Economics! Tax Structure In India for SSC Exam

Economics! Tax Structure In India for SSC Exam

Tax : A fee charge ( 'levied' ) by a government on a product , income or activity .

Tax is a compulsory payment without any return .

The objectives of Tax are :

1. Economic development

2. Full employment

3. To reduce income disparity

4. Redistribution of Income

5. Price stability

There are 3 types of Taxation :

1. Progressive Taxation

2. Regressive Taxation

3. Proportional Taxation

1. Progressive Taxation :-

If income will increase then tax rate will also increase .

It will create more burden on rich people.

2. Regressive Taxation :-

If income will increase then tax rate will decrease.

It creats adverse effect on poors.

3. Proportional Taxation :-

If income will increase then tax rate will be constant.

This method can not be used independently. It means it can be used with progressive or regressive taxation.

Note :-

Degressive Taxation is used in India.

Laffer Curve :-

It is a graphical representation of the relationship between Revenue Income and Tax.

According to this curve , if tax rate will increase , revenue income of govt. will also increase.

But after a certain limit , if tax rate will increase then revenue income of govt. will decrease.

It means higher tax rate will increase black money.

So, Tax Rate should be reasonable.

Thete are 2 types of Taxes .

1. Direct Tax

2. Indirect Tax

1. Direct Tax :-

The tax which is paid by the person on whom it is levied is known as direct tax .

In this tax , the incidence and impact of taxation fall on the same person .

For example :

1. Income Tax :-

It is a direct tax because the person whose income is taxed is liable to pay the tax directly to the govt. and bear the burden of the tax himself.

2. Corporate Tax :-

It is levied on profit of corporations and companies.

3. Wealth Tax :-

It is imposed on property of individuals depending upon the value of property.

The levy of wealth tax has now been completely removed from financial year 2015 - 2016 onwards.

4. Gift Tax :-

It is paid to the govt. by the recipient of gift depending on value of gift.

5. Estate Duty :-

It is charged from successor of inherited property.

2. Indirect Tax :-

The tax which is paid by the taxpayer indirectly is known as indirect tax.

In this tax , the incidence and impact of taxation fall on different person .

For example :

1. Excise Duty :-

It is paid by the producer ( manufacturer ) of goods , who recovers it from wholesalers and retailers .

2. Custom Duty :-

It is a tax imposed on Imports and Export of goods.

3. Entertainment Tax :-

It is a tax levied on every financial transaction that is related to entertainment such as movie tickets, major commercial shows .

As per the Indian Constitution , entertainment is included in list 2 .

This revenue is reversed primarily for the state govt.

4. Service Tax :-

It is imposed on the production of services.

This tax came into effect in 1994 - 95 and was introduced by Finance Minister Dr. Manmohan Singh on the recommendation of Chelliah Committee.

5. Entry Tax :-

When a product manufactured in another state and enter in a state to be sold then the state in which the product enters imposes entry tax.

Octroi ( Chungi ) is charged by local area Authority like Municipality whereas entry tax is charged by state govt.

6. Sales Tax :-

It is an indirect tax because liability to pay tax is that of shopkeeper who in turn collect the tax amount from the customer by including it in the price of commodity.

Sales Tax is levied at the time of purchase of the products or services.

There are 2 types of sales Tax :

1. Central sales Tax

2. State Sales Tax / Value Added Tax ( VAT )

1. Central Sales Tax :-

It is imposed of Central government on inter-state sale but amount goes to producer state.

It is an origin base tax.

It is an indirect tax .

2. Value Added Tax ( V. A. T. ) :-

It is imposed on value addition on every stage of production. So, it is a multi pointed tax .

VAT is charged when the transaction takes place in every single point of production and distribution.

It is a destination based tax.

VAT has replaced state sales tax.

In India , VAT was introduced on 1st aprail 2005 in Haryana.

