Taxation-FINAL_1694077297.pdf PDF

Taxation CONTENTS TAXATION 1. Introduction........................

Taxation CONTENTS TAXATION 1. Introduction............................................................................................................................................................3 2. Classification of Taxes..........................................................................................................................................3 Based On Fairness.................................................................................................................................................3 Progressive Taxation.............................................................................................................................................3 Regressive Taxation..............................................................................................................................................3 Different perspectives of Regressive taxes are as follows.............................................................................4 Proportional Taxation...........................................................................................................................................4 Based On who Pays the Taxes.............................................................................................................................4 Direct Taxes............................................................................................................................................................4 Indirect Taxes.........................................................................................................................................................4 Comparison between Direct Tax and Indirect Tax.........................................................................................4 3. Taxation in India...................................................................................................................................................5 Constitutional Provisions Pertaining to taxation in India.............................................................................5 4. Direct Taxes in India.............................................................................................................................................5 Cess and Surcharge...............................................................................................................................................6 Personal Income Tax.............................................................................................................................................6 Related Information..............................................................................................................................................7 Old and Existing Tax Regime in India.............................................................................................................7 New Tax Regime...................................................................................................................................................7 Points to note..........................................................................................................................................................7 Changes in Budget 2023.......................................................................................................................................8 Changes in new Income Tax Regime.................................................................................................................8 Points to note..........................................................................................................................................................8 Standard Deduction..............................................................................................................................................8 Corporate Tax.........................................................................................................................................................8 Minimum Alternate Tax(MAT)..........................................................................................................................9 How is MAT calculated?......................................................................................................................................9 Dividend distribution tax..................................................................................................................................10 Wealth Tax............................................................................................................................................................10 Capital Gains Tax................................................................................................................................................10 Securities Transaction Tax.................................................................................................................................11 Digital Tax………………………………………………………………………………………………………..11 Professional Tax..................................................................................................................................................12 Fringe Benefit Tax...............................................................................................................................................12 Banking Cash Transaction Tax.........................................................................................................................12 Taxation on Virtual Digital Assets...................................................................................................................12 Definition of Virtual Digital Assets...............................................................................................................12 The taxation regime............................................................................................................................................13 Tax deducted at Source.......................................................................................................................................14 Tax collected at source........................................................................................................................................14 Comparison of Tax collected at source and Tax deducted at Source.........................................................14 Stamp Duty...........................................................................................................................................................14 5. Reforms in Direct Tax in India.........................................................................................................................14 6. Budget 2023-24: Reforms Proposed in Direct Taxes......................................................................................15 7. Indirect Taxes.......................................................................................................................................................17 Types of Inditrect Tax.........................................................................................................................................17 Indirect Taxes in India.......................................................................................................................................17 Some Indirect Taxes in India............................................................................................................................17 8. Reforms in Indirect Tax.....................................................................................................................................19 9. Goods and Services Tax.....................................................................................................................................20 How is cascading effect reduced in GST?.......................................................................................................20 Key Features of GST...........................................................................................................................................21 GST Council.........................................................................................................................................................21 Key points about the GST Council..................................................................................................................21 Composition of GST Council............................................................................................................................22 For More Study Material, Visit: studyiq.com Page no. 1  Taxation Function of GST council....................................................................................................................................22 E-Way Bill ……………………………………………………………………………………………………….22 Benefits of E-Way Bill........................................................................................................................................23 Goods and Services Tax (Compensation to States) Act, 2017......................................................................23 Features of the Goods and Services Tax (Compensation to States) Act, 2017..........................................23 Challenges of Goods and Services Tax (Compensation to States) Act, 2017............................................23 IT Infrastructure for GST implementation.....................................................................................................24 Goods and Services Tax Network (GSTN).....................................................................................................24 Project Saksham..................................................................................................................................................24 Input tax