public rev

8/10/2019 public rev

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TRAINING ON PUBLIC FINANCIALMANAGEMENT AND

ACCOUNTABILITY


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Session objectives

Constitutional Framework Fiscale era sm

What is Public Revenue? Components

Canons of Taxation

Objectives of taxation in developing economies

Characteristics of a ood tax s stem

Incidence and Impact of taxation 2


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Tax and Non tax revenues rends in tax and non tax revenues

Tax revenues Direct and Indirect taxes

Tax system reforms

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axation in India

It was only for the good of his subjects

as the Sun draws moisture from the

"

--K li in R h v n h

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" " " "

means an estimate. These were levied either on the saleand purchase of merchandise or livestock and were

. There are references both in Manu Smriti and

Arthasastra to a variety of tax measures. Manu, the-levy taxes, "little by little, as a leech, calf or bee, sucksblood, milk or honey" thereby emphasizing the need toextract only what can be spared.

he wise sage advised that taxes should be related tothe income and expenditure of the subject. He, however,cautioned the king against excessive taxation and stated

a o ex remes s ou e avo e name y e er

complete absence of taxes or exorbitant taxation. 5


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Traders and artisans should pay 1/5 th of theirprofits in silver and gold, while the agriculturists,

depending upon their circumstances.

The detailed analysis given by Manu on the subject-

taxation system, even in ancient times.

Taxes were also levied on various classes of people

i e actors, ancers, singers an even ancing gir s.Taxes were paid in the shape of gold-coins, cattle,grains, raw-materials and also by rendering personalservice.

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' , . .

authoritative text on public finance, administration and the fiscallaws in this country. A major portion of Arthasastra is devoted byKautilya to financial matters including financial administration.

o ec on o an revenue orme an mpor an source orevenue to the State. The State not only collected a part of theagricultural produce which was normally one sixth but also leviedwater rates, octroi duties, tolls and customs duties. Taxes werea so co ec e on ores pro uce as we as rom m n ng o me a setc. Salt tax was an important source of revenue.

Collection of Income-tax was well organised and it constituted ama or art of the revenue of the State. A bi ortion was

collected in the form of income-tax from dancers, musicians,actors and dancing girls, etc. This taxation was not progressivebut proportional to the fluctuating income.

-purchase of buildings was also subject to tax. Even gambling

operations were centralised and tax was collected on theseoperations. 7


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According to him, the power of the government depended uponthe strength of its treasury. He states "From the treasury,comes the power of the government, and the Earth whose

,and Army"

The land revenue was fixed at 1/6 share of the produce and

import and export duties were determined on advalorem basis.

their value. Similarly, tolls, road cess, ferry charges and otherlevies were all fixed. Kautilya's concept of taxation is more orless akin to the modern system of taxation. His over all

.

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Systematic attempt to evolve a tax system in independentIndia started with the implementation of the report of the

Various objectives as raising the level of savings,

investments, effecting resources transfer from private topu c sec or, ac ev ng a es re s a e o re s r u on.

Direct taxes enquiry committee (1971) recommendedreduction in tax rates. On the indirect taxes side,

simplification attempted by Indirect taxes Enquirycommittee (1977).

committee (1991) laid down framework/roadmap for direct

and indirect tax reform, following the economic crisis 11


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Reforms included

Minimising exemptions/concessions

procedures

computerisation of tax returns

administrative and enforcement machinery

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Fiscal Federalism

The authority to levy a tax is derived fromthe Constitution of India, which allocates the

Centre and the State.

An important restriction on this power isr c e o e ons u on w c s a es

that "No tax shall be levied or collectedexcept by the authority of law." Therefore

eac tax ev e or co ecte as to e ac eby an accompanying law, passed either bythe Parliament or the State Le islature.

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,

powers including taxation, between the Parliament andthe State Legislature. Schedule VII enumerates thesesubject matters with the use of three lists;

List - I entailing the areas on which only the Parliament iscompetent to make laws,

List - II entailing the areas on which only the Stateeg s a ure can ma e aws, an

List - III listing the areas on which both the Parliamentand the State Legislature can make laws upon concurrently.

