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Money matters: understanding different taxes

The Goods and Services Tax can dramatically alter tax administration by giving a one-shot solution to a welter of levies that are the bugbear of inter-state trade and revenue-sharing with the Centre.

business Updated: Jan 08, 2014 00:50 IST
Gaurav Choudhury

The Bharatiya Janata Party (BJP) has proposed radical changes in India’s tax structure amid signs it was open the idea of replacing income tax with a transaction tax. HT explains the finer details of different types of taxation:

What are government’s main sources of revenue?
Governments need money to fund welfare schemes such as the Mahatma Gandhi National Rural Employment Guarantee programme, to pay salaries to its employees, fund its defence programme, pay subsidies such as those on fuel, food and fertilisers to assist state governments and fund other expenditures. The government funds its expenses from its earnings that can be clubbed under two broad heads: tax and non-tax revenue.

It collects revenues from individuals and organisations through various duties and levies — income tax, wealth tax, import duties, excise and other duties.

The government earns revenues also from disinvestment (selling equity in state-owned companies), selling resources such as telecom spectrum, dividends earned from government-owned companies and also from interests earned on funds that it lends out.

What is an income tax?
The government imposes taxes on income that individuals and companies earn.

Currently, individuals are clubbed in three tax slabs depending on their annual income. Those with an income less than `2 lakh annually are exempt from paying taxes; those earning between `2-5 lakh are taxed at 10%; those who earn between `5-10 lakh are taxed at 20%, while anybody earning more than `10 lakh has to pay an income tax of 30%.

In addition, in the last budget (2013-14) finance minister P Chidambaram, for the first time, introduced a concept of a super-rich tax. “Relatively prosperous” persons with a taxable income over `1 crore — and there are supposedly only 42,800 of them in India — now have to pay an additional surcharge of 10%.

A progressive tax regime always taxes the richer at a higher rate to achieve objectives of equity.

The corporate income tax rate in India is 33%.

What is Goods and Services Tax (GST)?
GST is India’s most ambitious indirect tax reform plan, which aims to stitch together a common market by dismantling fiscal barriers between states. It is a single national uniform tax levied across the country on all goods and services. The indirect tax system in India is currently mired in multi-layered taxes levied by the Centre and state governments at different stages of the supply chain such as excise duty, octroi, central sales tax (CST), value-added tax (VAT) and octroi tax, among others. In GST, all these will be subsumed under a single regime.

How will the system work?
GST, if adopted, can dramatically alter tax administration by giving a one-shot solution to a welter of levies. Under the system, the Centre and states will tax goods and services in identical rates. For instance, if 20% is the agreed rate on a certain good, the Centre and states will collect 10% each on the good.

What is a zero-income tax regime?
A zero income tax regime is one where people do not pay any taxes on income. Instead, they pay taxes on expenditure. It follows the same principle of income taxes: the greater the spending, the higher would be the tax rate.

What is being talked about?
There is a school of thought that argues that a tax on expenditure, as opposed to income, will help plug leakages and prevent evasion because it would be imposed on actual spending.

What are its demerits?
An expenditure tax fails on the test of equity. People in lower income brackets spend a large proportion of their income. As one goes up the income scale, the proportion of income spent comes down leaving more money to save.

Why is it being talked about now?It is being talked about as one of the means to clamp down on India’s black economy. Black money is income on which tax is evaded. It represents a large part of a bustling economy where transactions are carried out in cash circumventing banking channels.

What is the size of India’s black economy?
The government is expected to reveal a new estimate of India’s unaccounted “black money”, and follow it up with a plan to hold it to account. The new estimates, the first since 1985, have been compiled at the government’s behest by three think-tanks, the National Council for Applied Economic Research, National Institute of Public Finance and Policy, and National Institute of Financial Management. This report is speculated to have pegged the size of black economy at about 30% of India’s GDP or about `30 lakh crore.