credit.....................................................................................................................................................24 National Anti-Profiteering Authority..............................................................................................................25 Authority for Advance Ruling..........................................................................................................................25 Benefits of GST...................................................................................................................................................26 Challenges with GST..........................................................................................................................................26 About Windfall Tax............................................................................................................................................26 Why are Countries Levying Windfall Taxes ?................................................................................................27 Issues with Imposing Windfall Tax.................................................................................................................27 10. Budget 2023: Reforms in Indirect Taxes..........................................................................................................27 11. Concepts Related to Taxation............................................................................................................................28 Tax to GDP ratio..................................................................................................................................................28 Key points ……………………………………………………………………………………………………… 28 India’s Tax-GDP Ratio.......................................................................................................................................29 Factors contributing to low Tax – GDP Ratio in India.................................................................................29 Measures that can be taken to increase Tax to GDP ratio............................................................................29 Refining tax structure.........................................................................................................................................30 Improving tax administration...........................................................................................................................30 Tax buoyancy.......................................................................................................................................................30 Tax Avoidance......................................................................................................................................................31 Tax Evasion...........................................................................................................................................................31 Ways of Tax Evasion in India............................................................................................................................31 Impact of Tax evasion on Economy.................................................................................................................31 Black Money.........................................................................................................................................................32 Ways for generation of black money...............................................................................................................33 Ill Effects of Black Money on the Economy...................................................................................................34 Efforts to Combat Black Money.......................................................................................................................34 Legislation to Prevent Black Money in India.................................................................................................35 Tax Haven,............................................................................................................................................................38 Countermeasure against Tax havens...............................................................................................................38 Tax Terrorism.......................................................................................................................................................39 Indirect Transfers................................................................................................................................................39 Buyback Tax.........................................................................................................................................................39 Pigovian Tax.........................................................................................................................................................39 12. Treaties and Agreements related to taxation..................................................................................................39 Advance Pricing Agreement (APA).................................................................................................................40 Purpose of the Advance Pricing Agreement..................................................................................................40 Types of Advance Pricing Agreement.............................................................................................................40 General Anti-Avoidance Rules(GAAR)..........................................................................................................40 Procedure…..........................................................................................................................................................41 When can GAAR Apply?...................................................................................................................................41 13. PYQS (UPSC)........................................................................................................................................................41 For More Study Material, Visit: studyiq.com Page no. 2  Taxation TAXATION INTRODUCTION Taxation is an instrument used by the Governments to garner resources. These resources are used by the governments to pay for the expenditure that the government incurs in order to provide services to the people. Though the taxation system is primarily aimed at maintaining the government revenues, the governments around the world use it creatively for other functions also. For example, taxation can be a useful instrument of fiscal policy to control inflation. Taxation can be used for promoting growth in the country. CLASSIFICATION OF TAXES BASED ON FAIRNESS Progressive Taxation It refers to the taxes which increase with an increase in the income level of the person. Progressive Taxes are considered fair in nature as they subject poor to lesser taxes than the rich. ○ A progressive tax rate may move from 0% to 45%, from the lowest and highest brackets, as the taxable amount increases. Example: This is just an example for understanding. We will not go into the technicalities of exemptions etc. The best example is the income tax slab based rates in India. Suppose, for the financial year 2022-23, the income tax slabs and rates for individuals are as follows: ○ For individuals with income up to Rs. 2.5 lakh: No tax ○ For individuals with income between Rs. 2.5 lakh and Rs. 5 lakh: 5% tax ○ For individuals with income between Rs. 5 lakh and Rs. 7.5 lakh: 10% tax ○ For individuals with income between Rs. 7.5 lakh and Rs. 10 lakh: 15% tax ○ For individuals with income between Rs. 10 lakh and Rs. 12.5 lakh: 20% tax ○ For individuals with income between Rs. 12.5 lakh and Rs. 15 lakh: 25% tax ○ For individuals with income above Rs. 15 lakh: 30% tax Let's take an example of an individual with an annual income of Rs. 8 lakh. Under the above tax structure, this individual would fall into the 15% tax bracket. Therefore, they would have to pay a tax of Rs. 45000 (0%of Rs 2.5 lakh + 5% of Rs. 2.5 lakh + 10% of Rs. 2.5 lakh + 15% of Rs. 50, 000) on their total income of Rs. 8 lakh. On the other hand, an individual with an annual income of Rs. 3 lakh would fall into the 5% tax bracket and would have to pay a tax of Rs. 2500 (5% of Rs. 50,000) on their total income of Rs. 3 lakh. ○ Thus, the progressive tax structure in India ensures that those with higher incomes contribute a greater percentage of their income towards taxes, while those with lower incomes are taxed at a lower rate or not at all. Regressive Taxation Regressive taxes are those taxes which make the poor people pay more taxes as compared to the Rich. For example: Let's say that in country X, all property purchases are subject to a flat tax of Rs. 10,000, irrespective of the area of the property bought by an individual. Now, let’s say two individuals A and B, with respective incomes of Rs. 10 lakhs per annum and Rs 1 lakh per annum, purchase a property. ○ For individual A: the tax paid by A with reference to his annual income is: 10,000/10, 00,000 * 100 = 1%. For More Study Material, Visit: studyiq.com Page no. 3  Taxation ○ For individual B: the tax paid by B with reference to his annual income is: 10,000/1, 00,000 * 100 = 10%. It is clear from the above example that the individual having a lesser income is paying more tax in comparison to the person having more income. Therefore, this tax is an example of a Regressive Tax. Different perspectives of Regressive taxes are as follows Many economists favor the application of Regressive taxes. ○ They say that such taxes promote merit in the economy as people are incentivised to earn more. Modern economists do not believe in this concept. They argue that not all decisions can be based on economics. ○ Some