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Economics 

 

Ideas to cover

  • Quick revision
  • Output and Outcome budgeting
  • Government Taxation

 

Output-Outcome budget

 

  • Budget shows the government’s priorities and commitments to different causes
  • However budget outlays do not automatically translate into works on ground
  • Thus, while budget highlights the financial plan for schemes and sectors, it must also justify it through planning certain monitorable results

 

Output-Outcome budget

 

  • To instill accountability, the government started publishing a output/performance budget which tied outlays to monitorable targets
    • g. Sarva shiksha abhiyan – 1000cr
  • Output – building of 50 schools in rural areas
    • MGNREGA – 50000cr
  • Output – employment to xyz people
  • Creation of xyz assets
  • However, mere physical outputs again do not automatically translate into policy outcomes

 

Output-Outcome budget

 

  • So a better approach is to bind outlays to intended outcomes during the year and medium term
    • g. Sarva shiksha abhiyan – 1000 crore
  • Increasing literacy to xy %
  • Increasing GER to xy %
    • MGNREGA – 50000 cr
  • Improve rural income
  • Reduce poverty by providing rural livelihood
  • Outcomes -> end products and results of various Government initiatives and interventions
  • Outcomes are expected results not only in terms of monetary units or physical infrastructure but also in terms of qualitative targets and achievements

 

Output-Outcome budget

 

  • With effect from FY 2007-08, the Performance Budget and the Outcome Budget hitherto which were presented to Parliament separately by Ministries/Departments, were merged and presented as a single document titled “Outcome Budget” in respect of each Ministry/ Department
  • From FY 2017-18 onwards, the Outcome Budget of all Ministries have been combined into one single document released by MoF in collaboration with NITI Aayog
  • Outcome Budget broadly indicates the outcomes of the financial budget of a Ministry/Department, indicating actual deliverables linked with outlays targeted during the year and in the medium term

 

Taxation

 

  • Means of generating revenue by the government
  • Primarily divided into:
    • Direct Tax [incidence = impact]
    • Indirect Tax [impact away from incidence]
  • Other types:
    • Ad valorem tax
    • Specific tax
  • Taxation regimes:
    • Proportional
    • Regressive
    • Progressive
  • Levied by Central and State government

 

Taxation

 

  • Progressive Taxation:
    • Increasing rates of tax for increasing volume or value on which tax is imposed
    • Benefits: pro-poor, redistribution of wealth, tax according to affordability
    • Cons: richness is punished, low incentive or growth, high tax evasion because of lower tax base

 

Taxation

 

  • Regressive taxation:
    • Decreasing tax rates on increasing value or volume on which tax is imposed
  • Proportional taxation:
    • Uniform tax rate along income or value
    • Pros: neutral to all, taxpayer satisfaction, easier tax administration
    • Cons: disproportionately impacts low income groups

 

Direct Tax

 

  • Impact and Incidence lie on the same economic unit
  • Various major direct taxes in India:
    • Income tax
    • Corporate tax
    • Capital gains tax
    • Securities transaction tax
    • Fringe benefit tax/Perquisite tax
Direct Tax

Corporate Tax

  • If a corporate organisation (Eg: Private Limited Company or Limited Company) is operating in India then corporate taxes is applicable on the income generated by the company
  • Makes the major chunk of Government’s tax revenue
  • Earlier – very high (before 1991)
    • Low compliance
    • More evasion
    • Low industrial growth
  • Since then being phased down

 

Direct Tax

Corporate Tax issues

  • Concept of transfer pricing:
    Transfer price is the price at which divisions of a company transact with each other
  • This is being utilized by large companies to avoid corporate tax – How?
  • India has APAs (Advanced Pricing Agreements)
  • India also follows OECD BEPS guidelines
  • APAs- Prospective agreement between taxpayer (company) and Tax Authority (Government) regarding taxpayer’s transfer pricing

 