.There is no head of taxation in the Concurrent List (Unionand the States have no concurrent power of taxation)

law or is beyond the powers of the legislating authority may

be struck down as unconstitutional. 14


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mandated in the constitution (Article 280) in recognitionof the vertical imbalance implicit in the assignment of thepowers an unct ons to t e two eve s o government(the 'federal rationale').

The constitution also authorises the centre and thestates) to make grants for any public purpose (Article282)

states are addressed by various articles in theconstitution likeArticle 268, which facilitates levy ofuties y t e entre ut equips t e states to co ect an

retain the same. 15


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m ar y, t ere are r c es , , , an , a o

which specify ways and means of sharing resources betweenUnion and States.

Thus there are both mandatory and enabling provisions in theConstitution for facilitating a wide-ranging transfer of resources,arran ed in a s stematic manner throu h1) Levy of duties by the Center but collected and retained by the States.2) Taxes and duties levied and collected by the Center but assigned inwhole to the states

3) Mandatory sharing of the proceeds of income tax4) Permissible participation in the proceeds of the Union excise duties5) Statutory grants in-aid of the revenues of states6) Grants for any public purpose and

7) Grants of loans for any public purpose 16


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Planning Commission too has been giving substantialassistance to the States to finance developmental plans.

e ass stance s g ven ot as grant an oan n t eratio 30:70 for the larger States and 90:10 for the special

cate or States.

Central Ministries give assistance to the States toimplement Central schemes. The Central sector schemes

States are merely implementing agencies. The centrallysponsored schemes are shared cost programs requiringthe States to make matching contributions, the matching

ratio differing with projects. 17


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Apart from the above- mentioned provisions, the IndianConstitution provides an institutional framework to facilitate

- . ,which came into existence in 1951, underArticle 280of the

Indian Constitution. The functions of the Finance Commission are

Distribution of net proceeds of taxes between Centre and the States, tobe divided as per their respective contributions to the taxes.

Determine actors governing Grants-in Ai to t e states an t emagnitude of the same.

Work with the State Finance Commissions and suggest measures to

additional resources to Panchayats and Municipalities in the state.

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-transfers

criteria/formula - nearly 40 percent of the transfers have taken placethrough other channels, mainly Planning Commission (PC) and the

,aid agencies also as sources of conditional funds routed under"additional central assistance" for state plans

'revenue expenditure and so plan grants from their purview.

The transfers may act as a dampener on the revenue raising efforts

transfers may have created a dependency syndrome.

'gap filling' approach of the FCs whereby grants-inaid are

budget after taking account of their share of central taxes under the

FC's devolution formula 19


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Canons of taxation

1. Canon of Equality: means the principle of justice, i.e., inaccordance to ability to pay. The cannon of equality does

sum. Nor does it means that they should pay at the same

rate, which means proportional taxation. The amount of the

taxpayers. This clearly points to progressive taxation, i.e.,taxing higher incomes at higher rates.

. anon o er a n y: means e ax w c eac n v uais bound to pay ought to be certain, and not arbitrary. Thetime of payment, the manner of payment, the quantity to bepa , oug t to e c ear an s mp e to t e taxpayer.

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3. Canon of Convenience: Every tax, according to Adam Smith,ought to be levied at the time or in the manner in which it is mostconvenient for the taxpayers to pay their dues. For example, if a taxon land or house is collected at a time when rent is expected to bereceived, it satisfies the canon of convenience. If the tax can be paid

through cheque, or credit card, or internet, the manner is convenient,but not so if it is to be paid personally to the taxing authority.

4. Canon of Economy: The tax will be economical if the cost ofcollection is very small. If, on the other hand, the salaries of the

officers engaged in collecting the tax eat up a big portion of the taxrevenue, the tax is certainly uneconomical. Similarly, such other hugeand unnecessary administrative costs will make the tax collection an

.frequent visits to the income tax office and the odious examination by

the taxing officer the canon of economy is not satisfied. 21


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5.Fiscal Adequacy or Productivity: he State should be able to

function with the revenue raised from the people by means oftaxes. The tax proceeds should adequately cover the governmentexpen iture an t e government oes not run into a e icit. But at t esame time, the government should also not err on the side of

excess. In their zeal to raise more revenue, they should not cripple, in, .

