• The government fiscal policy is used to stabilize the level of output and employment through changes in its expenditure and taxes. The government attempts to increase output and income and seeks to stabilize the ups and downs in the economy.
• In the process, fiscal policy creates a surplus (when total receipts exceed expenditure) or a deficit budget (when total expenditure exceeds receipts) rather than a balanced budget (when expenditure equals receipts).
• Fiscal policy deals with the revenue and expenditure decisions of the government.
• As far as fiscal resources are concerned, taxes, user charges (power, water, transport charges etc); disinvestment proceeds; borrowings from internal and external sources are the main channels.
• Fiscal policy can achieve important public policy goals like growth
– Promotion of small scale industries
– Encouragement to agriculture
– Location of industries in rural areas
– Labour-intensive growth
– Export promotion
– Development of sound social and physical infrastructure etc.
Instruments of Fiscal Policy
The two main instruments of fiscal policy are:
(a) Government Expenditure
(b) Government Revenues
REVENUE AND ITS CLASSIFICATION
They are divided into
• TAX REVENUES
India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies.
Central Government levies taxes on
1. Income Tax (except tax on agricultural income, which the State Governments can levy) – Tax on income of a person
2. Customs Duties – Duties on import and export of goods
3. Central Excise – Taxes on Manufacturing of dutiable goods
4. Service Tax – Taxes on provision of services
5. Corporate tax: Taxes on firms and corporations
State Governments levies taxes on
1. Value Added Tax (VAT) – This is tax on sale of goods. While intra-state sale of goods are covered by the VAT Law of that state, inter-state sale of goods is covered by the Central Sales Tax Act. Even the revenue collected under Central Sales Tax Act is done so by the State Governments themselves and actually the Central Government has no role to play so.
2. Stamp duty – Since land is a matter on which only State Governments can govern, thus the Stamp duties on transfer of immovable properties are levied by State Governments
3. State excise – on Liquor and certain agricultural goods
4. Land revenue
5. Profession tax
Local bodies are empowered to levy tax on
2. Octroi and
3. For utilities like water supply, drainage etc.
Indian taxation system has undergone tremendous reforms during the last decade. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. The process of rationalization of tax administration is still ongoing in India.
Tax revenues are further divided as:
A. DIRECT TAXES
• In case of direct taxes (income tax, wealth tax, etc.), the burden directly falls on the taxpayer.
• Under the Income Tax Act, 1961 The Central Government levies direct taxes on the income of individuals and business entities as well as Non business entities also.
• The taxation level depends on the residential status of individuals.
• The thumb rule of residential status is that an individual becomes resident in India if he has remained in India for more than 182 days in a particular residential year.
• If he becomes resident in India, then his global income i.e. income earned even outside India is taxable in India.
Personal Income Tax
Personal income tax is levied by Central Government and is administered by Central Board of Direct taxes under Ministry of Finance in accordance with the provisions of the Income Tax Act.
Income Tax – Regressive, Proportional, or Progressive Taxation
Taxes can also be categorized as either regressive, proportional, or progressive, and the distinction has to do with the behaviour of the tax as the taxable base (such as a household’s income or a business profit) changes.
• Progressive tax—a tax that takes a larger percentage of income from high-income groups than from low-income groups.
• Proportional tax—a tax that takes the same percentage of income from all income groups.
• Regressive tax—a tax that takes a larger percentage of income from low-income groups than from high-income groups.
The taxability of a company’s income depends on its domicile. Indian companies are taxable in India on their worldwide income. Foreign companies are taxable on income that arises out of their Indian operations, or, in certain cases, income that is deemed to arise in India. Royalty, interest, gains from sale of capital assets located in India (including gains from sale of shares in an Indian company), dividends from Indian companies and fees for technical services are all treated as income arising in India. Current rates of corporate tax.
Different kinds of taxes relating to a company
Minimum Alternate Tax (MAT)
• Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the income tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. There were large number of companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act was either nil or negative or insignificant.
• In such case, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. These companies are popularly known as Zero Tax companies. In order to bring such companies under the income tax act net, section 115JA was introduced in the year 1997-98.
Fringe Benefit Tax (FBT)
• The Finance Act, 2005 introduced a new levy, namely Fringe Benefit Tax (FBT) contained in Chapter XIIH of the Income Tax Act, 1961.
• Fringe Benefit Tax (FBT) is an additional income tax payable by the employers on value of fringe benefits provided or deemed to have been provided to the employees. The FBT is payable by an employer who is a company; a firm; an association of persons excluding trusts/a body of individuals; a local authority; a sole trader, or an artificial juridical person. This tax is payable even where employer does not otherwise have taxable income. Fringe Benefits are defined as any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment and includes expenses or payments on certain specified heads.
