TAXATION

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TAXATION

• Aparna

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CONTENTS

• Public Finance
• Public Revenue
• Taxation
• Objectives of taxation
• Canons of taxation
• Classification of taxation
• Individual Income tax rates in India
• Exemptions and Deductions from tax
• Conclusion
• References

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• What is Public Finance?
• According to Dalton, Public finance is the
  branch of knowledge which is concerned with the
  income and expenditure of public authorities and
  with the adjustment of one to another. It deals
  with the study of revenue and expenditure of the
  government at the centre, state and local bodies.
• The public authorities have to perform various
  functions such as maintenance of law an order,
  provision of defence, production for bringing in
  economic development. The performance of these
  functions require large amount of funds which is
  raised through taxes, fees, fines, commercial
  revenues and loans.

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• Public Revenue
• This is one of the branches of public finance.
  It deals with the various sources from which the
  state might derive its income. These sources
  include incomes from taxes, commercial revenues
  in the form of prices of goods and services
  supplied by public enterprises, administrative
  revenues in the form of fees, fines etc and gifts
  and grants.

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Difference between Public revenue and Public
receipts Public revenue includes that
income which is not subject to repayment by the
government. Public receipts include all the
income of the government including public
borrowing and issue of new currency. In this way
public revenue is a part of public receipts.
Public Receipts Public revenue Public
borrowing issue of new currency
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• Taxation
• The most important source of revenue of the
  government is taxes. The act of levying taxes is
  called taxation. A tax is a compulsory charge or
  payment imposed by government on individuals or
  corporations. The persons who are taxed have to
  pay the taxes irrespective of any corresponding
  return from the goods or services by the
  government. The taxes may be imposed on the
  income and wealth of persons or corporations and
  the rate of taxes may vary.

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Objectives of Taxes

• Raising Revenue
• Regulation of Consumption and Production
• Encouraging Domestic Industries
• Stimulating Investment
• Reducing Income Inequalities
• Promoting Economic Growth
• Development of Backward Regions
• Ensuring Price Stability

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• Canons of Taxation
• A good tax system should adhere to certain
  principles which become its characteristics. A
  good tax system is therefore based on some
  principles. Adam Smith has formulated four
  important principles of taxation. A few more have
  been suggested by various other economists. These
  principles which a good tax system should follow
  are called canons of taxation.

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Adam Smiths four canons of taxation

• Canon of Equality
• Canon of Certainty
• Canon of Convenience
• Canon of Economy

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• Canon of Equality
• This states that persons should be taxed
  according to their ability to pay taxes. That is
  why this principle is also known as the canon of
  ability. Equality does not mean equal amount of
  tax, but equality in tax burden. Canon of
  equality implies a progressive tax system.
• Canon of Certainty
• According to this canon, the tax which each
  individual is required to pay should be certain
  and not arbitrary. The time of payment, the
  manner of payment and the amount to be paid
  should be clear to every tax payer. The
  application of this principle is beneficial both
  to the government as well as to the tax payer.

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• Canon of Convenience
• According to this canon, the mode and timings of
  tax payment should be convenient to the tax
  payer. It means that the taxes should be imposed
  in such a manner and at the time which is most
  convenient for the tax payer. For example,
  government of India collects the income tax at
  the time when they receive their salaries. So
  this principle is also known as the pay as you
  earn method.
• Canon of Economy
• Every tax has a cost of collection. The canon of
  economy implies that the cost of tax collection
  should be minimum.

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Classification of Taxes
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Taxes can be classified into various types on the
basis of form,nature,aim and method of taxation.
the most common and traditional classification is
to classify into direct and indirect taxes.

• Direct Tax
• Indirect tax

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• Direct taxes
• A direct tax is that tax whose burden is borne by
  the same person on whom it is levied. The
  ultimate burden of taxation falls on the person
  on whom the tax is levied. It is based on the
  income and property of a person. Thus income tax,
  corporation tax on companys profits, property
  tax, capital gains tax, wealth tax etc are
  examples of direct taxes.
• Indirect taxes
• An indirect tax is that tax which is initially
  paid by one individual, but the burden of which
  is passed over to some other individual who
  ultimately bears it. It is levied on the
  expenditure of a person. Excise duty, sales tax,
  custom duties etc are examples of indirect taxes.

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On the basis of degree of progression of tax, it
may be classified into

• Proportional tax
• Progressive tax
• Regressive tax
• Degressive tax

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• Proportional tax
• A tax is called proportional when the rate of
  taxation remains constant as the income of the
  tax payer increases. In this system all incomes
  are taxed at a single uniform rate, irrespective
  of whether tax payers income is high or low. The
  tax liability increases in absolute terms, but
  the proportion of income taxed remains the same.
• Progressive tax
• When the rate of taxation increases as the tax
  payers income increases, it is called a
  progressive tax. In this system, the rate of tax
  goes on increasing with every increase in income.

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• Regressive taxation
• A regressive tax is one in which the rate of
  taxation decreases as the tax payers income
  increases. Lower income is taxed at a higher
  rate, whereas higher income is taxed at a lower
  rate. However absolute tax liability may
  increase.
• Degressive taxation
• A tax is called degressive when the rate of
  progression in taxation does not increase in the
  same proportion as the increase in income. In
  this case, the rate of tax increases upto a
  certain limit, after that a uniform rate is
  charged. Thus degressive tax is a combination of
  progressive and proportional taxation. This type
  of taxation is often used in case of income tax.
  This is the case of income tax in India as well.

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Taxable income slab (Rs.) Rate ()
Up to 1,10,000Up to 1,45,000 (for women)Up to 1,95,000 (for resident individual of 65 years or above) NIL
1,10,000 1,50,000 10
1,50,001 2,50,000 20
2,50,001 1,000,000 30
1,000,001 upwards 30

• An education cess is added to the total tax
  payable at the rate of 3
• A 10 surcharge is applicable if the taxable
  income after taking all the deductions is greater
  than Rs.10 lakh(1 million)

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Income exempt from tax

• Dividends paid by companies and mutual funds
• Insurance proceeds from an Insurance company
• Maturity proceeds of a Public provident fund (PPF
  account)

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Deductions from taxable income

• Section 88 of the Income Tax Act 1961(rebate on
  certain investments)
• Section 80C deductions
• Section 80D(Medical insurance premiums)
• Interest on Housing loans

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• Conclusion
• To conclude, we can say that the instrument of
  taxation is of great significance on
• increasing the level of economic activity -
  Regressive taxation
• reducing income inequalities - progressive
  taxation
• promoting economic growth Funds could be
  reinvested
• Social-Welfare Objective - Tax payment helps
  reduce the gap between the haves and have-nots.
  As it helps in mobilizing the surplus income from
  the haves and reinvesting them for public
  welfare, it helps these surplus funds to reach
  the have-nots.

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References
Frank ISC Economics- By D.K.Sethi and U.Andrews
http//finance.indiamart.com/taxation/income_tax/r
ates.html
http//en.wikipedia.org/wiki/Income_tax_in_India
http//www.iloveindia.com/finance/post-office/publ
ic-provident-fund.html
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Thank you