ECONOMY NOTES FOR UPSC

Economy holds a very important role in UPSC civil service examination be it in prelims or mains. Generally, it is seen that student from non economics background fear a lot with this subject so here we are with the solution i.e. a series of economy notes for upsc examination.

Economy question related to Indian economy are generally asked in prelims and mains but in mains certain occurrence of any event in global arena with light on Indian economy can be asked.

Notes presented here are in a series with a simpler and understandable language so follow regularly to get them.

Note- soon there will also notes for economy survey and budget too.

 

CHAPTER 4

TAXATION IN INDIA

Usually taxation is regarded as revenue generation by government but modern economist differ this view according to them “taxation is mode of income redistribution”

Usually tax is imposed by government to fulfill it’s important obligation to expenditure front.

To understand tax we should observe first thing is to see tac effect. Tax effect at primary (equal income factor) and secondary level (i.e. money is available to government for spending on different sectors like infrastructure, education, health etc.

Tax includes two parts:-

Incidence of tax                                                              Impact of tax

(the point where tax looks being imposed)            (the point where tax effects)

 

If both the incidence of tax and impact of tax are at the single point or same point then it is direct tax.

if the both point of incidence of tax and impact of tax are different then it is Indirect tax.

So it is clear that in case of direct tax the person who is hit, the same person bleeds.Ex. income tax, interest tax etc.

And in case of indirect tax the person who is hit do not bleed.

 

Methods of taxation

Progressive	Regressive	Proportional
-increase tax rate for increased value eg. India	-decreased tax rate for increased value	Neither progression nor regression.
-Less tax on people who earn less, more tax on people who earn more.	Not any permanent or specific purpose.	Fix rate for every level income. Neutral to poor and rich
-sometimes it is assumed that it discourage more earning by individual.	As a provision of promotion, on some sectors it can be imposed. Like in India for small scale industries taxation in 90’s.	Used as compliment to any of the method.
It is assumed that being poor here is awarded.	It is criticized as for being more tax on poor	If progressive and regressive not converted into proportional method tax will either be increasing a lot or decreasing a lot.
Tax payer start evading tax by showing low income.	It is assumed that here tax payer will be willing to show it’s all income because being more is paying less.	————————-
Pro poor and taxes people according to their affordability.	Pro development means striving to be rich and taxes people less when they earn more.	—————————
Most popular method.	Applied for a sector specific development for a short term.	Ultimate level of progressive and regressive method is proportional method.

 

 

Taxation terms to remember.

Tax expenditure refers to revenue foregone (for promoting dispersal of industries with a balanced regional growth or can be incentive to priority sector) as a result of exemption and concessions. It was introduces in 2006-07

Tax base:-  value of goods, services and incomes on which tax is imposed.

Tax burden: – entity who actually pays taxes or from whom tax is collected.

Tax shelter:-techniques which allows one to legally reduce  or avoid tax liabilities.

Tax avoidance: – avoiding tax liabilities by finding loopholes in laws that allows one to save and invest.

Tax evasion: – avoiding tax liabilities by showing false records. It is punishable offence in the court.

Statutory tax:- tax imposed by official authorities according to the written documents of government.

Effective tax:- tax that is actually collected after deducting various concession and tax expenditure.

So by above explanation we can understand that statutory tax is more tehn effective tax rate.

Difference between cess and surcharge.

Taxable income = Gross income – exemptions

Surcharge is applied on taxable income

Cess is applied on taxable income after surcharge.

Cess are for a specific purpose and goes into public account and cannot be shared with state government.

Surcharges are not for any specific purpose and come under article 271 in consolidated fund of India.

 

Direct taxes (of union)

Direct tax by union is imposed on 3 categories namely on assets and property, on income, on expenditure. See the table below

Assets and property and capital transaction	Expenditure	On income
Ø Security transaction tax, capital transaction tax(it is kind of tax when securities or capital is transferred from one to another).	Ø Hotel receipts tax(it is removed now, it was paid by enlisting the receipts)	Ø Income tax (tax applied on income).
Ø Wealth tax (removed by Arun jaitely sir,it was imposed on total wealth of person).	Ø Fringe benefit tax (removed by Pranab mukherjee,it was a tax on the extra benefits a employee get like cab, house etc.).	Ø Corporation tax and minimum alternative tax (MAT) Corporation tax is imposed on more then 1cr and around 30% but going to be reduced to 24% in 4 year in a phase wise manner. Ø MAT companies use deduction expemption to become zero profit company and escape tax liabilities so a fix minimum amount of tax is imposed ,1987 Rajeev Gandhi applied it.
Ø Banking cash transaction tax(removed, was applied earlier when cash transaction done at a bank.)	Ø Gift tax(Yashwant sinha removed it).	Ø Dividend distribution tax(after receiving dividend from any company it is deducted at the source)
Ø Estate duty tax(removed by V.P. Singh, it was imposed when anyone get property in inheritance by his forefather).		Ø Capital gains tax(imposed on buyer when there is any gains in capital)Vodafone case was related to this tax.
		Ø Interest tax(removed,was applied on banks).