decisions must be taken while keeping in mind social considerations. This is especially relevant for countries which have chosen socialism as the basis of their Constitution. At the same time, the pro-progressive tax economists contend that the money earned by the rich must be shared with the society as the society contributes to building the wealth in an economy. Proportional Taxation Proportional taxes are independent of the earnings of an individual. This is also called Flat tax. In other words, regardless of how much money a person earns, they pay the same percentage of their income in taxes. Goods and Services Tax (GST) is an example of Proportional tax. It is not related to the income level of an individual. Both Rich and Poor pay the same tax on an item bought by the respective individual. For e.g., let’s say the tax rate on 1 kg sugar is 10% and the rate of Sugar is Rs. 100/kg. Now, if one buys 1 kg sugar, the tax liability stands at Rs 10. On the other hand, if a person buys 10 kilograms of sugar, the tax liability rises to 10% of Rs 1000, i.e., Rs 100. From the given example it is clear that irrespective of the annual income of the individual, the tax rate remains the same for buying same quantity of goods. BASED ON WHO PAYS THE TAXES Direct Taxes These taxes are non-transferable in nature. They are paid by the person on whom they are applied by the government. Direct taxes are generally applicable to incomes, revenues and earnings of the people and other entities. For example, income tax is applicable on the individual who earns money. Indirect Taxes It is the tax charged on a person who purchases the goods and services and it is paid indirectly to the government. These taxes are transferable in nature. They are applied to a different person and someone else ends up paying such taxes Examples of indirect taxes are excise tax, VAT, and service tax. Comparison between Direct Tax and Indirect Tax Parameter Direct Tax Indirect Tax For More Study Material, Visit: studyiq.com Page no. 4  Taxation Meaning Tax, levied on person’s income Tax levied on a person who consumes and wealth and is paid directly to the goods and services and is paid the government. indirectly to the government Incidence and Falls on the same person Falls on different persons Impact Tax base Income or wealth of the assesse Purchase/sale/manufacture of goods and provision of services Evasion Possible Tax evasion is hardly possible Inflation Helps in controlling the inflation. Push up price inflation. Imposition and Imposed on and collected from Imposed on and collected from collection assesses, i.e. Individual, HUF consumers of goods and services but (Hindu Undivided Family), paid and deposited by the assesse Company, Firm etc. Burden Cannot be shifted Can be shifted TAXATION IN INDIA Taxes in India are levied at three levels by Central Government, State Government and Local authorities such as panchayats and municipalities. Constitutional Provisions Pertaining to taxation in India Articles Provisions Article 265 It states that no tax shall be levied or collected except by the authority of law. It means, whatever tax is being charged needs to be backed by the law passed by the parliament or state legislatures. Article 246 (SCHEDULE VII) It distributes legislative powers including taxation between the Parliament and the State Legislature. Schedule VII provides for the three lists: List – I (It provides for areas on which only parliament is competent to make laws). List – II (It provides for areas on which only the state legislature can make laws). List – III (the areas on which both the Parliament and the State Legislature can make laws concurrently). 73rd and 74th Constitutional Provisions to levy taxes by Panchayats and Municipalities. amendment acts DIRECT TAXES IN INDIA Direct Taxes Union Government State Government For More Study Material, Visit: studyiq.com Page no. 5  Taxation On Income Corporation Tax Agriculture tax, Personal Income Tax Professional tax Minimum Alternative Tax (MAT) Dividend Distribution tax, Capital Gains tax. On Expenditure Fringe Benefit Tax (abolished) Road Tax (although debatable Gift Tax (abolished) as in some States/categories of vehicles- the seller will collect & submit On Assets Securities Transaction Tax, Land Revenue, Wealth Tax (abolished) Stamp/Registration duty. Banking Cash Transaction Tax (abolished) Property tax in urban areas. CESS AND SURCHARGE Cess A cess is a form of tax levied by the government on tax with specific purposes till the time the government gets enough money for that purpose. A cess is imposed as an additional tax besides the existing tax (tax on tax). For example, a cess for financing primary education is known as an education cess, Road & infrastructure cess, Health & Education, GST compensation cess etc. By default, cess goes to CFI. from there,cess goes to Public Accounts. Finance Commission can’t prescribe formula to share cess with States. (Although some of the cess money will invisibly goto states as a part of scheme implementation e.g. Pradhan Mantri Fasal Bima Premium share, etc. but that depends on discretion of Union) Surcharge A surcharge is an additional charge or tax. A surcharge of 10% on a tax rate of 30% effectively raises the combined tax burden to 33% Surcharge is not shared with States using Finance Commission Formula. Usually, surcharge doesn’t have any clear objective so it may be used for any purpose PERSONAL INCOME TAX Personal income tax is a taxation system that the government imposes on income generated by individuals. By law, taxpayers must file an income tax return annually to determine their tax obligations. The revenues from here are an important source of income for the government of India. For More Study Material, Visit: studyiq.com Page no. 6  Taxation It is governed by the Income Tax Act, 1961 and is levied on individuals, Hindu Undivided Family (HUF), partnership firms etc. Related Information Income tax slab: Indian Income tax levies tax on individual taxpayers on the basis of a slab system. Slab system means different tax rates are prescribed for different ranges of income. It means the tax rates keep increasing with an increase in the income of the taxpayer. Income tax has classified three categories of “individual “taxpayers such as: Individuals (aged less than of 60 years) including residents and non-residents Resident Senior citizens (60 to 80 years of age) Resident Super senior citizens (aged more than 80 years) Old and Existing Tax Regime in India Tax Slab (₹) Old Tax Rates 0 – 2.5 lakh 0% 2.5 lakh – 5 lakh 5% 5 lakh – 10 lakh 20% 10 lakh & above 30% New Tax Regime The Union Budget 2020-21 introduced a new and simplified income tax regime. As per the new regime: Tax Slab (₹) Tax Rates Below 2.5 lakhs Nil 2.5-5 lakhs 5% 5-7.5 lakhs 10% 7.5-10 lakhs 15% 10-12.5 lakhs 20% 12.5-15 lakhs 25% Above 15 lakhs 30% Points to note Around 70 of the existing exemptions and more than 100 deductions were removed in the new simplified regime. Senior citizens above the age of 75 years have been exempted from filing Income tax returns if income is derived only from pension and interest. Section 194P was newly inserted to enable banks to deduct the tax on deposits of senior citizens over 75 years of age. For More Study Material, Visit: studyiq.com Page no. 7  Taxation The new income tax regime was made optional - an individual may continue to pay tax as per the old regime and avail of deductions and exemptions. Changes in Budget 2023 Changes in new Income Tax Regime Changes in new Income Tax Regime Income range Income tax rate Up to Rs. 3,00,000 nil Rs. 300,000 to Rs. 6,00,000 5% Rs. 6,00,000 to Rs. 900,000 10% Rs. 9,00,000 to Rs. 12,00,000 15% Rs 12,00,000 to Rs. 1500,000 20% Above Rs. 15,00,000 30% Points to note Number of slabs decreased: The tax structure in the new personal tax regime has been changed by reducing the number of slabs to five and increasing the tax exemption limit to ₹ 3 lakh. Tax Rebate Limit Raised: Also the rebate limit in the new tax regime has been increased to ₹ 7 lakh. It means that persons in the new tax regime with income up to ₹ 7 lakh will not have to pay any tax. Standard Deduction The new tax regime has proposed to increase the standard deduction for salaried individuals to 50,000 rupees and the deduction for family pension up to 15,000 rupees. CORPORATE TAX It is levied on profits earned by companies. Companies that are registered in India under the Companies Act 1956, both private and public, are subject to pay corporate tax. The rate at which the tax is imposed as per the provisions of the Income Tax Act, 1961 is known as the Corporate Tax Rate. The Corporate Tax rate is based on a slab rate system depending on the type of corporate entity and the different revenues earned by each of corporate entities. In 2019, the Finance Ministry had announced new corporate tax rates applicable from 1st April 2019 onwards for certain types of corporations. For all other types of corporations including foreign companies, the corporation tax rates have remained unchanged. Corporation Tax Rates in India for a Domestic Corporation Type of Company New Corporation Tax Rate Additional Benefit/Requirements For More Study Material, Visit: studyiq.com Page no. 8  Taxation Corporations not seeking any 22% (earlier 30%) + applicable companies don't have to pay incentives/exemptions cess and surcharge. Effective any minimum alternate tax or corporate tax rate of 25.17 MAT. Corporations seeking Unchanged at 30% MAT rate reduced to 15% from incentives/exemptions earlier level of 18.5% For new firms 15% (earlier 25%) company must be incorporated on or after 1st October 2019 making fresh investment in manufacturing Corporate tax rates Foreign Companies Foreign Companies: A foreign company is defined as a company that is not of Indian origin. Its management and control takes place outside of India. These corporations are not registered under the Companies