Concepts Related to Taxation

1. Tax Buoyancy

(GDP High – Tax Collection High, GDP low – Tax Collection Low).

• Tax buoyancy explains this relationship between the changes in government’s tax revenue growth and the changes in GDP.
• It refers to the responsiveness of tax revenue growth to changes in GDP.
• When a tax is buoyant, its revenue increases without increasing the tax rate.
• Buoyancy = Proportionate change in the tax revenue/ Proportionate change in the GDP

2. Tax Elasticity

(Tax Rate Increase, Tax Collection Increase. Tax Rate Decrease, Tax Collection Decrease.

Ex: Income tax for 5,00,000.

Tax 5% = 12,500. If tax 10% = 25000 to pay).

• It refers to changes in tax revenue in response to changes in tax rate.
• For example, how tax revenue changes if the government reduces corporate income tax from 30 per cent to 25 per cent indicate tax elasticity.

 3. Laffer Curve

(Tax rate high, tax revenue high on a particular rate (T star). More than T Star Tax revenue is reduced Because of high tax)

Corporate tax 30% is higher than T star. So Govt reduce Tax.

• In economics, the Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of government revenue.
• It illustrates the concept of taxable income elasticity—i.e., taxable income changes in response to changes in the rate of taxation.

4. Cess

- (Tax on Tax. Collected Cess are keep seperatly for specific purpose. Once achieved the purpose, Cess are removed. If Primary education cess is 3%. Once achieve, After No cess collected.

- Ex: Income tax of 8 lakhs is 45,000. Additionally, 3% Educational cess on 45,000. So I need to pay 46,350.

A cess imposed by the central government is a tax on tax, levied by the government for a specific purpose.

• Generally, cess is expected to be levied till the time the government gets enough money for that purpose.
• For example, a cess for financing primary education – the education cess (which is imposed on all central government taxes) is to be spent only for financing primary education (SSA) and not for any other purposes.
• For example, the education cess of 3% on personal income tax of 30% is imposed as a tax on the prevailing 30%. As a result, the total tax rate goes up to 30.9% (30% basic rate + 3% (cess) of the 30%).
• Another difference between cess and the usual tax is the way in which tax revenue from cess is kept.
• Revenue from main taxes like Personal Income taxes are kept at Consolidated Fund of India (CFI). The government can use it for any purposes.
• But the tax revenue from Cess are first credited to the CFI and the Central Government may, after due appropriation made by Parliament, utilise the money for the specified purposes.
• For example, the proceeds are kept as Central Road Fund (CRF) in the case of fuel cess (on petrol and diesel).
• The revenue collected is initially credited to the CFI and after adjusting for the cost of collection, Parliament through its appropriation bill, credits such proceeds to the Central Road fund.
• Another major feature of cess like surcharges is that the Centre need not share it with states. But regarding all other major taxes they come under the divisible pool and hence they shall be shared with the states with the recommendations of the Finance Commission.
• At present, the main cess are: education cess, road cess or (fuel cess), infrastructure cess, clean energy cess, krishi kalyan cess and swachh bharat cess.

Cess on Income Tax

• Education Cess -> To promote Primary Education (2%)
• Secondary & Higher Education Cess (1%)

Cess on Services

• Swachch Bharat Cess -> Clean India Mission Cess of 0.5% is applicable on all services
• Krishi Kalyan Cess -> 0.5%

5. Surcharge

- (Tax on Tax without any Specific Purpose. Government used it for any purpose)

- Surcharge is the additional tax payable over & above the normal tax. It is a conditional tax wherein if you meet the condition you became liable to pay such additional tax. Generally, the condition is dependent on the income Earned. A threshold limit that states any person earning beyond the limit shall have to pay an additional tax on the income earned.

• Surcharge is a charge on any tax, charged on the tax already paid. As the name suggests, surcharge is an additional charge or tax.
• The main surcharges are that on personal income tax (on high income slabs and on super rich) and on corporate income tax.
• A common feature of both surcharge and cess is that the centre need not share it with states. Following are the difference between the usual taxes, surcharge and cess.
• The usual taxes go to the consolidated fund of India and can be spend for any purposes.
• Surcharge also goes to the consolidated fund of India and can be spent for any purposes.
• Cess goes to Consolidated Fund of India but can be spend only for the specific purposes.
• The main difference between surcharge and cess is that despite they are not shareable with state governments, surcharge can be kept with the CFI and spent like any other taxes, the cess should be kept as a separate fund after allocating to CFI and can be spent only for a specific purpose. This means cess can be spent only for the specific purpose for which it is created. If the purpose for which the cess is created is fulfilled, it should be eliminated.

6. Tax Expenditure

(Tax exemption is act as a subsidy to individual. So tax exemption is indirectly called as Tax Expenditure.)