Effects of VAT :-

1. It has increased purchasing power of consumer.

2. Due to increment in purchasing power , sale and profit of businessman increased.

3. VAT has reduced cascading effect ( tax on tax )

4. After VAT , tax collection of government has increased.

Difference between Direct and Indirect Taxes :-

Direct Tax :-

1. The tax which is paid by the person on whom it is levied is known as Direct Tax .

2. The Direct Tax is levied on person's income and wealth.

3. The burden of direct tax is non - transferable.

4. The incidence and impact of direct tax falls on the same person.

5. The evasion of tax is possible in case of a direct tax if the proper administration of collection is not done.

6. The nature of direct tax is progressive.

7. Direct tax helps in reducing the inflation.

8. Direct tax is collected when the income for the financial year is earned or the assets are valued at the date of valuation.

Indirect Tax :-

1. The tax which is paid by the tax payer indirectly is known as Indirect tax.

2. The Indirect tax is levied on a person who consumes the goods and services.

3. The burden of indirect tax is transferable.

4. The incidence and impact of indirect tax falls on different persons.

5. The evasion of tax is not possible since the amount of tax is charged on goods and services.

6. The nature of indirect tax is regressive.

7. Indirect tax sometimes help in promoting inflation.

8. Indirect tax are collected when the purchase or sale of goods or services are rendered.

Difference between Central Sales Tax and VAT :-

Central Sales Tax :-

1. Tax charged on the total value of the commodity , when the sale takes place is known as Central Sales Tax .

2. It is a single stage tax.

3. In this tax , the evasion of tax can be done easily.

4. Double taxation is always there in Central Sales Tax.

5. Tax is levied on total value.

6. Tax is easy to calculate.

7. The tax burden falls on the consumer.

8. The authority of levying central sales tax is in the hands of Central Government.

Value Added Tax :-

1. Tax charged at each level of the production and distribution chain whenever the value is added to the product is known as Value Added Tax .

2. VAT is a multi stage tax.

3. In VAT , the chances of tax evasion are very less.

4. VAT is totally free from cascading effect.

5. VAT us charged only on the value added to the commodity.

6. VAT calculation requires time and effort.

7. The tax burden is rationalised.

8. VAT is levied by the State Government only.

GST ( Goods and Services Tax ) :-

It is a single indirect tax for the entire country which aims at making India unified common market.

It is a single tax on the supply of goods and services right from manufacturer to the customer.

Legislative History :-

To generate GST , there was a need of constitutional ammendment.

The 122nd ammendment bill , 2014 was introduced in Lok Sabha by Finance Minister Arun Jaitly on 19th dec 2014 , passed by the house on 6th may 2015.

In the Rajya Sabha , the bill was referred to a selected committee on 14th may 2015. The selected committee of the Rajya Sabha submitted its report on the bill on 22nd july 2015.

The bill was passed by Rajya Sabha on 3rd aug 2016 and the amended bill was passed by the Lok Sabha on 8th aug 2016.

Aim of GST :-

1. GST aims to bring uniform direct tax regime throughout the country by subsuming central and state Indirect taxes into single Indirect tax.

2. GST wants to enhance fiscal federalism by removing indirect tax barriers across states and integrate the country into a common market , boosting Government revenue and reducing business costs.

Objectives of GST :-

1. One country - One tax

GST is a tax reform in indirect taxes , it will replace almost all indirect taxes except custom duty and will create a uniform tax system in the country.

2. Consumption based tax instead of manufacturing.

3. To eliminate cascading effect of indirect taxes on single transaction.

4. Reduce tax evasion and corruption.

5. Increase productivity.

6. Increase tax to GDP Ratio ( the ratio of tax collected compared to National Gross Domestic Product and surplus Income ).

7. Reduce Economic Distortions.

Characteristics of GST :-

1. Indian GST will be of dual nature.

It has two components.

1. Central GST

2. State GST

2. GST Rate will be decided by GST Council.

3. Alcohol for human consumption , petroleum goods , real estate will be excluded from GST.

4. Export duty will be zero.

5. GST will increase production capacity of producer , consequently there are chances of increment in GDP.

6. Proposal rate of GST are 5% , 12% , 18% , 28%.

Very Short Answer :-

1. Give the meaning of budget.

Ans : A budget is an annual statement of the estimated receipts and expenditure of the government over the fiscal year.