Act. Nature of Income % Any other Income from Indian Operations 40% Royalty received or fees for technical services 50% received by a foreign corporation from the government or any indian concern under an agreement made before April 1, 1976 and approved by the central government MINIMUM ALTERNATE TAX(MAT) The tax provision Minimum Alternate Tax (MAT) was created to bring ‘zero-tax paying companies’ within the ambit of income tax and make them pay a minimum amount in tax to the government.It was introduced from 1997-98. How is MAT calculated? MAT is levied on book profit, unlike normal corporation tax, which is levied on taxable profit. In September 2019, the government reduced the MAT tax rate from 18.5 per cent to 15 per cent. Also, no MAT would be imposed on new domestic manufacturing company (incorporated on or after October 1, 2019) Rationale behind MAT Generally, income tax is computed as per the provisions of the IT Act. However, companies compute their book profit as per the provisions of the Companies Act 2019. IT Act allows several kinds of exemptions, depreciation, deductions from gross income or book profit, companies in many instances can show their taxable income as very less, on which the amount of taxes comes out to be very low. Therefore, for these zero taxes or very less tax Companies, MAT was introduced. Now, a company must pay at least either corporate tax or MAT, whichever is higher. For More Study Material, Visit: studyiq.com Page no. 9  Taxation DIVIDEND DISTRIBUTION TAX Dividend Distribution Tax (DDT) is a tax levied on dividends distributed by companies out of their profits among their shareholders. The Dividend Distribution Tax is taxable at source and is deducted at the time of the distribution. Budget-2020 abolished DDT. But, dividend will be taxable in the hands of shareholder (i.e. shareholder will pay income tax on it. The Benefits of this are: To provide relief to large class of investors To make India an attractive destination for investment WEALTH TAX It was governed by the Wealth Tax act 1957. It was levied on the net wealth owned by an individual, a HUF or a company on the date of valuation (31st March). However, wealth tax was not applicable to trusts, partnership firms, cooperative societies, political parties etc. It was abolished w.e.f 1 April 2016. CAPITAL GAINS TAX Any profit or gain arising from the sale of “capital assets“ is a capital gain. The sale of an asset resulting in profit is considered as an income to the asset holder. Tax levied on such profit or gain is capital gains tax. When an owner/ person makes profit by selling his capital assets such as non-agro-land, property, jewellery, paintings, vehicles, machinery, patents, trademarks, shares, bonds & other securitiesthen he has to pay capital gains tax (CGT) Types of Capital Gains Taxation Short Term Capital Gains Tax An asset held for a period of 36 months or less is a short- term capital asset. The criteria is 24 months for immovable properties such as land, building. Some assets are considered short-term capital assets when these are held for 12 months or less like Equity or preference shares in a company, Securities (like debentures, bonds, govt securities etc.), Zero coupon bonds. The profit generated through sale of such asset would be treated as short term capital gain and would be taxed accordingly. Long Term Capital Gains Tax An asset held for more than 36 months is a long-term capital asset. Capital assets such as land, building and house property shall be considered as long-term capital asset if the owner holds it for a period of 24 months or more Also some assets if held for a period of more than 12 months, shall be considered as long-term capital asset like Equity or preference shares, Securities (like debentures, bonds, govt securities etc.), etc The profit generated through sale of such asset would be For More Study Material, Visit: studyiq.com Page no. 10  Taxation treated as long term capital gain and would be taxed accordingly Example Suppose Mr X sells a capital Asset —--------> He has to pay Capital Gain Tax—-----> if it is a digital asset—-------> 30% flat tax on profit If it is a share (equity)------->sold before 12 months—---->Short term CGT Share if sold after 12 months—--------> Long Term CGT If it is a home, propert—------>different % of CGT (depending on short term or long term capital Asset) SECURITIES TRANSACTION TAX STT is levied on the sale and purchase of shares, ETF-units, derivatives and other securities at stock-exchanges STT is a kind of turnover tax where the investor has to pay a small tax on the total consideration paid or received in a share transaction. It was introduced in the Budget of 2004 and implemented in Oct 2004. The objective behind the levy is to mitigate tax evasion as the same is taxed at source. Stocks, futures, option, mutual funds and exchange traded funds come under the ambit of STT. STT is applicable in the case of transaction that takes place in the exchanges. Example of STT Suppose, there is a ‘Mr. X’ is an investor in the Indian Equity Market. He purchased 1000 shares on 12th January for 50 Rs. each in the morning. He then sold his 1000 shares at 60 Rs. each in the evening. As per the intraday equity trading, the STT levied on this transaction will be 0.025%. Let’s calculate the STT on this transaction: STT= 0.025% x 60 x 1000 = 15 Rs DIGITAL TAX Digital Tax refers to the tax levied on digital goods or services or digital business activities. It is a form of Direct tax. In other words, Digital Tax is levied on non-resident e-commerce operators and nonresident digital companies who provide services to Indian residents or companies. The purpose of this tax is to ensure that foreign companies pay their fair share of taxes in India In 2016, India was the one of the first countries to introduce a 6 percent equalization levy i.e., Digital tax on nonresident digital companies (Google, Facebook) that was restricted to online advertisement services (digital advertising taxes or “DATs”). In 2020, the Indian Income-tax Act expanded the scope of Equalisation Levy (commonly referred to as ‘Equalisation Levy 2.0 or EL 2.0’) as part of the Finance Act 2020. o EL 2.0 was made effective on April 1, 2020. o The new levy now includes 2 percent Digital Service Tax (DST) or EL on trade and services of foreign e-commerce companies such as Amazon and Walmart-owned Flipkart and others having an annual turnover of ₹2 crore or more. DST is aimed at ensuring that non-resident, digital service providers pay their fair share of tax on revenues generated in the Indian digital market. For More Study Material, Visit: studyiq.com Page no. 11  Taxation Digital Services tax is part of the OECD’s two-pillar plan. This plan has been agreed upon by 137 countries (including India) in 2021 to reform international taxation rules and address the tax challenges arising from the digitalization of the economy. Example: o Let's take an example to understand how the equalization levy works. Suppose there is a non-resident e-commerce operator like Amazon, that provides advertising services to Indian companies. The total consideration received by Amazon. for these services is Rs. 50 lakh. Under the equalization levy, Amazon would be required to pay a tax of 2% on the consideration received, which would be Rs. 1 lakh (i.e., 2% of Rs. 50 lakh). PROFESSIONAL TAX It is levied and collected by the state governments (unlike other direct taxes). It is imposed on professionals or employees who earn a salary. Examples of professional tax payee include CA, Lawyers, and Doctors etc. FRINGE BENEFIT TAX It was introduced in 2005. It was fundamentally a tax that an employer had to pay in lieu of the benefits that were given by him to his employees like telephone reimbursements, free or confessional tickets etc. Fringe Benefit Tax was withdrawn in 2009. Example of Fringe Benefit Tax when company often pay its employees something extra over and above the salary. It could be in the form of reimbursing expenses, paying subscription, offer shares, tickets, reimbursements, company vehicles or in any other way. Hence, if an employer spends on things like the entertainment costs, free of cost share allotments or allotting them at lower rates and hospitality expenses etc. then it is regarded as fringe benefit. Fringe benefit is not a part of the salary. Now, if an employee was given a company car to use for both business and personal travel. The value of the car would be considered a fringe benefit and would be subject to FBT. BANKING CASH TRANSACTION TAX It was introduced in 2005 and was levied at 0.1% on cash withdrawal exceeding Rs. 25, 000 in a day by an individual or HUF from a bank account (other than savings bank account). BCTT was withdrawn in 2009. TAXATION ON VIRTUAL DIGITAL ASSETS The Government has provided a specific tax regime for virtual digital assets in Budget 2022-23. Definition of Virtual Digital Assets Under clause 47A of the Section 2 of Income Tax Act the virtual digital assets means: o Any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, providing a digital representation of value, o It has a digital representation of value which is exchanged with or without consideration. o It functions as a store of value or a unit of account. o It can be used in any financial transaction or investment, but not limited to, investment schemes. o It can be transferred, stored or traded electronically. o The definition of VDA also specifically includes Non-Fungible Token (NFT). ▪ NFTs is a digital asset that exists on a block chain, allowing anyone to verify its authenticity and who owns it. For More Study Material, Visit: studyiq.com Page no. 12  Taxation The Central Government may include or exclude any other digital asset from the definition of the virtual digital asset by notification in the Official Gazette. The taxation regime Since 1st April 2022, under Section 115BBH of the Income Tax Act, any income from the transfer of any virtual digital asset is being taxed at the rate of 30%. No deductions are allowed in respect of any expenditure or allowance while computing such income except the cost of acquisition. Loss from the transfer of virtual digital assets can’t be set off against any other income. Gain from the transfer of virtual digital assets is non-deductible. Gift of virtual digital assets is also proposed to be taxed in the hands of the recipient. 