A Simple Note on Expenditure Tax in India

In a recent development, Expenditure Tax has been abolished in India. What is Expenditure Tax? Expenditure tax is a type of indirect tax which is levied on the expenditure incurred by individuals and businesses. The main difference between income tax and expenditure tax is that income tax is levied on the profits generated by an individual or business, whereas expenditure tax is levied on the total expenditure incurred. Let’s take a closer look at Expenditure Tax and see how it works with an example.

What is Expenditure tax in India?

Expenditure tax was a tax levied in India on the expenditure incurred by an individual or a Hindu Undivided Family (HUF). Expenditure tax was abolished with effect from Financial Year 1998-1999. The Expenditure Tax Act, 1987 was repealed by the Direct Taxes Laws (Amendment) Act, 1997.

Expenditure tax abolished in India

Prior to its abolishment, expenditure tax was levied at the rate of two per cent on expenditure in excess of Rs. 30 lakhs incurred by an individual or a HUF. Expenditure for the purpose of this tax included expenditure incurred on the acquisition, construction, repair, renovation or restoration of any immovable property. Expenditure incurred on the consumption of fuel (other than kerosene used for lighting), expenditure incurred on vehicles, expenditure incurred on entertainment and amusement as well as expenditure incurred on foreign travel were also included in the tax base. Expenditure incurred on medical treatment was however exempt from tax.

The difference between income tax and expenditure tax

Income tax is levied on the basis of net income while expenditure tax was levied on the total Expenditure incurred. Income tax is a progressive tax, which means that as the income increases, so does the rate of taxation. Expenditure Tax, on the other hand, was a flat-rate tax, which means that everyone paid the same rate of tax regardless of their income.

The main difference between income tax and expenditure tax is that while income tax is levied on the total income of an individual, Expenditure Tax was levied on the total Expenditure incurred.

Expenditure tax example

To illustrate, let us assume that Mr A has an annual income of Rs. 50 lakhs and he incurs expenditure of Rs. 35 lakhs in a financial year. In this case, his taxable income will be Rs. 15 lakhs (50-35) and he will be liable to pay income tax at the applicable rate on this amount. However, if Expenditure Tax was still in existence, Mr A would have been liable to pay Expenditure Tax at the rate of two per cent on his total expenditure of Rs. 35 lakhs.

Applicability of Expenditure tax:

Expenditure tax was levied on all individuals in India who had a total expenditure of more than INR 25,000 in a financial year. Expenditure tax was abolished with effect from the financial year 2017-18. The difference between income tax and expenditure tax: Expenditure tax was levied on the total expenditure of an individual in a financial year, whereas income tax is levied on the income of an individual in a financial year.

Conclusion:

Expenditure tax has been abolished in India. The main difference between income tax and expenditure tax is that the former is levied on an individual’s income, while the latter was levied on an individual’s spending. Expenditure tax was seen as a way to discourage luxury spending and encourage savings. However, it was generally felt to be unfair and unpopular and was eventually abolished. Expenditure tax is still levied in some countries, though it is not common.