What is Tax all about?

World of Finance by M.Vijaya Sai

What is Tax….? It is a monetary, pecuniary or compulsory burden that is levied or put on each and every individual by the government. The payment of tax is inevitable that’s why a funny thing that is said about the tax is that “death comes once, but the payment of tax comes every year”. When the topic of tax comes, being a common man there are two questions that arise in our mind the first one is why the government needs to collect tax and the second one is what does the government do with the amount of tax collected? Well the answer for the first question is that the amount of tax collected is very huge and is the main source of income forthe government. The gross tax receipts for the year 2008-09 is Rs.6, 87,715 Cr whereas according to the budget the estimated amount of tax to be collected in 2009-10 is Rs.6, 41,079 Cr. The answer for the second question is thatthe government invests the tax collected for providing the amenities and for the development of the society.

History of Tax

The procedure of taxation is very old it is said that the taxation system started from the time  around 3000 BC in Ancient Egypt. At that time the main occupation of the people was agriculture and they use to pay one fifth or 20% of their total crop to Pharaoh (ancient Egyptian rulers) as tax. In India the people used to pay tax to the kings and it was mainly in the form of crops. The history also has provided enough evidences that during the rule of King Akbar he had canceled many forms of taxes. During the British rule it was introduced in the year 1860. There was no act passed so it was just used as a temporary way for the government to get the income it went on till 1886 and in 1886 an Income Tax Act was passed and it was replaced by legislation act of 1918 and later by the Income Tax Act of 1922. This income Tax Act was followed till India got the freedom and as there was an establishment of congress government and adoption of constitution so there was a need for a new income tax act as the prevailing economic condition of post independence India were different to pre-independent India and as a result of that a New Income Tax Act was passed in the year 1961. Till today this act is being followed and till today on an average there have been about 25 amendments every year made to this Income Tax Act and because of this some of the experts have opinioned that the Income Tax Act of 1961 has lost its originality and we need to replace it with a new act. Another reason for the talks of changing this act is that the economic conditions of the present year ie 2009 are very different as compared to 1961 and one of the reasons for this might be the liberalization, privatization and globalization that happened in the year 1991. As a result of this a new tax code has been prepared and once it gets passed in the parliament it’s going to be passed as an act.

Types of Taxes

There are different forms of taxes that are levied by the government some of the examples are customs, excise, toll, tribute, impost etc. The taxes are divided into two types Direct & Indirect but before going to types of taxes there are two terminologies that one needs to understand they are incidence and impact.

Incidence: According to the economic theory it is the point at which the tax is being charged. Impact: This means the effect that the imposition of tax is going to have.

Direct tax

A direct tax is one in which the incidence and the impact is on the same person. Examples of direct tax are;

• 
  
  Wealth tax
  
• 
  
  Income tax etc.
  

Now let us understand the meaning of incidence and impact in case of these taxes. Let us take the example of income tax, in case of income tax the tax is paid on the income that is earnt by a person or in other words the person liable and the person who is paying the income tax are both the same.

Indirect Tax

In case of indirect tax the incidence and impact are on different persons.  Examples of indirect tax are;

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  Sales tax
  
• 
  
  Customs duty etc.
  

In the Indirect taxes for example the sales tax the incidence is on the shopkeeper and the impact is on the customer that is when we buy something from that shop we have to pay the sales tax.

Differences between the Direct & the Indirect tax are;

• The direct taxes flow directly from the payer to the government. For example when we pay the income tax it goes to the government and not through any third person or intermediary. The indirect goes through an intermediary for example when we pay the sales tax it goes through the shopkeeper.
  
  
• The direct taxes are traceable whereas the indirect taxes are not traceable.
  

The seventh schedule of Indian Constitution gives the right to the government to collect the taxes. There are various kinds of taxes and these are collected by central government, state government, and local municipality. The Central Board of Direct Taxes (CBDT) is the authority which governs or supervises the collection process of the taxes. The CBDT comes under the finance commission and it is the commission which decides as to what is the percentage of total tax collected which must be given to central government, state government & the municipality.

The rates for each of this is given every year by the finance minister in the parliament and when it passed it becomes the finance act of that year. All these taxes are explained in detail below;

Income tax

The income tax is levied by the central government and is direct tax. The income tax that a person is liable to pay depends on the income that he earns. The total amount of income that is taken into account is of the previous year in other words a person or assessee pays the income tax in the year 2009 on the income that he has earned in the year 2008. To find out the liability to pay the tax , first we need to determine whether the assessee is an ordinary resident or not. Usually the people who have never gone out of India do not even go for this because by any means they will be the residents and liable to pay tax.

Excise duty

This is an example of indirect tax and is levied by the central government. The excise duty is paid by the manufacturer who manufactures the goods which are movable and marketable. The excise rates have been stipulated in the central excise act of 1985. This duty is paid only if the goods are brought out of the factory where they have been manufactured. The rates of excise duty have been changed by the central government as a consequence of the recession. It was 16% from 1-3-2000 till 29-2-2008 but it was changed to 14% then to 10% and as of now it is 8%.

Customs Duty

The customs duty is paid when an importer imports anything into India and exporter exports goods outside India. It is an indirect tax because ultimately the expenses are borne by the customer. India is surrounded by the sea and 12 nautical miles (1NM=1.852 kms) from the land is known as the territorial waters and 12 NM from there is called as the Indian Customs Water and if anything is imported and if it enters into this water becomes liable for the payment of customs tax.

Sales tax

A manufacture produces goods so as to sell them in the market and he has to pay a tax called sales tax on this. It is ultimately borne by the customer because the sales tax is nothing but what we call as Value Added Tax (VAT). The term sales tax was replaced by VAT in April 1, 2005.

The excise duty on alcohol and the income tax on agriculture are levied and collected by the state government.

Wealth tax

The wealth tax is paid by an assesssee for the benefit he enjoys by owning a property. The tax that he must pay again depends on his residential status as it was in the case of income tax. A person needs to pay the wealth tax every year irrespective of whether the property is yielding him any income or not. The wealth tax is calculated taking into account the present market value of the property.

Octrion Duty

It is the duty that a person needs to pay to the municipality when he moves from one city to another.

There are three more terminologies which you need to understand which can make a lot of difference if slightly misunderstood, they are;

·         Tax Planning

·         Tax Avoidance

·         Tax Evasion

Tax Planning

The income tax act provides many deductions, allowances, exemptions, rebate on the total income for calculation of the tax that you need to pay. If a person uses these methods to reduce his tax liability then it is said as tax planning. The tax planning is completely legal.

Tax Avoidance

Every system has some drawbacks and loopholes and so is the case in the Income tax act. A person who tries or exploits this loophole to reduce his tax burden is said to be avoiding the tax. But not everyone is smart and intelligent enough to find the loopholes only an expert like a Chartered Accountant can do this. It is the legal utilization of the tax regime for one’s own advantage. It is not an illegal activity but it is just wrong from the view of ethical dimension.

Tax Evasion

The third and the dangerous one is the tax evasion. In this the person tries to show false accounts and tries to reduce the tax burden. This is an offense and if found guilty the person can be jailed or made to pay heavy amounts as charges.