1% TDS (Tax Deducted at Source) is to be deducted on payment made above a monetary threshold in relation to the transfer of virtual digital assets. Tax on virtual digital Asset. Ex Bitcoin Agricultural Income Tax Agricultural income is defined under section 2(1A) of the Income-tax Act. As per section 2(1A), agricultural income generally means: ○ Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. ○ Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce. ○ Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A). ○ Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. As per section 10(1), agricultural income earned by the taxpayer in India is exempt from tax. Arguments against the Taxation of Agriculture Income: Small tax base: The recent agricultural census showed that around 95% of the total agriculture assets are owned by small and marginal farmers-whose capacity to pay taxes is very low. Low credit facilities: If agricultural tax is imposed on farmers, it will reduce their chances of getting significant credits, and it will lead to credit flowing only to rich farmers, as they’ll have a higher For More Study Material, Visit: studyiq.com Page no. 13  Taxation income to show. Agrarian distress: With so many farmers committing suicide because of pending debts, low productivity and small income, imposing an agriculture tax will add to their burden. Agriculture is an informal sector: Almost all the payments are made in cash which makes it difficult to keep a track of income and expenditure. Arguments in favour of the Taxation of Agriculture Income: The Kelkar Committee and third Tax Administration Reform Commission Report (2014) listed the following three reasons in support of taxing the agriculture income: Exemption to agricultural income distorts horizontal and vertical equity -those getting exemptions are at an advantage over those earning equivalent level of income from non-agricultural activities (horizontal equity) and exemption fails to distinguish between the poor and the rich farmers (vertical equity). This has benefited the big farmers as they are not required to pay income tax. Exemption encourages laundering of non-agricultural income as agricultural income, i.e., People engaged in the non-agricultural sector tend to evade taxes by somehow showing that their income is derived from agriculture. A narrow tax base due to exemption of agriculture income leads to a higher tax rate structure and burdens other tax payers. TAX DEDUCTED AT SOURCE TDS, or Tax Deducted at Source, is a certain percentage of one’s monthly income which is taxed from the point of payment. It is a type of advance tax that the Government of India levies on a periodic basis. The overall deducted TDS is claimed as a tax refund after a taxpayer files the Income Tax Return. TDS helps fighting tax evasion but on the other side, TDS also creates hardship for lower middle-class persons, because part of their payment is cut in advance. TAX COLLECTED AT SOURCE TCS or Tax Paid at Source is a tax that the seller owes but that is collected by the buyer. Comparison of Tax collected at source and Tax deducted at Source Tax Collected at Source Tax Deducted at Source Tax which is collected at the time of selling Tax that is deducted at the time of making certain Goods and services payment Collected by the entity that sell the Goods and Deducted by the entity that makes the payment services Collected on sale of certain specified goods Deducted on Payments like salary, Interest, such as tendu leaves, scrap, Mineral ores, professional fee, Lottery prize, payment to Motor vehicles etc. contractors, Rent, purchase of immovable property etc STAMP DUTY Stamp duty is a tax imposed on the sale of property/property ownership by the state government. It is payable under Section 3 of the Indian Stamp Act, 1899. REFORMS IN DIRECT TAX IN INDIA Administrative reforms: Following steps have been take as administrative reforms For More Study Material, Visit: studyiq.com Page no. 14  Taxation o Computerisation involving allotment of a unique identification number to taxpayers which is emerging as a unique business identification number. o Creation of Tax Information Network (TIN) by National Securities Depository Limited (NSDL) to modernise the income tax department through information technology for collection, processing, monitoring, and accounting of direct taxes. Technological reforms: The computerisation in the Income-tax Department was initiated in 1981, with the setting up of the Directorate of Income tax (Systems). The computerised activities were subsequently extended to allotment of Permanent Account Number (PAN) under the old series, allotment of Tax Deduction Account Number (TAN), and pay roll accounting. Restructuring of the Income Tax Department: In 2000, the ITD was restructured to- Enhance effectiveness and productivity; Increase revenue collection; Improvement in services to taxpayers; Reduction in expenditure by downsizing the workforce; Introduction of information technology; and Standardisation of work norms. Recent initiatives o Project Insight, launched in 2017, is an income tax department initiative to monitor high value transactions. o The Faceless Assessment Scheme, 2019 was introduced to impart efficiency, transparency and accountability to the assessment process. It eliminates the interface between the Assessing Officer and the assessee. o In 2020, Government has launched ‘Transparent Taxation–Honouring the Honest, which is a platform to meet the requirements of the 21st century taxation system. o The Government of India in September 2021 has launched a new e-filing web portal for taxpayers. Taxpayers’ Charter: It emphasises the importance of fair, courteous and reasonable treatment to the taxpayer Tax grievance redressal system: The present tax grievance redressal system consists of grievance cells headed by department officials/ Aaykar Sewa Kendras (ASK), e-nivaran portal. It is a separate and dedicated window for grievance redressal in the Income Tax Business Application, and CPGRAMS (Central Public Grievance Redress and Monitoring System). BUDGET 2023-24: REFORMS PROPOSED IN DIRECT TAXES Cooperation New co-operatives that commence manufacturing activities till 31.3.2024 to get the benefit of a lower tax rate of 15 per cent Opportunity to be provided to sugar co-operatives to claim payments made to sugarcane farmers for the period prior to assessment year 2016-17 as expenditure. o This is expected to provide them a relief of almost Rs. 10,000 crore. The limit for cash deposits and loans by Primary Agricultural Co- operative Societies and Primary Co-operative Agriculture and Rural Development Banks has been increased to 2 lakh rupees per member. A higher limit of Rs. 3 crore for TDS on cash withdrawal to be provided to co-operative societies Start-Ups The date for start-ups to receive income tax benefits has been extended to 31.3.2024. Proposal to provide the benefit of carry forward of losses on change of shareholding of start-ups from seven years of incorporation to ten years. capital gains on Deduction from capital gains on investment in residential house under For More Study Material, Visit: studyiq.com Page no. 15  Taxation investment in sections 54 and 54F to be capped at Rs. 10 crore for better targeting of residential house tax concessions and exemptions. Online Gaming Minimum threshold of Rs. 10,000/- for TDS to be removed Taxability relating to online gaming to be clarified Proposal to provide for TDS and taxability on net winnings at the time of withdrawal or at the end of the financial year. Gold Conversion of gold into electronic gold receipt and vice versa not to be treated as capital gain. Exception from Income of authorities, boards and commissions set up by statutes of Income Tax the Union or State for the purpose of housing, development of cities, towns and villages, and regulating is proposed to be exempted from income tax Agniveer Fund to be provided EEE status. Payments received by Agniveers enrolled in Agneepath Scheme, 2022 will be exempt from taxes. Deduction in total income will be allowed for contributions to the Agniveer Seva Nidhi account by the Agniveer or the Central Government. Common IT Return Budget also proposes to roll out a next-generation common IT return Form form for tax payer convenience. It also stipulates a plan to strengthen the grievance redressal mechanism for direct taxes Deployment of 100 Joint Commissioners for disposals of small appeals in direct tax matters Better targeting of Income tax exemption from proceeds of insurance policies with very Tax concessions high value will also have limit. Extension of period of tax benefits to funds relocating to IFSC, GIFT City till March 2025. Decriminalisation under section 276A of the Income Tax Act Allowing carry forward of losses on strategic disinvestment including that of IDBI Bank Personal Income Tax Rebate limit of Personal Income Tax to be increased to Rs. 7 lakh from the current Rs. 5 lakh in the new tax regime. o It means that persons in the new tax regime with income up to ₹ 7 lakh will not have to pay any tax The tax structure in the new personal tax regime has been changed by reducing the number of slabs to five and increasing the tax exemption limit to ₹ 3 lakh. New income tax regime would be the default tax regime. However, citizens will continue to have the option to avail the benefit of the old tax regime. Highest surcharge rate to reduce from 37 per cent to 25 per cent in the new tax regime. This to further result in reduction of the maximum personal income tax rate to 39 per cent. For More Study Material, Visit: studyiq.com Page no. 16  Taxation INDIRECT TAXES TYPES OF INDITRECT TAX Ad- Valorem tax: Ad Valorem tax is a tax imposed as percentage of the value of the product. For example, customs duty of 20% on solar panel cells costing Rs 10,000. The most common ad valorem taxes are property taxes levied on real estate. Specific tax: Specific tax is a tax imposed on quantity.E.g. ₹ 200 Excise duty on production of every 1000 cigarettes of 65-70mm length. Here we’re taxing cigarettes irrespective of their manufacturing price or selling price. INDIRECT TAXES IN INDIA Some Indirect Taxes in India 1.Excise Duty It was implemented in 1944. Excise duty is a form of indirect tax that is levied by the Central Government of India for the production, sale, or license of certain goods Except for alcoholic drinks and narcotics, the central government imposes an explicit excise levy. It has now been replaced by GST. Three kinds of excise duties existed in India are: Basic Excise Duty Additional Excise Special Excise Duty Duty Levied on goods Levied on goods of Levied on special that were high importance, goods classified classified under under the Additional under the Second the first schedule Duties of Excise Schedule to the of the Central (Goods of Special Central Excise Tariff Excise Tariff Act, Importance) Act, Act, 1985. 