TAXATION

1. TAXATION

2. 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

3. 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.

4. 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.

5. 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

6. 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.

7. 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

9. 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.

10. Adam Smith’s four canons of taxation • Canon of Equality • Canon of Certainty • Canon of Convenience • Canon of Economy

11. 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.

12. 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.

13. Classification of Taxes

14. 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

15. 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 company’s 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.

16. On the basis of degree of progression of tax, it may be classified into: • Proportional tax • Progressive tax • Regressive tax • Degressive tax

17. 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 payer’s 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 payer’s income increases, it is called a progressive tax. In this system, the rate of tax goes on increasing with every increase in income.

18. Regressive taxation • A regressive tax is one in which the rate of taxation decreases as the tax payer’s 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.

19. Taxable Capacity Taxable capacity is the maximum amount which the citizen of a country can contribute towards the expenses the public authorities of without having undergo an unbearable strain.

20. Taxable capacity is normally used into two senses;(a)The absolute taxable capacity and(b) The relative taxable capacity.

21. a) The absolute taxable capacityThe absolute taxable capacity indicates the amount of money or the proportion of national income that can be taken away by the government from people in the form of taxes without producing unfavorable effects. The concept of absolute taxable capacity is not to be assumed as a constant entity.

22. (b)The relative taxable capacityIn the relative sense, the reference is to the proportion in the two or more nations or groups of persons or states in a federation contribute towards the common expenditure through taxation. The relative taxable capacity refers to the proportion in which two or more community can contribute in the form of taxes in order to meet some common expenditure. In other words, relative taxable capacity of the community to contribute to some common expenditure in relations to the capacities of other communities.

23. CONCLUSIONIt is true that we cannot measure the absolute taxable capacity of a country with any degree of accuracy. But it would be wrong to deny the existence of the concept of absolute taxable capacity in public finance. There are a number of concepts in economics which cannot be measured accurately and yet they play an important role in the formulation of economic laws. Concept of absolute taxable capacity is one of such concepts

24. FACTORS DETERMINE TAXABLE CAPACITYSize of the National IncomeThe taxable capacity of a country is primarily depends on its size of a national income which in turn on the proper use of natural resources, skill, technology, investment pattern.

25. Size and rate of growth of populationSize and rate of population affects the taxable capacity to a greatextent. The larger the population the lower the taxable capacity. Countries like Indiaand China have a lower taxable capacity because of high population.

26. Distribution of income and wealthThe distribution of income and wealth also influence the taxable capacity of the people. If the wealth and income is unequally distributed, taxable capacity is high because it will be easy for the Government to raise the bulk of revenue

27. Stability and growth of incomeTaxable capacity of the country will be lower if there are economic fluctuations with serious ups and downs especially during the period of depression.

28. Pattern of taxationTaxable capacity depends upon the pattern and method of taxation. If the tax system is well planned and broad based, it will bring more revenue, similarly if it observes the canons of economy and convenience, taxable capacity will certainly be greater.· Purpose of taxationThe purpose of taxation has to do much with the extent of taxable capacity.

29. Nature of public expenditureThe nature of public expenditure also determines the extents of taxable capacity. When it is used on productive projects, it increases the wealth of the country which in turn increases the taxable capacity.

30. Psychology of taxpayerPsychology of taxpayer plays a vital role to determine the taxable capacity of a country. Incase the people are psychology depressed; the taxable capacity will be reduced automatically.

31. Thank you