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Summary
Economics_RS Class 17

A BRIEF DISCUSSION OF THE PREVIOUS CLASS (5:02 PM)

  • IGST
  • IGST is a system under Article 269A
  • IGST proceeds are shared outside the consolidated fund and the sharing mechanism will be decided by the GST Council

CESS AND SURCHARGE  (5:18 PM)

  • As per Article 270, cesses and surcharges are not made part of the divisible pool of taxes, i.e. the center will not share cess and surcharge proceeds with the states
  • Cess Surcharge

    Cess is levied for a specific purpose i.e., cess proceeds cannot be used for any other purposes. For example, education cess proceeds should be used for education

    The surcharge is defined under Article 271. It is a tax on tax to reduce the disparity between rich and poor. In India, the surcharge is levied on income above Rs 50 lakh

    Cess proceeds will not be shared with states

    The surcharge is also not shared with states

    Cess is levied on tax liability plus the surcharge

    The surcharge is on tax liability

CONCEPTS RELATED TO TAXATION (5:41 PM)

  • Cascading effect
  • It is a tax on tax and increases the cost of production
  • It is seen as an inefficient tax mechanism
  • Tax evasion
  • It is an illegal activity in which a person or entity deliberately escapes from paying tax
  • Tax avoidance
  • It is the use of legal methods to minimize the amount of tax liability by an individual or a business by claiming as many deductions as possible
  • For example, the Vodafone case
  • Transfer pricing
  • It is  a pricing mechanism between two known entities (between the related legal entity situated in different countries)
  • It is used as a mechanism to shift profits from countries with a high tax rate to countries with low tax rates (tax heaven)
  • Base erosion and profit shifting
  • Company shift their profits to other tax jurisdictions having lower tax rates, thereby eroding the tax base in India
  • Tax buoyancy
  • It measures actual or observed changes in tax revenue relative to that of the GDP
  • Tax buoyancy = Proportionate change in tax revenue / Proportionate change in GDP
  • ΔT = Change in tax revenue
  • ΔG= Change in GDP
  • Here the change in tax can be due to an automatic increase or due to discretionary changes or both
  • A change in the tax rate may lead to a change in tax revenue
  • Change in coverage i.e. bringing a new group of items into the tax base are discretionary changes
  • Tax elasticity = ΔAT/ΔGDP
  • Proportionate change in tax revenue without any discretionary changes, relative to GDP is called tax elasticity
  • It is calculated after setting aside changes in tax revenue due to discretionary changes (adjusted tax revenue)
  • For example, change in GDP = 10%, change in tax revenue = 20% (automatic change 10%, discretionary change 10%)
  • Then, tax buoyancy = 20/10 = 2 and tax elasticity = 10/10 = 1
  • Methodology of taxing  (6:35 PM)
  • Taxing can be based on, the principle of equity e.g. progressive taxing
  • Progressive taxing
  • If the tax rate increases with an increase in the size of the tax base e.g. income tax
  • In income tax, the base is the income of the individual
  • Progressive taxing helps in ensuring economic equality 
  • New income tax slab:
  • Income (in lakhs) Tax rate (%)
    0-3 Nil
    3-6 0
    6-9 5
    9-12 10
    12-15 20
    Above 15 30
  • Here, the percentage of the tax rate, as well as the absolute amount of tax increases with an increase in the size of the tax base
  • Proportional tax
  • Tax is levied as a percentage of the tax base irrespective of the size of the tax base at a uniform rate
  • Here, the percentage of tax remains the same but the absolute amount of tax increases with an increase in the size of the tax base
  • For example, corporate tax
  • Regressive tax
  • It is when the tax rate decreases with an increase in the tax base (income/profit)
  • Here, the percentage of tax rate decreases, but the absolute amount of tax increases with an increase in the size of the tax base
  • Indirect taxes are seen as regressive in nature as poor people pay a higher proportion of their income as tax
  • Goods can also be taxed based on ad-valorem or specific tax
  • Ad-valorem
  • If tax is levied as a percentage of the value of goods, regardless of the number of units produced/sold/imported
  • For example, for a 10% tax on the value of a car, tax revenue will increase with the increase in price
  • If the price of a car is Rs 2 lakhs, the tax amount is Rs 20000, and if the car price increase to 4 lakhs, then the tax amount collected is Rs 40000
  • Specific tax
  • If tax is levied at a flat rate per unit of goods produced/sold/imported regardless of value, then it is called specific duty
  • For example, Rs 2/Kg  of iron, Rs 3/meter of cloth, etc.
  • Here, the revenue increases only with the number of units and not the value
  • In the above example, if the car price increase from Rs 2 lakhs to Rs 4 lakhs and the government collects a tax of Rs 10000/car, the tax revenue will only increase if the sales of the car increases
  • In some cases, both types of taxing can be levied on the same good
  • For example, Rs 10000/car plus 10% on the value of the car
  • Classification of taxes  (7:28 PM)
  • Direct Tax
  • Impact and incidence of tax are at a different point
  • Indirect tax
  • Impact and incidence of tax are at a different point
  • In a welfare state, where the focus is on inclusiveness, the proportion of indirect tax rate should not be high due to its regressive nature
  • Value Added Tax (VAT)
  • The cascading effect of taxation in the manufacturing process inflates the price and increases the burden of indirect tax
  • To overcome such an effect of excise duty levied on the manufacturing process, Manufacturing VAT or Man-VAT was introduced
  • Man-VAT will tax only the value added during the manufacturing process and does away with the cascading effect of excise duty.
  • Later, Man-VAT was changed to Modified VAT and again converted into CENVAT (Central VAT)
  • Now, this CENVAT is merged with the GST

The topic for the next class: Continuation of the taxation system