6. Canon of Elasticity: The canon of elasticity is closely connectedwith that of fiscal adequacy. As the needs of the State increase, the

adequate. To meet an emergency or a period of stress and strain, thegovernment should be in a position to augment its financial

. ,considerably increased when needed.

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. anon o ex y: ex ty means t at t ere s ou e

no rigidity in the tax system so that it can be quickly adjusted tonew conditions; and elasticity means that the revenues can beincreased. The presence of flexibility is a condition ofelasticity.

8. Canon of Sim licit : s stem of taxation should be sim leplain and intelligible to the common understanding. This canonis essential if corruption or oppression is to be avoided.

.do. There should be a variety of taxes so that all the citizens,who can afford to contribute to the State revenue, should be

.ways. There should be a wise admixture of direct and indirect

taxes. But too great multiplicity will be bad and uneconomical. 23


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. oc a an conom c ec ves: n mo ern mes, econom s s

emphasised that the tax system should be based on the principle that theeffects of taxation should be compatible with the economic and social

.objectives of a standard tax system are:

(i) Reduction of inequalities in the distribution of income and,proportional taxes.

(ii)Accelerating economic growth: For this purpose, the tax system mustbe so designed as to raise the rates of saving and investment. This is a very

important objective for less developed countries (LDCs), where there is adeficiency of savings and investments.

(iii)Price stability: to ensure stable economic growth. When LDCs launch

prices. An integrated tax policy would solve this problem.

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DEVELOPING ECONOMIES

(a) Ability to contribute to economic development: Eachperson should be made to contribute to economic development,.

utilised, through appropriate tax measures, for purposes of economicdevelopment. Suppose a person is making a large saving but he lets it

lie idle. Such savin must be mobilised and channelised intoinvestment.

(b) Mobilisation of economic surplus: In all backward countries,a significant portion of national output goes to the big landlords and

other idle rich people. A large portion of their income is spent onconspicuous consumption, e.g., building of palaces, etc. This isunproductive expenditure and a waste from the point of nationaldevelopment. Economic growth can be accelerated if an appreciableportion of this surplus income is mobilised and made available forproductive investment. 25


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(c) Increasing the incremental saving ratio:As economicdevelopment proceeds apace, incomes rise. But there is a dangerthat propensity to consume may also increase so that extra incomesgenerated in the economy are utilised in consumption rather theninvested in production. This has to be prevented. The consumption

should not be allowed to increase in proportion to increase inincome. For this purpose commodity taxes are quite effective.

(d) Income elasticity of taxation: In backward economies, theshare of taxation out of the national income is less than 10%. This

share must be progressively raised as national income increases as aresult of economic development. This needs built-in flexibility in thetax system. Progressive taxation of income provides this flexibility.

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(e) Equity: The canon of equity demands that theburden of economic development must be distributed

equitably. That is why the richer classes are prevented

from increasing their consumption in proportion to the rise.economic development of their country. The poor peoplealso make a sacrifice because rising prices curtail their

. ,are shared by all sections of the society. Thus, theburden of economic development is equitably distributedamong a . s s a so nown as r z u y .

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Characteristics of a good taxation system

(a) Simple, financially adequate and elastic: The tax systemshould be simple, financially adequate and elastic. In other words,

productive of revenue; and the tax structure should be adaptable tomeet the changing requirements of the economy.

-as possible. It should be multiple tax system. There should bediversity in the system. But too great multiplicity in tax system shouldbe avoided.

(c) Administratively efficient: The tax system should be efficientfrom the administrative point of view. It should be simple toadminister. here should be little scope for evasion or accumulationof arrears. It should be foolproof and knave-proof. Chances of

corruption should be minimised. 28


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(d) Balanced and harmonious:Another importantcharacteristic of a good tax system is that it should be aharmonious whole. It should have a balanced structure. Itshould be truly a system and not a mere collection of isolatedtaxes. Every tax should fit in properly in the system as a whole

so that it is a part of a connected system. Each tax shouldoccupy a definite and due place in the financial structure.