2. Name the two components of budget.

Ans : 1. Budget Receipts

2. Budget Expenditure

3. Why is borrowings considered as capital receipts.

Ans : It increases the liability of the govt. So, it is considered as capital receipt.

4. Define tax .

Ans : Tax is legal compulsory payment imposed by the govt. on the people.

5. Give two examples of direct tax .

Ans : 1. Income tax

2. Gift tax

6. Give two examples of indirect tax .

Ans : 1. Sales tax

2. Custom duty

7. Give two examples of non-tax revenue.

Ans : 1. Dividend

2. Fees and fines

8. When budget is normally presented in the Parliament ?

Ans : On 28th Feb

9. Why is tax not a capital receipt ?

Ans : Tax neither creates liability nor reduces assets , so it is not considered as capital receipt.

10. Give two examples of revenue expenditure.

Ans : 1. Payment of salaries

2. Interest payment

11. Give two examples of capital Expenditure.

Ans : 1. Loan to public

2. Acquiring land , building , machine and investment in shares.

12. What is balance budget ?

Ans : A govt. Budget is said to be balanced in which govt. Receipts are shown equal to govt. Expenditure.

13. What is Surplus Budget ?

Ans : when govt. Receipts are more than govt. Expenditure in budget , the budget is called Surplus Budget.

14. What is Deficit Budget ?

Ans : When govt. Expenditure exceeds govt. Receipts in the budget is said to be budget deficit.

15. Give the formula to calculate 'Revenue Deficit' .

Ans : Revenue Deficit = Total Revenue expenditure - Total Revenue Receipts

16. Give the formula to calculate 'Fiscal Deficit' .

Ans : Fiscal Deficit = Total Budget Expenditure - Total Budget Receipts net of borrowings .

17. Give the formula to calculate 'Primary Deficit' .

Ans : Primary Deficit = Fiscal Deficit - Interest Payment.

18. Define capital receipts.

Ans : Capital receipts refer to those receipts of govt. which 1. Tend to create a liability or 2. Cause reduction in assets.

19. Define revenue receipts .

Ans : A revenue receipts are those receipts which neither create a liability nor reduces assets of the govt.

Ex. Tax and non-tax receipts.

20. Define revenue expenditure.

Ans : It resulted in neither creation of assets nor reduction of liabilities.

Ex. Payment of salaries.

21. Define capital expenditure.

Ans : It refers to the expenditure which leads to creation of assets and reduction of liabilities Ex. Expenditure incurred on construction of buildings , roads ,bridges etc.

22. Give two sources of capital receipts .

Ans : 1. Recovery of loans

2. Borrowings

23. Give one objective of budget.

Ans : To reduce inequalities of income and wealth.

24. Define direct tax.

Ans : Thse taxes are those tax in which liability to pay and burden of tax falls on the same person.

25. Define indirect tax.

Ans : Liability to pay and burden of indirect tax falls on different persons.

Short Answer Question :-

1. Write any three objective of government budget.

Ans : The objective that are pursued by the government through the budget are :

1. To achieve economic growth.

2. To reduce inequalities in income and wealth.

3. To achieve economic stability.

2. Explain the basis of classifying government receipts into revenue receipts and capital receipts.

Ans : Revenue Receipts :- A government revenue receipts are those receipts which neither create liability nor reduce assets of government.

example : dividend

Capital Receipts :- capital receipts refer to those receipts of the government which tends to create a liability or causes reduction in its assets of the government.

example : borrowings

3. Distinguish between Revenue and Capital Expenditure.

Ans :

Revenue Expenditure :-

1. It does not result in creation of assets.

2. It is for short period and recurring in nature.

3. Expenditure on salaries of employees.

Capital Expenditure :-

1. It results in creation of assets.

2. It is for long period and non - recurring in nature.

3. Expenditure on acquisition of assets like land , building etc.

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