 

Direct tax(for states)

On income	On property
Ø Agriculture tax( a very minimum amount is applied )	Ø land revenue tax (imposed on the land)
Ø Professional tax (under article 276 state and local bodies can impose this tax maximum up to 2500rs.)	Ø Stamp duty/registration duty
	Ø Property tax (in urban areas only).

Maximum direct tax by union is usually (descending order) corporation tax, income tax, security transaction tax respectively.

Maximum direct tax by states is usually (descending order) stamp and registration, land revenue respectively.

 

 

Indirect tax

Indirect tax can be transferred to another person. Goods and services are transferred from one person to another so there is always probability of transferring of tax to another next person(it totally depends on may factors like kind of goods, take example of essential goods here transfer would be rapid and in case of luxurious goods transfer would be very slow.

Indirect tax under union.

Custom duty	Imposed when any goods crosses border of Indian territory
Excise tax	Imposed on production of goods.
Service tax	Imposed on services.
Central sales tax	Imposed on sale of any goods.

 

Indirect tax under states.

• Excise tax:- this tax is generally with union but some of the items production tax is collected by states. Like on liquor and other narcotics products.
• Vehicles, animals, beats, tolls
• Luxury, batting and gambling.
• Entertainment, electricity
• Advertisement-TV, radio, newspaper.
• Octroi-on applied in Maharashtra it is kind of local tax for entering in a area or for using any resources of that area.
• Value added tax(VAT)barring newspaper.
• VAT is tax on added value to the products after production or during exchange. Take an example of wheat converting into bread so here if wheat is bought from farmers at rate of 100 bucks and then it is grinded and later on baked then sold with 1000 buck the total value addition is 900 bucks so tax implied on this 900 is VAT.
• VAT is different turnover tax(unlike sales or excise duty which are applied on full volume of exchange.
• Historically in mid 50’s French implemented it later on in India in late 70’s L K Jha committee suggested modified value added tax.
• ModVAT is different than conventional VAT because in ModVAT tax is imposed on total volume of goods(like in above case on yhe value of final goods i.e. bread of 1000 buks) but after taxing on final volume of goods the input cost tax is credited to them(in above case after imposing tax on 1000 bucks on bread let’s say 10% then total tax is 100 bucks but here input tax credit i.e input cost that is 100 bucks and 10% of it 10 rs so 100 rs of tax will be credit with 10rs so final tax would be 90rs.)
• Why so complicated VAT rather than simple one.?
• Because in ModVAT it will be compulsory for businessmen to present input cost bill so that he can get input tax credit otherwise he will be taxed fully on final volume so he will be willing to show input cost bill. It will resolve the problem of hiding bills from taxation by businessmen.

 

But there are some limitation to this model of taxation like cascading effect(like on electricity used for various other process, advertisement, hoardings.)

Standard VAT is 12.5% but different rate across state so no level playing fields for the product for sale from other  states(eventually different rates will increase price of the product produced in another state and sold at another state.)

State demands cess and surcharge

There is information of cartel formation with false invoice to reduce VAT liability.

That leads to the solution that is new tax i.e. GOODS AND SERVICES TAX.

 

Goods and services tax (GST)

Tax on goods and services with key points of

• Uniform rate
• Covers both goods and services
• Covers most of union and state indirect tax.
• Most cess and surcharge will be gone.
• Input credit for all inputs.
• Minimum exemption

 

Used in several federal countries like Canada, NZ, Australia and results were very good with revenue, GDP, and export.

In 2004, vijay kelkar committee was made for the fiscal consolidation and it suggested GST. In 2008 budget it was planned to launch from year 2010. Amendment is required in 7^th schedule of constitution. Later on in 2011, 115^th amendment was put forward but it lapsed. In 2014 , 122^nd amendment was made and GST council was formed to resolve various issue in implementing GST  specially by states.

GST council(will come under Article 279-a) will be setup by president and headed by finance minister. Here decisions will be taken by 3/4^th majority, union minister of state are allotted 1/3^rd voting power with 3/4^th voting power to state minister of finance<cooperative federalism>. Quorum requirement of 50% of total strength.

• Functions-council will decide which union and state taxes, cess, surcharge should be suspended.
• Registration, threshold limit, interstate commerce(principle of sharing interstate GST)
• Will decide floor rate, special rate during calamity.
• Decide upon special category states.
• Dispute settlement.

Integrated GST is not a tax it’s a system of interstate commerce.

 

Exempted in GST

Under central GST:-

• Custom duty will be not a part, imported products will be subject to InterstateGST.
• Cess on custom duty
• Petroleum products( GST council will decide it)

 

Under state GST:-

• Excise duty on liquor for human
• Stamp duty
• Electricity duty and cess
• Oetroleum products.

 

GST benefits

• Will cover both goods and services
• Standard rate
• Minimum exemption
• Business will expand ultimately help in expanding jobs
• High gdp
• Integrated GST will help in efficient logistics
• Ancillarisation
• Same base computation
• Zero rated exports

 

 

all the best and keep remember ek sathi aur b tha.