Dividend Distribution Tax (DDT)
• Under the Income Tax Act, any amount declared, distributed or paid by a domestic company by way of dividend shall be chargeable to dividend tax. Only a domestic company (not a foreign company) is liable for the tax.
• Tax on distributed profit is in addition to income tax chargeable in respect of total income. It is applicable whether the dividend is interim or otherwise. Also, it is applicable whether such dividend is paid out of current profits or accumulated profits.
• Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth tax is a tax on the benefits derived from property ownership. The tax is to be paid year after year on the same property on its market value, whether or not such property yields any income.
• Under the Act, the tax is charged in respect of the wealth held during the assessment year by the following persons: –
– Hindu Undivided Family (HUF)
B. INDIRECT TAXES
• In India, indirect taxes is a vast ocean as there are number of taxes to be paid on manufacture, import, sale and even purchase in certain cases. Further the law is governed less by the Acts and more by day to day notifications, circulars and orders by the Governing bodies. So an explicit understanding is very much essential.
• Indirect taxes is based on the nature of Activity as follows:
– Provision of services
– Manufacture of Excisable Goods
– Import of Goods
– Sale of Goods
Central Sales Tax (CST)
• Central Sales tax is generally payable on the sale of all goods by a dealer in the course of inter-state trade or commerce or, outside a state or, in the course of import into or, export from India.
Value Added Tax (VAT)
• VAT is a multi-stage tax on goods that is levied across various stages of production and supply with credit given for tax paid at each stage of Value addition. Introduction of state level VAT is the most significant tax reform measure at state level.
• The state level VAT has replaced the existing State Sales Tax. The decision to implement State level VAT was taken in the meeting of the Empowered Committee (EC) of State Finance Ministers held on June 18, 2004, where a broad consensus was arrived at to introduce VAT from April 1, 2005. Accordingly, all states/UTs have implemented VAT.
Goods and Services Tax (GST)
• GST is one indirect tax for the whole nation, which will make India one unified common market. The GST intends to subsume most indirect taxes under a single taxation regime. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. This is expected to help broaden the tax base, increase tax compliance, and reduce economic distortions caused by inter-state variations in taxes.
Why GST has been proposed?
• Our Constitution empowers the Central Government to levy excise duty on manufacturing and service tax on the supply of services. Further, it empowers the State Governments to levy sales tax or value added tax (VAT) on the sale of goods. This exclusive division of fiscal powers has led to a multiplicity of indirect taxes in the country. In addition, central sales tax (CST) is levied on inter-State sale of goods by the Central Government, but collected and retained by the exporting States. Further, many States levy an entry tax on the entry of goods in local areas.
• This multiplicity of taxes at the State and Central levels has resulted in a complex indirect tax structure in the country that is ridden with hidden costs for the trade and industry.
• In order to simplify and rationalize indirect tax structures, Government of India attempted various tax policy reforms at different points of time. A system of VAT on services at the central government level was introduced in 2002. The states collect taxes through state sales tax VAT, introduced in 2005, levied on intrastate trade and the CST on interstate trade. Despite all the various changes the overall taxation system continues to be complex and has various exemptions.
• This led to the idea of One nation One Tax and introduction of GST in Indian financial system. This is simply very similar to VAT which is at present applicable in most of the states and can be termed as National level VAT on Goods and Services with only one difference that in this system not only goods but also services are involved and the rate of tax on goods and services are generally the same.
Levy of GST
• The central government has the exclusive power to levy and collect GST in the course of interstate trade or commerce, or imports. This will be known as IGST (Integrated GST).
• A central law will prescribe the manner in which the IGST will be shared between the centre and states, based on the recommendations of the GST Council.
• Both, Parliament and state legislatures will have the power to make laws on the taxation of goods and services. A law made by Parliament in relation to GST will not override a state law on GST.
Central Excise duty is an indirect tax levied on goods manufactured in India. Excisable goods have been defined as those, which have been specified in the Central Excise Tariff Act as being subjected to the duty of excise.
Custom or import duties are levied by the Central Government of India on the goods imported into India. The rate at which customs duty is leviable on the goods depends on the classification of the goods determined under the Customs Tariff. The Customs Tariff is generally aligned with the Harmonised System of Nomenclature (HSL).
Service tax was introduced in India way back in 1994 and started with mere 3 basic services viz. general insurance, stock broking and telephone. Today the counter services subject to tax have reached over 100. There has been a steady increase in the rate of service tax. From a mere 5 per cent, service tax is now levied on specified taxable services at the rate of 12 per cent of the gross value of taxable services. However, on account of the imposition of education cess of 3 per cent, the effective rate of service tax is at 12.36 per cent.
• NON TAX REVENUE
Non-tax revenue mainly consists of:
1. Interest receipts on account of loans by the central government
2. Dividends and profits on investments made by the government
3. Fees and other receipts for services rendered by the government
4. Cash grants-in-aid from foreign countries and international organizations.