(GIST OF YOJANA) India's Tax System: Increasing Progressivity

 (GIST OF YOJANA) India's Tax System: Increasing Progressivity

The government mobilises financial resources for funding its different activities mainly through taxes, user fees/ service charges and borrowings. The sources of funds which neither create liabilities nor reduce assets are called Revenue Receipts. Other sources of funds such as borrowings which create liabilities or those that reduce assets (e.g. disinvestment) are called Capital Receipts. Thus, taxes and user fees/service charges are some examples of revenue receipts of the government while borrowings are capital receipts.

Tax Revenue and Non-Tax Revenue

Government's revenue receipts can be further divided into two categories: tax revenue and non-tax revenue. Tax Revenue: Tax revenue refers to the money collected by the government through payments imposed by law. Non-Tax Revenue: Non-Tax Revenue refers to revenue of the government raised through instruments other than taxes such as fees/user charges, dividends and profit of public sector enterprises, interest receipt, penalty or fine, etc. For most countries across the world, tax revenue forms a significant proportion of government revenue.

Direct and Indirect Taxes

Taxes can be broadly classified into two kinds: Direct Tanis and Indirect Taxes. Direct Taxes: Those taxes for which, the burden of the tax falls on the entity that is being taxed are known as direct taxes. In other words, an entity that directly pays this kind of a tax to the government bears the burden of that particular tax and cannot shift the tax burden. Direct taxes are levied on incomes, property and wealth. Indirect taxes, on the other hand, are those taxes for which the tax-burden can be shifted or passed on to other persons later through business transactions of goods/ services. These taxes are indirect because the agent who bears the burden of the tax is not the one on whom it is normally levied, Indirect taxes include Customs Duties, Excise Duties, Service Tax, and Sales Tax/Value Added Tax (VAT).

Taxes: Different Types

There exist a number of taxes, both direct' as well as indirect, that are levied on incomes of various kinds, production and sale of goods and services within the economy and others that are levied on cross-border movement of goods. Examples of some of the different types of taxes that exist in India is given in the box.

Division of Taxation Powers between Centre and States

The Constitution of India clearly demarcates the taxation powers at different levels of governance. Thus, the power to levy taxes and duties has been divided among the governments at the three tiers i.e. Central Government, State Governments, and Local Bodies.
The power to levy taxes on corporations and personal income (except for tax on agricultural income, which the State Governments can levy) lies mostly with the Central government.

In the arena of indirect taxes, the Central government has the authority to impose a broad spectrum of excise duties on production or manufacture and service tax on services provided, while States are assigned the power to levy tax on the sale of goods and some other taxes. Some of the indirect taxes that the Centre levies are Customs Duties, Central Excise, Sales Tax and Service Tax.

State Governments have been vested with the power to levy: Sales Tax, Stamp Duty (a duty on transfer of property), State Excise (a duty on manufacture of alcohol), Land Revenue (a levy on land used for agricultural/ non-agricultural purposes), Duty on Entertainment and Tax on Professions. The system of Sales Tax levied by State governments has been replaced with Value Added Tax (VAT) since 2005 when all States moved to the VAT system.

Local Bodies have been empowered to levy tax on properties (buildings, etc.), Octroi (a tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and TaxlUser Charges for utilities such as water supply, drainage, etc. In the last few years, Octroi has been abolished in a number of Local Bodies.

Distribution of Revenue collected in the Central Tax System

For various reasons, imbalances arise between the taxation powers and expenditure responsibilities of the Centre and the States respectively. In order to address this, a Finance Commission is set up .once every five years to recommend sharing of financial resources between the Centre and the States, a significant part of which pertains ta the sharing of revenue collected in the Central government tax system. At present, revenue collected from all Central taxes, barring those collected from Cesses, Surcharges and taxes of Union Territories, and an am aunt equivalent to the cast of collection of central taxes - is taken as the shareable / divisible pool of Central tax revenue, The 14th Finance Commission (beginning April 1, 2015), has recommended devolution of 42 per cent of the shareable / divisible pool of Central tax revenue to States every year and the Centre is to retain the remaining am aunt far the Union Budget.

Tax-GDP Ratio and Progressivity of Taxes in India:'

A country's tax-GDP ratio is an important indicator that helps to understand how much tax revenue is being collected by the government as compared to the overall size of the economy, A higher tax-GDP ratio gives mare roam in a government's budget so that it can spend more without barrowing.

Another aspect of India's structure is the lack a progressivity in it. Taxes that impose a proportionately greater burden (in relation to their consumption or income) an the lower income groups than an the upper income groups are described as being regressive taxes, Indirect taxes, therefore, are generally considered to be regressive since the rich and the poor are subject to the same tax rate for similar goods they consume. Direct taxes, an the ather hand, are considered to be progressive since they are linked to the tax-payee's ability to pay and the average tax rate increases as the taxable income of the tax payer increases, In India, mare than 60 per cent of total tax collected (Centre and States) is accounted for by indirect taxes, implying that the tax structure is extremely regressive.

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