Direct Tax

Corporate Tax issues

  1. Exemptions, Deductions etc. – companies try to avoid taxes by taking advantage of various deductions and exemptions through legal mechanisms
  • Taxable profit is much lower than book profits
  • India used MAT (Minimum Alternate Tax)
  • Minimum Alternative Tax (MAT): if taxable profit is less than 30% of book profit then MAT was applicable (Example)

 

Direct Tax

Capital Gains Tax

  • Applies on income from sale of assets
    • Short term capital gains – if asset is sold within 36 months of purchase; For shares, MFs, UTI etc. it is 12 months
    • Long term capital gains – >36 months
  • Recent Change in LCGT 2018-19 budget -> income on sales of equity and mutual fund assets after more than 12 months now considered for LCGT at 10% (or CG of >1lakh)

 

Direct Tax

Securities Transaction Tax

  • levied on every purchase and sale of securities that are listed on the recognized stock exchanges in India
  • Prevent speculative trading
  • curb evading of capital gains tax on profits earned by transacting in securities

 

Direct Tax

Fringe benefit tax

  • Tax an employer has to pay in lieu of the benefits that are given to his/her employees

Indirect Tax

  • Paid indirectly to the government, as the incidence and impact is separate
  • Various major indirect taxes:
    • Excise tax
    • Sales tax
    • Service tax
    • Customs
    • MODVAT and CENVAT
    • State VAT
    • GST

 

Indirect Tax

Excise Tax

  • levied on those goods which are manufactured in India and are meant for home consumption
  • The taxable event is ‘manufacture’ and the liability of central excise duty arises as soon as the goods are manufactured
  • It is a tax on manufacturing, which is paid by a manufacturer, who passes its incidence on to the customers
  • Later MODVAT

 

Indirect Tax

Sales Tax

  • Consumption tax when the good is sold
  • As a percentage of value of good
  • Central Sales tax – on interstate transactions
  • State Sales tax – on intrastate transactions

 

Indirect Tax

Service Tax

  • Consumption tax on services sector e.g. restaurants, transport etc.
  • Only central service tax
  • One of the major indirect tax revenue source for Centre

 

Indirect Tax

Custom duties

  • On imports and exports
  • If word customs is used generally – it means duties on imports; and export customs are usually return as “export duties”
  1. Basic Customs duty – the customs imposed on most imported products. It is also called “peak rate of duty”
  2. Additional Customs duty [Countervailing Duty] -> on products whose price is lower than similar products in domestic market because of input subsidies given by exporting country
  3. Anti – Dumping Duty -> To safeguard against “dumping” -> products deliberately sold by exporting country at a price which is lower than the price at which it is sold in exporting country’s own markets

Goods and Services Tax

 

Problems with the previous indirect tax regime:

  • Complex multistage system
  • Difficult and poor compliance
  • Tax evasion
  • Two points of fiscal policy –
    • Central indirect taxes
    • State indirect taxes
  • Multiple taxes = cascading of taxes

Goods and Services Tax

  • Unified indirect tax across the country on products and services
  • Similar concept of VAT collected at multi-point
  • Destination based
  • Subsumes various state and central indirect taxes
  • Decided by GST Council

 

Goods and Services Tax

 

Taxes subsumed:

  • At the Central level, the following taxes are being subsumed:
    • Central Excise Duty
    • Additional Excise Duty
    • Service Tax
    • Additional Customs Duty
    • Special Additional Duty of Customs
  • At the State level, the following taxes are being subsumed:
    • Subsuming of 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.

 

Goods and Services Tax (Benefits)

To Industry and businesses

  • Easy compliance
  • Uniformity of tax rates and structures
  • Removal of cascading
  • Improved competitiveness
  • Gain to manufacturers and exporters

Goods and Services Tax (Benefits)

 

To Central and State Governments

  • Simple and easy to administer
  • Better controls on leakage
  • Higher revenue efficiency

To Consumer

  • Single and transparent tax proportionate to the value of goods and services
  • Relief in overall tax burden