1985. It was 1957. applied on all goods except salt. 2.Central Sales Tax It was implemented in 1956. Central Sales tax refers to the tax levied on sales generated during inter-state trade and commerce in a country. It is origin-based tax It is charged only on inter-state transactions and any transaction within a state or import-export of goods does not fall under its purview. It’s now replaced by GST. For More Study Material, Visit: studyiq.com Page no. 17  Taxation 3.Customs Duty It was implemented in 1962. When commodities are transferred across international boundaries, customs duty is applied as a tariff or tax. Its goal is to safeguard the country's economy. 4.Basics Custom This is imposed on imported commodities under Section 12 of the Duty 1962 Customs Act. The tax rate is determined by the First Schedule of the 1975 Customs Act 7.Countervailing Countervailing duties are levied to compensate for the negative Duty effects of import subsidies and to protect domestic producers. To make their products cheaper and boost their demand in other countries, foreign governments sometimes provide subsidy to their producers. To avoid flooding of the market in the importing country with these goods, the government of the importing country imposes countervailing duty, charging a specific amount on import of such goods. The duty nullifies and eliminates the price advantage (low price) enjoyed by an imported product when it is given subsidies or exempted from domestic taxes in the country where they are manufactured For example: export subsidies given by the Chinese government will make the Chinese products low priced in the Indian market. This will be a disadvantage for the competing Indian products. To overcome this situation, government of India can impose a countervailing duty on Chinese imports. 8.Anti-Dumping It is a customs duty on imports providing a protection against the Duty dumping of goods at prices substantially lower than the normal value. In order to protect their respective economy, many countries impose duties on products they believe are being dumped in their national market; this is done with the rationale that these products have the potential to undercut local businesses and the local economy. India has initiated maximum anti-dumping cases against dumped imports from China. While the intention of anti-dumping duties is to save domestic jobs, these tariffs can also lead to higher prices for domestic consumers. For Example: In 2021, India has imposed anti-dumping duty on five Chinese products, including certain aluminium goods and some chemicals, for five years to guard local manufacturers from cheap For More Study Material, Visit: studyiq.com Page no. 18  Taxation imports from the neighbouring country 9.Service Tax In India, a service tax is levied on all services rendered. It also had a 'negative list' exclusion criterion, where some services are excluded from the tax net. It is now subsumed under GST. REFORMS IN INDIRECT TAX MODVAT (1986-2004): MODVAT was incorporated into the Indian tax system in the year 1986, covering a few limited commodities initially. MODVAT used a modified version of VAT wherein manufacturers of particular goods who relied on raw materials from other manufacturers were provided excise credit on the raw materials, eliminating double taxation. Before the introduction of MODVAT, it was hard for the government to keep a tab on taxes at multiple stages, thereby burdening the final consumer. For Example: A manufacturer (A) who procured raw materials from manufacturer B could claim excise credit on the raw material since B adds an excise duty on his/her final product.This credit can be subtracted from the final excise due by a manufacturer, thereby helping him/her pay only that amount which he/she is liable to pay. CENVAT (2004-2017): Central Value Added Tax is a modification of the previously functioning MODVAT. Let us take the example of a manufacturing company (A) specialising in producing fans of different kinds. This company equires raw material including steel blades, copper wires, plastic blades, motors, etc. The owner (A) purchases the blades from Zuma Blades Private Limited, paying them a certain amount. Similarly A purchases the copper wires from Cupro Private Limited and motors from Motored Private Limited. Now each time the company (A) purchases any of these input materials, it includes certain excise duties which have been added by the original manufacturer, thereby increasing the tax liability of Company A. CENVAT permits company (A) to use credit when it purchases an item for its manufacturing process, thereby reducing the overall tax liability, not just for them but also the final consumer. Now if we consider the total CENVAT of raw materials to be Rs 50,000 and the CENVAT on the final product to be Rs 60,000, the liability of company A is (Rs 60,000 – Rs 50,000 = Rs 10,000). CENVAT thereby reduces cascading taxation, ensuring that no party is unduly taxed an additional amount. VAT (2005-2017): VAT is a multipoint consumption tax levied by states on a commodity whenever it adds value at any point in the supply chain, from production to sale. Here, tax is levied at each stage of the transaction in the production/ distribution chain. For More Study Material, Visit: studyiq.com Page no. 19  Taxation The tax paid at an earlier stage is called ‘Input tax credit (ITC)’, and this credit can be used against a tax at a later stage. GST (2017): It is Comprehensive, multi-stage, destination-based tax that is levied on every value addition. It is an indirect tax levied on the supply of goods and services. GOODS AND SERVICES TAX GST is an indirect tax applicable uniformly across the country. This creates “One Nation One Tax” regime. GST is applicable on ‘supply’ of goods or services. GST is a destination-based consumption taxation. The Kelkar Task Force on the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 suggested a comprehensive GST. How is cascading effect reduced in GST? Cascading effect is a situation where a tax is levied on a product or service multiple times, resulting in an increase in its price. In the pre-GST era, the cascading effect of taxes was a major issue in India's tax system, as businesses had to pay tax on tax, leading to higher prices for consumers. However, with the implementation of the Goods and Services Tax (GST) system in India, the cascading effect of taxes has been significantly reduced. Here's how: Input Tax Credit (ITC): Under the GST system, businesses can claim input tax credit for the GST paid on inputs used in the production of goods or services. This means that businesses can offset the tax paid on inputs against the tax payable on the output, reducing the tax burden and the cascading effect of taxes. Subsuming of Multiple Taxes: GST has subsumed multiple indirect taxes such as Central Excise Duty, Service Tax, Value Added Tax (VAT), and others, into a single tax system. This has eliminated the need for businesses to pay multiple taxes, reducing the cascading effect of taxes. Uniform Tax Rates: GST has brought uniformity in tax rates across the country, with the same tax rates applicable to goods and services across all states. This has reduced the cascading effect of taxes, as businesses no longer have to deal with different tax rates for the same product or service in different states. Example: Let's assume that a manufacturer purchases raw materials worth Rs. 1000 and incurs a GST of Rs. 180 (18% of Rs. 1000). The manufacturer then processes these raw materials into finished goods and incurs a further GST of Rs. 270 (18% of Rs. 1500, assuming a sale price of Rs. 1500). o Without the benefit of input tax credit, the manufacturer would have to pay GST on the entire value of Rs. 1500, including the GST paid on the raw materials. This would result in a tax liability of Rs. 270 + Rs. 180 = Rs. 450. o However, with the input tax credit mechanism under GST, the manufacturer can claim a credit of Rs. 180 paid as GST on the raw materials, and set it off against the GST payable on the sale of finished goods. o This means that the manufacturer only has to pay GST on the value added during the production process, i.e. Rs. 1500 - Rs. 1000 = Rs. 500. The GST payable on Rs. 500 at 18% is Rs. 90. Hence, the total GST liability for the manufacturer is reduced to Rs. 180 (GST paid on raw materials) + Rs. 90 (GST payable on finished goods) = Rs. 270. o In this way, the input tax credit mechanism under GST reduces the cascading effect of taxes, as businesses can claim credit for the tax paid on inputs used in the production of goods or services. This results in a more efficient and transparent tax system, which ultimately benefits consumers in the form of lower prices. For More Study Material, Visit: studyiq.com Page no. 20  Taxation Key Features of GST Implementation: The Goods and Service Tax Act was passed in the Parliament on 29th March 2017. The Act came into effect on 1st July 2017. Amendment to the Constitution for GST: GST was introduced in 2017 as a comprehensive indirect tax for the entire country by the 101st Constitutional Amendment Act. Under Article 246A of the Constitution, the GST is charged and administered by the Centre and the States. Constitutional provisions related to GST : Provisions are as follows: Article 246A: States given power to tax goods and services. Note- Only Union has power to tax inter-state supply of goods and services in the form of IGST Article 269A: IGST to be distributed between Union and States as per the formula given by GST Council Article 270: CGST to be distributed between Union and States as per the formula given by Finance Commission Article 279A: President of India to appoint a constitutional body – GST Council Components of GST: GST is divided into three categories. They are: 1. Central GST (CGST): It is imposed by the Centre. 