• Tax Expenditures, as the word might indicate, does not relate to the expenditures incurred by the Government in the collection of taxes.
• Rather it refers to the opportunity cost of taxing at concessional rates, or the opportunity cost of giving exemptions, deductions, rebates, deferrals credits etc. to the tax payers.
• Tax expenditures indicate how much more revenue could have been collected by the Government in the absence of such measures.
• In other words, it shows the extent of indirect subsidy enjoyed by the tax payers in the country.
• But Such foregone tax is not necessarily mean that they have been waived off by government, but as incentive given by government to promote certain sectors.

Pigovian Tax

(Tax levied on the goods, which harm to Society. Ex: Pollution, Cigarettes, Alcohol.)

• The Pigovian tax is imposed on bodies that have a negative externality. For example, pollution.
• Externality means impact of one person’s actions on the well-being of an outsider (bystander or third party).
• For example, the seller and consumer of cigarettes together will harm the third person with pollution.
• The tax is intended to correct an undesirable or inefficient market outcome, and does so by being set equal to the social cost of the negative externalities.

Fiscal drag

Person Move from one tax slab from other, need to pay more tax, Reduce Disposal income, Cause drag in Economy.

(Person earn 4.5 lakh, pay tax of 5% (10,000). Due to inflation Wages rise. So income rise to 5.5 lakh, need pay 10% (17,500) of Tax. It reduces disposal income of the person)

• Occurs when earnings growth and inflation push more earners into higher tax brackets.
• Consequently, the government’s tax revenue rises without any increases in tax rates. If earners pay a higher percentage of income in tax, their spending declines.
• Fiscal drag refers to the automatic brakes that a progressive tax system applies to aggregate demand.
• Fiscal drag slows down or tames a rapidly-expanding economy.

Fiscal drag prevents overheating

• As people climb to higher tax brackets, their tax bills rise. Not only the total amount but also as a proportion of their total income.
• This subsequently dampens spending, or aggregate demand for goods and services, i.e., fiscal drag results.
• An economic stabilizer
• However, fiscal drag is not necessarily a bad thing. If it stops demand from causing the economy to overheat, it’s a good thing, i.e., it’s an economic stabilizer.
• Fiscal drag either limits or reduces aggregate demand. Thus, it becomes a deflationary fiscal policy.

7. Entry Tax

(Tax on Goods, which entering in the state boundaries ordered via E-commerce).

• State government has recently imposed new tax called as Entry tax on online shopping products.
• All items entering in the state boundaries ordered via E-commerce are under this tax boundary.
• This entry tax is imposed by Gujarat, Madhya Pradesh, Assam, Delhi and Uttarakhand state government recently.
• The tax rate is variable 5.5-10% depending upon the state. Soon all e-commerce company will pass on this tax to us and we have to bear an additional cost of this tax

8. Google Tax or Equalisation Levy

(Tax on Service provided by international company (Business to Business). Company who not register under GST).

Ex: Zomato ad on Google & YouTube. Charge 100 Cr. Zomato pay 94% to Google & YouTube. And 6% to Government as Tax.

• Any person or entity which makes a payment exceeding Rs 1 lakh in a financial year to a non-resident technology company for some B2B {Business to Business Services} needs to withhold 6% tax on the gross amount being paid as an equalisation levy.
• The conditions for this tax are as follows:
• This tax is applicable to B2B services and goods only and NOT on B2C {Business to Consumer} goods and services.
• The tax is applicable to only those companies which have no permanent establishment in India.
• The tax has to be withheld by the buyer and deposited by him to the government.
•  It is a tax to equalize the tax burden on remote and domestic suppliers of similar goods and services. The objective of this tax is to make sure that those entities making a payment to a non-resident for specified services like online advertisements to deduct this tax before making the payment.
• However, India introduced the digital tax in April 2020 for foreign companies selling goods and services online to customers in India and showing annual revenues more than INR 20 million.

Applicability:

• India has expanded the scope of the equalisation levy over the last few years, to tax non-resident digital entities.
• While the levy applied only to digital advertising services till 2019-20 at the rate of 6 percent, the government in April last year widened the scope to impose a 2 per cent tax on non-resident e-commerce players with a turnover of Rs 2 crore.
• The scope was further widened in the Finance Act 2021-22 to cover e-commerce supply or service when any activity takes place online.
• Since May 2021, this also includes any entity that systematically and continuously does business with more than 3 lakh users in India.

When will the tax not apply?

• Offshore e-commerce firms that sell through an Indian arm will not have to pay.
• This means if the goods and services sold on a foreign e-commerce platform are owned or provided by an Indian resident or Indian permanent establishment, they will not be subject to the two percent equalization levy.