Taxation

A tax is a mandatory financial payment imposed by the government on a taxpayer (an individual or legal entity) to fund certain government expenses.

In order to run the government and manage the affairs of a state, money is required. So the government imposes taxes in many forms on the incomes of individuals and companies. Thus Income taxes are most governments’ principal source of revenue and serve as a tool for income distribution. Taxation is also critically important for the economic and political development of any country.

Purpose of Taxation

•  Allocation of Resources

When some industries are subjected to high taxes, resources from the high-taxed industries will be diverted to the low-taxed ones.

• Distribution of Income

Its goal is to reduce inequities in income and wealth distribution to achieve the purpose of social fairness.

• Stabilization

Taking on inflation, slowing down, and so forth (through appropriate fiscal policy). It contributes to the preservation of high employment and price stability.

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Types of Taxes

Direct Tax

• A direct tax is paid to the government directly by an organization or an individual
• It is a tax that has both an incidence and an impact at the same time
• Direct taxes are inherently progressive and highly elastic
• Income tax, corporate tax, security transaction tax, capital gain tax, and other direct taxes are examples of direct tax

Indirect Tax

• It is a government tax levied on products and services rather than an individual’s income, profit, or revenue, and the tax burden can be moved from one taxpayer to another
• Sales tax, Customs duty, Goods and Services Tax, and other indirect taxes are some examples
• It is usually levied on a manufacturer or a supplier, who subsequently passes the tax on to the customer
• Indirect taxes have the effect of increasing the price of the goods on which they are levied

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Methods of Taxation

• Progressive Taxation

People with higher incomes pay a more considerable percentage of their income in taxes. It simply indicates that the bigger a person’s income, the higher his tax rate. Income tax, for example, rises in tandem with personal income.

• Regressive Taxation

 People with low income pay higher tax rates in a regressive taxation system. People with higher income, on the other hand, benefit from lower tax rates. Regressive taxation can be used to boost specific industries, such as production.

• Proportional Taxation

A proportional tax is one in which all taxpayers pay the same tax rate, regardless of their income. Low, middle, and high-income people all pay the same tax rate under a proportional tax. Proportional taxation is rarely utilized as a stand-alone type of taxation. It can be used in conjunction with either progressive or regressive taxation regimes.

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Reforms in Direct Taxation System

Direct Tax Code (DTC) :

• The Direct Taxes Reform Act (DTC) is a proposed legislative reform of the direct taxation system
• It aims to simplify and combine all of the federal government’s direct taxes, such as income tax, gift tax, and wealth tax
• It aims to extend the tax base to enhance tax revenue
• Tax laws are recast in plain and unambiguous language to decrease the scope of misinterpretation
• The exemption-deduction discussion is reduced to reduce the range of misuse, and the tax system is adaptable to allow for changes in tax provisions without amending the tax law

Transparent Taxation ‘Honoring the Honest’

• The Union Government launched the ‘Transparent Taxation: Honoring the Honest’ agenda in 2020 to recognize the nation’s honest taxpayers

• The faceless evaluation, taxpayers’ charter, and faceless appeal are all key innovations in this platform

• Faceless Assessment: The goal of this is to eliminate human interaction between the taxpayer and the IRS

• Taxpayer Charter: This document defines both taxpayers’ and tax officers’ responsibilities and rights

• Faceless Appeal: Appeals will be allocated to any officer in the country at random under this arrangement
• The identity of the officer who will decide the appeal will be kept secret

General Anti-Avoidance Rule (GAAR) 

• It is a provision of direct tax legislation that aims to prevent tax evasions, such as the misuse of exemptions, vague language, and tax law loopholes
• It gives the IRS discretion to deny a company a tax benefit if it created an arrangement purely to avoid taxes, i.e., if there is no business substance to the account
• It gives tax officers the authority to override certain aspects of domestic tax law and the Double Taxation Avoidance Agreement (DTAA), a bilateral agreement

Reforms in the Indirect Taxation System

The Goods and Services Tax (GST) 

• It is a unified tax system formed by combining several central and state taxes in India
• Most domestic indirect taxes, such as excise, service, and entertainment taxes, were combined into one

• It is levied at various levels, with the Central Government levying and collecting Central GST (CGST), the State Government levying and collecting State GST (SGST) on intra-state supplies of goods and services, and the Centre Government levying and collecting Integrated GST (IGST) on inter-state supplies of goods and services

• By inserting a sub-clause, 12A to Article 366 of the Indian Constitution, the 101st Constitution Amendment Act defined GST
• Since then, the GST Council has existed as the constitutional authority responsible for deciding on GST-related issues

• Under GST, businesses must pay taxes based on the value of their output
• However, the input taxes would be offset (reimbursed) in the form of an Input Tax Credit (ITC)
• Commercial taxes are now referred to as Goods and services tax in India

Conclusion

In earlier times taxes were used to support the ruling classes, raise armies, and build defences. After the evolution of the nation-state taxation became critically important for the economic and social development of the country.  It provides the Government with the resources to provide goods and services to the people. Though India has introduced far-reaching reforms in the domains of both direct and indirect taxes, it remains largely a tax non-compliant society as evident from the low tax-to-GDP ratio. Thus more tax reforms like simplification of tax and introduction of technology are needed to increase the tax compliance by our society.