(e) Ensuring the reduction of economic inequalities:Agood tax is that it should be an instrument for the reduction of

economic inequalities. he purpose of public finance is notmerely to raise revenues for the State but to raise the revenuein such a manner as to reduce the economic inequalities. In

s manner, e a e may a so e a e o ver e resourcesin bank balances or lockers to more productive areas.

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(f) Ensuring economic stability: From the point of view ofensuring economic stability, it is necessary that the tax system must.

means that when national income rises, an increasing part of rise inincome should automatically accrue to the tax authorities.

system should ensure that the national income is increasing duringboom periods. Similarly, in depression, tax revenues should fall fasterthan income so that the purchasing power of people does not fall as

fast as their pre-tax income. Thus, an overall progressive tax systemis an important factor in ensuring stability.

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n ns rumen o econom c grow : or eve op ng econom es, e

tax system has to serve as an instrument of economic growth. Economicdevelopment rather than economic stability is the objective of under-developedcountries. Their tax s stem must be so sha ed as to accelerate economicdevelopment. For this purpose, it must mobilise the required resources andchannelise them into investment. It must, in short step up savings and

investment and raise the level of income and employment in the economy. oc a y a vantageous: e tax system s ou e soc a y

advantageous and promote general economic welfare. From this point of view,taxes on goods of mass consumption should be avoided. The burden of tax onbasic items should not be excessive.

(j) Optimum allocation of resources: The tax system should be soframed as to ensure that the productive resources of the economy are optimallyallocated and utilised. For this purpose, it is essential that the tax systemshould be economically neutral. In other words, it should interfere as little aspossible with the consumers choices for consumption goods and the producers

choices regarding the use of factors. 31


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Sources of Public revenue

Public revenue

Tax revenue Non-tax revenue

Direct taxes eg.Income tax, wealth

tax

Indirect taxes eg.Central excise,customs, VAT

Interest receipts,dividends and fees

from licenses,ass orts

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Tax revenue Non tax revenue

A tax is a compulsory levy imposedby a public authority on persons andorganizations to meet public

expenditures

Non Tax Revenue includes allrevenues other than taxes, accruingto the Government.

These are internall enerated A tax is the compulsory payment

made to the government. Refusal topay the tax is a punishable offence.

Every tax involves some sacrifice on

funds.

These sources of revenues are:

Administrative revenues.

Commercial revenues.par o e ax payer.

A tax is not a fine or penalty. Grants and gifts.

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ren s o ax an non ax


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Rs. In crore

Year Taxrevenues

Non taxrevenues

Totalrevenues

% of taxrevenuesto total

% of nontaxrevenues

revenue

receipts

o o a

revenuereceipts

-

2002-03 158544 72789 231333 69 31

2003-04 186982 77801 263813 71 292004-05 224798 79894 304692 74 26

2005-06 270264 77738 348002 78 22

2006-07 351182 82909 434091 81 19

2007-08 439547 101542 541089 81 19

2008-09 443319 93734 537053 83 17

-

2010-11 534094 145189 679283 79 2135


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COMPONENTS OF TAX REVENUE

Year Corpora

tion tax

Income

tax

Wealth

tax

Customs ED ST TOTAL

2006-07 144318 80408 240 86327 117612 37597 351182

2007-08 192910 111820 340 104118 123611 51301 439547

- 213395 106074 389 99879 108613 60941

2009-10 255076 124991 511 84477 102000 58000 465103

2010-11 301331 120568 603 115000 132000 68000 534094

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Direct vs Indirect taxes

Direct taxes

Direct tax is a tax imposed andcollected directly from the

Indirect taxes

An indirect tax (such as sales tax, value addedtax (VAT), is a tax collected by an

person on whom it is legallyimposed.

It is a tax the incidence of which

falls on the person concerned

nterme ary suc as a reta store rom t eperson who bears the ultimate economicburden of the tax (such as the consumer).The intermediary later files a tax return and

forwards the tax proceeds to government withan canno e s e or passeon to another person.

The direct taxes compriseincome tax, corporation tax,

e re urn

Indirect taxes are imposed on commodities.