2. State GST (SGST): It is imposed by the States. 3. Integrated GST (IGST): It is imposed on inter-state supplies of goods and services. Taxes subsumed under GST: Central taxes subsumed under GST: Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty commonly known as Countervailing Duty; and Special Additional Duty of Customs. State taxes subsumed under GST: State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax; and Taxes on lottery, betting and gambling. Items outside the purview of GST in India: Petrol, high-speed diesel, aviation turbine fuel, crude oil. Electricity Alcohol used for human consumption Natural Gas GST slab 0%, 5%, 12%, 18% & 28%. No tax slab: items like jute, fresh meat, fish chicken, eggs, milk, butter milk, curd, natural honey, fresh fruits and vegetables, flour, besan, bread, prasad, salt, bindi, etc. GST COUNCIL It is a constitutional body established under Article 279A (1), introduced through the 101st Constitutional Amendment Act. Under Article 279A (4), the GST rates to the Union and States are recommended by the GST Council. Key points about the GST Council The GST rates are decided mutually by States and Union governments at the GST Council Meeting. For More Study Material, Visit: studyiq.com Page no. 21  Taxation The GST Council has a quorum requirement of one-half of the total members for present at the meeting. Its decisions are based on a majority of not less than three-fourths of the weighted votes of the members present and voting. The weightage of the Union Government vote is one-third of the total votes cast, while that of all States taken together is the remaining two-thirds of the total votes cast. Composition of GST Council Other Members of GST council Union Finance Minister as Chairperson. The members of the Council from the states The Minister of State in charge of must elect a Vice-Chairperson of the Council from Revenue or Finance in the Union. among themselves. The members of the Council from the Secretary (Revenue) is the ex-officio secretary states must elect a Vice-Chairperson of to the GST Council. the Council from among themselves. Central Board of Excise and Customs (CBEC)’s chairperson as a permanent invitee (non-voting) to Function of GST council all proceedings of the GST Council. Determination of the principles of levying the taxes, cesses, and surcharges. Listing the items and services that are either subject to GST or are exempt from GST Determining the annual revenue threshold below which goods and services are excluded from GST Providing special provisions for the Hilly states of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh, and Uttarakhand Taking decisions on any extra rate or rates for a limited time to raise additional funds in the event of a natural disaster or crisis. Any other GST-related subject that the Council deems appropriate. Recent Developments related to GST council The Supreme Court, in a recent judgement, opined that the recommendations of the GST Council are not binding on either the Centre or the States. Supreme Court‘s Judgement on GST framework According to the latest judgement, both the Parliament and the State legislatures possess simultaneous power to legislate on GST as: o Recommendations of the GST Council are only persuasive (not binding). o Article 279A doesn’t specifically mention that all GST Council decisions are binding on the parties. o Article 246A empowers Parliament and State legislatures to make laws relating to GST, i.e., GST Council decisions are not enforceable, and the Union or State can reject the GST Council decisions and set different rates for goods and services in their jurisdiction E-WAY BILL E-way bill refers to the tool created for ease of movement of goods across the country. It is carried by the transporters of goods across India if the value of goods is more than Rs. 50,000. It provides for pre-registration of goods being transported from one location to another. The bill is carried physically for inspection by the authorities. QR Code is provided on the bill for quick inspection by the authorities For More Study Material, Visit: studyiq.com Page no. 22  Taxation Benefits of E-Way Bill It relaxes the need for constant inspection and frequent interruptions in the trip, which had earlier led to delays and an increase in the costs for the transporters. It also contains the vehicle number, which makes it easy to trace the movement of vehicles across the territory of India. At the same time, e-way bill is not required for non-motorized transport, thus, easing the compliance for the small traders. GOODS AND SERVICES TAX (COMPENSATION TO STATES) ACT, 2017 When GST was enacted, many states feared a loss of revenue collection through the GST system. In fact, experts had pointed out that since GST was a destination-based tax, many states would gain due to higher consumption rates, but at the cost of states which are considered frontrunners in the manufacturing sector. Moreover, it was contended that GST was a revenue-neutral tax. This effectively means that there How is the compensation funded? would be no loss to states due to For providing compensation to States, a cess is being enactment of GST. However, many levied on certain goods, and the amount of cess collected is economists had pointed to the being credited to the Compensation Fund. contrary, leaving States in a worry. Compensation to States is then paid out of the To allay these concerns, the Compensation Fund. provision was provided statutory status through the Goods and Services Tax (Compensation to States) Act, 2017. Features of the Goods and Services Tax (Compensation to States) Act, 2017. The Act provides for revenue compensation to the States for any revenue loss incurred due to the enactment of GST for five years or for the duration decided by the GST Council. To garner revenues for the compensation, GST compensation cess was initiated on the supply of select goods and services. Goods subject to GST compensation cess include tobacco and its products, aerated waters, motor vehicles etc. Compensation is available only for SGST. It is not given to the Union Territory Without Legislature. Reason for compensation to state For the Union govt, largest source of tax collection were corporate tax and personal income tax. Both are direct taxes and therefore kept out of the GST regime. For the state governments, VAT was largest source of tax income, but it is subsumed under GST, along with other indirect taxes, cess and surcharges levied by the states. Therefore, states were afraid their revenue income will decrease. Secondly, GST is a destination-based tax, therefore industrialized states are not happy with it. Challenges of Goods and Services Tax (Compensation to States) Act, 2017 The Goods and Services Tax (Compensation to States) Act, 2017 was enacted to address the challenges faced by states during the implementation of the GST system. However, the act also faced some challenges, which are as follows: Delayed Payments: One of the main challenges faced by states under the GST compensation mechanism is delayed payments. Due to various reasons such as lack of funds and technical glitches in the system, the payment of compensation to states was often delayed, causing financial stress to the state governments. For More Study Material, Visit: studyiq.com Page no. 23  Taxation o In 2020 (Corona Period), due to huge shortfalls in the tax collection under GST the Central government and State Government came at loggerheads as Centre has shown its incapability to compensate the States as promised under the GST Act 2017. ▪ The Union Finance Minister in 41st GST Council meeting asserted that the Centre will not be able to compensate the States. ▪ The Central Government asserted that GST collections had sharply come down this year due to the Covid-19 pandemic. ▪ The GST compensation requirement was estimated to be around Rs 3 lakh crore in 2020, while the cess collection was expected to be around Rs 65,000 crore. Thus there is an estimated compensation shortfall of Rs 2.35 lakh crore. Revenue Collection Shortfall: The GST compensation mechanism is designed to provide compensation to states for any revenue loss incurred due to the implementation of the GST system. However, the revenue collection under the GST system has been lower than expected, leading to a shortfall in the compensation amount. o In 2022, it was reported that the state’s GST revenue gap in 2020-21 is expected to be about Rs. 3 lakh crore, while cess collections are only projected to reach Rs. 65,000 crore, leaving a shortfall of Rs. 2.35 lakh crore. Disputes over Compensation