direct tax is imposed and collected directly from the person on whom it is legally imposed. The burden of tax cannot be shifted to others. These taxes are imposed on incomes. Example of direct tax:

• a) Personal Income tax is paid by individuals on their income.
• b) Corporate income tax levied on the income of companies.
• c) Capital gains tax is payable on monetary gains on sale of assets e.g. share or houses.
• d) Property tax imposed on owners of property.

Indirect taxes
Indirect tax is the tax which is imposed on one person but paid partly or wholly by others. The burden of tax can be shifted to others. Examples of Indirect taxes:

• a) Excise duties- these are specific taxes levied on manufactured goods.
• b) Custom duties: these taxes are paid on imports.
• c) Value added tax- these are imposed on good and services.
• d) Octroi- this is collected by local government on entry of goods.
• e) Service tax- a tax charged on services by service providers.
• f) GST

Non tax Revenue The revenue collected by the government from sources other than tax revenue is known as non-tax revenue. Non tax revenue may be compulsory or voluntary. Following are non- tax revenue:

1. Grants & gifts Grants are financial assistance provided by a government at higher level government to lower level government to perform function such as education, health, social security, food security etc. thus local government receive grants from state governments and state government receive grants from central government. Developing countries receive grants from developed countries in the form of economic aid, food aid, military aid, technological aid etc. Gifts are voluntary contributions from individuals or institutions during calamities, accidents, war etc.

2. Commercial revenue They are receipts of the government from the sale of govt. produced goods and services. Examples of commercial revenue include the revenues received by the Indian railways, post & telegraphs, govt. schools, hospitals, govt. companies etc. commercial revenue is in the form of prices rather than taxes. There are not compulsory like taxes as only those who purchase the govt. produced goods and services have to pay for them.

3. Administrative Revenue It includes Fees, Fines & penalties, special assessments and Escheats.

a) Fees: A fee is charged by public authorities for rendering services to the people. Usually a fee is charged to cover the cost of the service but it may be greater than the cost. Examples of fees court fees, passport fees, driving licence fee, birth, death, marriage fees etc. fees are compulsory payments for all those who avail of these benefits.

b) Fines & Penalties: Fines & penalties are a form of punishment imposed on those who break the law. For example exceeding speed limit on the road, travelling without a valid ticket, driving without licence, entering prohibited areas, evading taxes etc.

c) Special Assessments: Seligman has defined a special assessment as a compulsory contribution imposed in the proportion to the special benefit derived, to meet the cost of a specific improvement undertaken in public interest. It is a special charge collected only from those members who receive certain special benefits from government activities or projects. E.g. irrigation facilities, road construction, public-park, water supply, street lighting, provision of drainage etc.

d) Escheats: when an individual dies without a valid will, indicating who is to inherit his or her property then such property is taken over by the government. Escheated property may be real assets like land, building and financial assets like bank accounts, shares etc. such unclaimed property or money are taken over by the government after not finding any inheritors.

Tax System in India

The tax system in India is well developed and includes taxes that are paid to the Central, State Governments and the local government bodies.

Taxes can be Direct or Indirect.

• The more important direct taxes include Income Tax, Wealth Tax
• The important indirect taxes include Service Tax, Customs Duty, Excise Duty

Here’s how taxes are levied at the various levels.

• Central Government gets tax revenues from Direct Taxes (such as Income Tax, Wealth Tax), and Indirect Taxes (such as Excise Duty, Customs Duty, and Service Tax).
• State Government gets revenue from Sales Tax, Value Added Tax, Excise duty on liquor and tax on agriculture.
• Local Municipalities get tax revenues from Property Tax, Octroi, Professional Tax.

Income Tax

The Income Tax Act, 1961 provides the rules and mechanisms for levying taxes, for computing income/losses under various income heads, mentions the various deductions and exemptions of income, levying of interest or penalty if taxes are not paid, and how to appeal against assessment and for collection.

Website: Incometaxindia.gov.in

Agricultural Income

Agricultural Income in India refers to the income (or rent) that is generated from a land due to agricultural activity. While agricultural income in India is exempt from income tax, the Income-tax Act has laid down provisions to indirectly tax certain parts of the agricultural income.

Academic Questions on Taxation

Q. Mr Bob is a resident of London. He visits India to understand the business environment. He is keen to start up a business in India. However, he is not aware of the tax structure prevalent in India. As a tax consultant, discuss with him the tax structure in India post the introduction of Goods and Service Tax Act.

Q. Income from house property is the only income that is charged on the notional basis. It means that the incidence of tax depends not only on the income earned from the property, but also on the inherent potential of the property to earn income. Tax has to be paid even in cases where no income is being earned. Discuss the Cases where income from house property is not chargeable to tax under the head ‘Income from House Property and thus chargeable under any other head.

Q. Following information is available for Mr. Saurabh Pandey for Assessment Year 2019-20 with respect to the premium paid of life insurance during Financial Year 2018-19.

Policy Issue, Date In the name of, Capital Sum Assured, % Restriction of Sum Assured, Insurance Premium Paid in Financial Year 2018-19

May 01, 2015, Spouse, 1.5 lacs, 10%, Rs 20,000
May 31, 2012, Self, 2 lacs, 20%, Rs 50,000
June 01, 2015, Daughter with a disease specified under section 80DDB, 3 lacs, 15%, Rs 60,000
Jan 01,2013, Son with a disease defined under Section 80DDB, 2 lacs, 10%, Rs 40,000
May 01, 2015, Parents 5 lacs, 10%, Rs 75,000

a. Calculate the total eligible deduction, as per Section 80C, with reasons for each payment inclusion and exclusion, for Mr. Saurabh Pandey
b. Discuss, briefly the eligibility norms and provisions for claiming deduction under the said section.

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