The impact and incidence of indirect taxesmay be on different persons. The person onwhom the tax is imposed bears the impact,, ,

gift tax, wealth tax.while the person who ultimately pays it bearsthe incidence.

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Year%

OF

DIRECT

%

OF

INDIRECT

DIRECT

TAXES

INDIRECT

TAXES

TOTALTAX

REVENUES

TAXESTO

TOTALTAX

REVENUES

TAXESTO

TOTALTAX

REVENUES

2006-07 225045 248467 473512 48 52

2007-08 312220 280926 593146 53 47

2008-09 319892 285405 605297 53 472009-10 380582 252512 633094 60 40

- 422508 324142 746650 57 43

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revenues

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rend in Indirect tax collection

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COMPONENTS OF NON TAX REVENUE

RECEIPTS

CONTRIB

UTIONSBY PSUs

NON TAX

REVENUES

interest

receiptsin total

receipts

in totalnon tax

non taxrevenue

revenues

2006-07 21550 37534 82909

2007-08 23804 41711 10154223 41

-

23 472009-10 19205 55275 106959

18 522010-11 19254 55747 145189

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Tax reforms in the past

-

1973-74 11 tax slabs, rates from 10 to 85 %, surcharge 15% 1991- simplified tax structure 3 slabs, 1997-98 3 slabs with rate

10-30%

Excise duties

1970s 24 different rates from 2 to 100% 1996-97 MODVAT followed by CENVAT in 2001

Customs

- - ,

1995-96 peak rate down to 50% , 2003-04 peak rate 25%

Reforms in State tax systems

Shift from cascading type sales tax to VAT

reduction in the Central Sales Tax rate to 2%, from 4%, as part of acomplete phase out of the tax 46


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rec axes co e u ge -

Single Code for direct taxes: All the direct taxes have been broughtunder a single Code and compliance procedures unified. This willeven ua y pave e way or a s ng e un e axpayer repor ng sys em.

Use of simple language: With the expansion of the economy, the

number of taxpayers can be expected to increase significantly. The bulko ese axpayers w e sma pay ng mo era e amoun s o ax.Therefore, it is necessary to keep the cost of compliance low byfacilitating voluntary compliance by them. This is sought to be achieved,

, ,

clarity, the intent, scope and amplitude of the provision of law. Eachsub-section is a short sentence intended to convey only one point. All

, ,active voice. Similarly, the provisos and explanations have been

eliminated since they are incomprehensible to non-experts. 47


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Reducing the scope for litigation: Wherever possible, an attempt

has been made to avoid ambiguity in the provisions that.

Flexibility: The structure of the statute has been developed in amanner which is capable of accommodating the changes in the

amendments. Therefore, to the extent possible, the essentialand general principles have been reflected in the statute and thema ers o e a are con a ne n e ru es c e u es.

To ensure that the law can be reflected in a Form: For mosttaxpayers, particularly the small and marginal category, the taxlaw is what is reflected in the Form. Therefore, the structure ofthe tax law has been designed so that it is capable of beinglogically reproduced in a Form. 48


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Consolidation of provisions: In order to enable a betterunderstanding of tax legislation, provisions relating to

, ,been consolidated. Further, the various provisions havealso been rearranged to make it consistent with the

.

Providing stability: At present, the rates of taxes arestipulated in the Finance Act of the relevant year.

ere ore, t ere s a certa n egree o uncerta nty aninstability in the prevailing rates of taxes. Under theCode, all rates of taxes are proposed to be prescribed inthe First to the Fourth Schedule to the Code itselfthereby obviating the need for an annual Finance Bill.

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Goods and service tax to come into force from april2012

ea o a o on o o er axes as , , en rytax, stamp duty, tax on consumption or sale of electricity,

thus avoiding multiple layers of taxation Comprehensive levy on manufacture, sale and

consumption of goods Central GST and State GST

Throu h tax credit mechanism tax is collected on value

added goods and services at each stage of purchase/sale Will be levied only at destination point and not at various

.

Expected to lead to fall in prices as dealers may pass on

benefits of reduced tax to consumers 50


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