Calculation: There have been disputes between states and the central government over the calculation of compensation amounts. States have often claimed that the compensation amount provided by the central government is inadequate, leading to disagreements and delays in payment. Political Disputes: The issue of GST compensation has also become a political issue, with some states accusing the central government of not fulfilling its promises regarding compensation. This has led to tensions between the central and state governments, with some states threatening to boycott meetings of the GST Council. IT INFRASTRUCTURE FOR GST IMPLEMENTATION Goods and Services Tax Network (GSTN) It provides IT infrastructure and services to the Central and State Governments, taxpayers and other stakeholders for implementation of the Goods and Services Tax (GST) in India. It is wholly owned government corporation with equal shares held by the state and federal governments. GSTN in 2019 decided to make Aadhaar authentication mandatory for new dealers from January 2020 to check malpractices in GST. Project Saksham It is the Central Board of Excise and Customs' New Indirect Tax Network (Systems Integration). By integrating CBEC's IT system with GSTN, it will aid in the implementation of the Goods and Services Tax (GST). It will also aid in the expansion of Indian Customs' Single Window Interface for Trade Facilitation (SWIFT). Input tax credit Input credit means that when you pay tax on your output, you can deduct the tax you already paid on your inputs. It is a mechanism provided under the Goods and Services Tax (GST) system, which allows businesses to claim the tax paid on purchases of goods or services that are used for business purposes. Under the ITC system, a business can claim a credit for the GST paid on inputs (raw materials, goods in progress, capital goods, and services) used in the production of goods or services that the business is engaged in. This means that the GST paid on inputs is offset against the GST payable on the output (goods or services) that the business sells. For More Study Material, Visit: studyiq.com Page no. 24  Taxation For example, let's say a manufacturer buys raw materials worth Rs. 1 lakh, and the GST rate applicable is 18%. The GST paid on the purchase of raw materials is Rs. 18,000. If the manufacturer sells the finished product for Rs. 1.5 lakhs, and the applicable GST rate is 18%, the GST payable on the sale of the product is Rs. 27,000. However, the manufacturer can claim the ITC of Rs. 18,000 paid on the purchase of raw materials, which reduces the GST liability to Rs. 9,000 (27,000 - 18,000). Total GST liability of the manufacturer: (18000+9000= 27000) o In this example, the ITC mechanism helps the manufacturer to avoid the cascading effect of taxes, which means paying tax on tax. Without ITC, the manufacturer would have to pay GST on the entire value of the finished product, including the tax paid on the raw materials used to make it. To claim GST input credit - One must have a tax invoice (or debit note) issued by a registered dealer. One should have received the products/services National Anti-Profiteering Authority National Anti-profiteering Authority was constituted under section 171 of the Central Goods and Services Tax Act, 2017. It was constituted by the Central Government to examine whether additional input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in prices to the consumers. This Authority shall cease to exist after two years from its inception (2017), unless GST council renews it. In 2019 GST council extended it for another 2 years AUTHORITY FOR ADVANCE RULING Advance ruling’ means a decision provided by the authority or the Appellate Authority to an applicant on matters or on questions specified in section 97(2) or 100(1) of CGST/SGST Act. An advance ruling helps the applicant in planning his activities which are liable for payment of GST, well in advance. It also brings certainty in determining the tax liability, as the ruling given by the Authority for Advance Ruling is binding on the applicant as well as Government authorities. Advance Ruling can be sought for the following questions: classification of any goods or services or both; applicability of a notification issued under provisions of the GST Act(s); determination of time and value of supply of goods or services or both; admissibility of input tax credit of tax paid or deemed to have been paid; determination of the liability to pay tax on any goods or services under the Act; whether applicant is required to be registered under the Act; Objective of having a mechanism of Advance Ruling provide certainty in tax liability in advance in relation to an activity proposed to be undertaken by the applicant; attract Foreign Direct Investment (FDI); reduce litigation; pronounce ruling expeditiously in transparent and inexpensive manner. Composition of Authority for advance rulings (AAR) under GST Authority for advance ruling’ (AAR) shall comprise one member CGST and one member SGST/ UTGST. They will be appointed by the Central and State government respectively. For More Study Material, Visit: studyiq.com Page no. 25  Taxation BENEFITS OF GST Economic Growth: GST will lead to an improvement in tax compliance by combining different types of taxes and lowering the tax burden on the end use. It will aid in the creation of a unified national market for India. Inflation will be reduced as a result of the single, clear tax. Unified Tax. Removal of Cascading Effect: Due to value addition at different stages and sale of goods in a supply chain, the goods and services were subject to cascading effect of taxes. Cascading effect leads to imposition of tax on tax, which is against a sound economic system. GST removes the cascading effect by giving Input Tax Credit to the businesses. Cooperative Federalism: The formation of GST Council is an important step in assuring the States that they will continue to share decision-making with the Centre and Centre would not be imposing any fiscal decision without a wider consultation process.. Ease of Use: GST is a simple and straightforward tax system to operate, as it replaces a number of indirect taxes at the state and national level. Also, the greater use of technology will lower the amount of human interaction between the taxpayer and the tax administration, which will help to reduce corruption. Ecosystem of automated taxation: GST filing is mostly an automated process, with most of the systems being put online, viz. electronic compliances to the preparation of e-invoices, tracking the movement of products via an e-waybill etc. Logistical efficiency and a reduction in production costs: Due to a single taxation regime, several checkpoints for inspection and issue of permits have been dismantled, leading to smoother transport system. CHALLENGES WITH GST Concerns of States: GST does not encompass certain taxes, like those on alcohol and tobacco. States claim that absorbing them will lead to a loss of revenue and a reduction in the valuable resources of the States. At the same time, due to different tax rates and slabs, the conceptual premise that GST stands for ‘One Nation, One Tax’ is presently compromised. Compromising the Constitutional Authority of Parliament: The Central GST Bill of 2017 gives the government the authority to fix CGST rates. This means that the government can modify rates up to a maximum of 20%, without getting Parliament's permission. This diminishes the constitutional authority of Parliament and its power to levy taxes. Grievance Redressal Mechanism: It is important to create a GST Appellate Tribunal because it is evident that not all taxpayers have the financial or other resources to go to the High Court for every practical issue they face. Anti-profiteering measures should be streamlined, and compliance procedures should be simplified to ensure that the cost efficiency and price reductions promised by the GST law actually reach the ordinary man. Tax in news: Windfall Tax The Ministry of Finance had justified the imposition of Windfall Tax on domestic crude oil producers in July 2022. About Windfall Tax A windfall is defined as an “unearned, unanticipated gain in income through no additional effort or expense”. This tax is levied by governments against certain industries when economic conditions allow those industries to experience significantly above-average profits. Windfall taxes are designed to tax the profits of the company that it derives from an external, sometimes unprecedented events. For instance, the energy price rise as a result of the Russia-Ukraine conflict. These profits cannot be attributed to something the firm actively did, like an investment strategy or an expansion of business. For More Study Material, Visit: studyiq.com Page no. 26  Taxation Governments typically levy a one-off tax retrospectively over and above the normal rates of tax on such profits, called windfall tax. One area where such taxes have routinely been discussed is oil markets, where price fluctuation leads to volatile or erratic profits for the industry. Why are Countries Levying Windfall Taxes ? Prices of oil, gas, and coal have seen sharp increases in recent times due to factors, like a mismatch between energy demand and supply during the economic recovery from Covid-19, and Russian war in Ukraine. The rising prices meant huge and record profits for energy companies while resulting in hefty gas and electricity bills for household bills in major and smaller economies. Issues with Imposing Windfall Tax Since windfall taxes are imposed retrospectively and are often influenced by unexpected events, they can brew uncertainty in the market about future taxes. It is believed that such taxes are populist and politically opportune in the short term. Introducing a temporary windfall profit tax reduces future investment because prospective investors will internalize the likelihood of potential taxes when