Syllabus
GS Paper 3: Government Budgeting
Applications where to apply?
– When asked about
– Tax Reforms
– GST
– Direct taxation trends
– India’s economic growth
– Prelims oriented terms and application based questions
Context
The article revolves around India’s strong current performance in tax collection and its potential implications for fiscal consolidation and future tax reforms.
Source
The Hindu | Editorial dated 13- January 2024
Robust Revenues
Higher direct tax collections build a safety net for public finances and pave the way for further tax system improvements.
Key Terms in the Article
- Direct taxes:
- Taxes levied directly on individuals or businesses based on their income or profits. Examples include income tax, corporate tax, and capital gains tax.
- Goods and Services Tax (GST):
- An indirect tax levied on the supply of goods and services across India, ultimately borne by consumers but collected and forwarded to the government by businesses.
- While individuals pay the GST at the point of purchase, the responsibility for collecting and remitting it to the government falls on the businesses involved in the supply chain.
- Tax filing base:
- The number of individuals or entities filing tax returns.
- Tax Deducted at Source (TDS)
- A mechanism where a certain percentage of tax is automatically deducted by the payer (deductor) at the time of making certain payments to another person (deductee) and deposited directly to the government on their behalf. This helps in ensuring that taxes are collected in advance and prevents tax evasion.
- Tax Collected at Source (TCS)
- A mechanism in India that involves the collection of tax by a seller (collector) from the buyer (collectee) at the time of sale of specified goods or services. The collector then deposits the collected tax with the government, ensuring tax compliance and revenue collection in advance.
- Fiscal consolidation:
- The process of reducing a government’s budget deficit and managing its finances sustainably.
- Withholding tax:
- Tax deducted at source by a payer (e.g., employer) and deposited directly to the government on behalf of the payee (e.g., employee).
- Net direct tax inflows:
- Gross direct tax collection minus refunds given to taxpayers.
- Macro fundamentals:
- Key economic indicators that reflect the overall health and stability of an economy.
- Interim Budget:
- A temporary budget presented before the general elections, covering the government’s expenses until the full budget is introduced by the newly elected government.
- GDP
- A monetary measure of the market value of all final goods and services produced within a country in a specific time period, usually a year. It is the broadest indicator of a country’s economic activity and performance.
- Fiscal Cushion
- Additional financial resources the Indian government has gained due to strong direct tax collection. It acts as a safety net that provides flexibility and resilience in managing the nation’s finances.
- Deficit targeting
- A key fiscal policy tool used by the Indian government to manage its finances. It involves setting a target for the budget deficit, which is the difference between the government’s total revenue and expenditure in a given year.
- India has been working towards reducing its budget deficit in recent years. The current target for 2023-24 is 5.9% of GDP.
Positive tax trends
- Direct tax collection is exceeding expectations, with nearly 81% of the budget target met with almost a quarter of the financial year remaining.
- Net direct tax inflows are significantly higher than last year, driven by strong growth in personal income taxes (27.3%) compared to corporate taxes (12.4%).
- This trend is likely to continue as the number of income tax returns filed reaches record levels.
- The healthy revenue increase and broadening tax base provide comfort for the government’s deficit reduction goals and potentially create room for further tax reforms.
Potential reform areas
- Simplifying the tax system for both corporations and individuals, such as minimizing withholding tax rates and possibly moving towards a single rate.
- Adjusting TDS and TCS rates, including possibly reconsidering the controversial levy on overseas spends.
- Rationalisation of GST rates
- Eg. Currently, there are five main tax rates (0%, 5%, 12%, 18%, and 28%), along with a cess applied on certain luxury goods. This complexity increase compliance burdens and create distortions in economic activity.
- Eg. Reconsidering the 18% GST levy on health insurance to promote insurance penetration.
- Nudging people towards making life choices aligned with public policy goals, such as encouraging retirement savings and health insurance.
Conclusion
India’s strong direct tax performance signals a robust economic recovery and presents a golden opportunity for further reforms.
RELATED TOPICS
Difference between Direct and Indirect Tax
| Basis | Direct Taxes | Indirect Taxes |
| Meaning | If a tax levied on the income or wealth of a person is paid by that person (or his office) directly to the Government, it is called direct tax. | If tax is levied on the goods or services of a person is collected from the buyers by another person (seller) and paid by him to the Government it is called indirect tax. |
| Incidence and Impact | Falls on the same person. Imposed on the income of a person and paid by the same person. | Falls on different persons. Imposed on the sellers but collected from the consumers and paid by sellers. |
| Taxpayer | Individuals, HUFs, firms and companies | End-consumer of the goods and services |
| Evasion | Tax evasion is possible. | Tax evasion is more difficult |
| Mode of progress | Progressive, reduce inequalities | Regressive, enhance inequalities |
| Inflation | Direct tax helps in reducing the inflation. | Indirect tax contributes to inflation. |
| Orientation | Discourage investments, lessen savings | Growth-oriented, encourage savings |
| Shiftability | Cannot be shifted to others | Can be shifted to others |
| Tax collection | It is difficult to collect taxes. | It is easy to collect taxes. |
| Examples | Income Tax, Wealth Tax | GST, Excise Duty |
New Tax Slabs
Difference between TDS and TCS
| Basis | TDS | TCS |
| Meaning | Tax Deductible at Source | Tax Collected at Source |
| Who is Responsible | The buyer is liable to deduct the tax. | The seller is liable to collect the tax. |
| Applicable for | Any person making a specified payment over and above a certain limit can deduct TDS under Income Tax Act, 1961. | Any person selling specific goods can collect TCS (barring those used for manufacturing and production). |
| Applicable on | It is made on payments including rent, brokerage, commission, salary etc. | It is made on the sale of goods such as timber, mineral wood etc. |
| Occurrence | TDS requirement arises at the time of payment or at the time of crediting the A/C of payee whichever is earlier. | As per Section 206C, seller shall collect tax from buyer at the time of debiting the A/C or receipt of amount of buyer whichever is earlier. |
Government Schemes for Tax Improvement
The Indian government has implemented various schemes and initiatives aimed at improving tax compliance, widening the tax base, and simplifying the tax system. Here are some notable examples:
Compliance Improvement Scheme
Vivad se Vishwas (Dispute Resolution from Trust): This scheme offers an opportunity to settle income tax disputes quickly and with reduced penalties.
Faceless Assessment: This system eliminates physical interaction between taxpayers and tax officials, reducing opportunities for corruption and improving transparency.
Aadhaar-based PAN linking: Linking Aadhaar cards with Permanent Account Numbers (PANs) reduces duplicate PANs and improves tax administration
Widening the Tax Base
Financial Inclusion Initiatives: Promoting digital payments and banking services makes financial transactions more transparent and easier to track for tax purposes. Eg.UPI payments.
Simplified Tax Regime for Individuals: The introduction of a new simplified tax regime with lower rates and reduced paperwork aims to attract more individuals into the formal tax system
Simplifying the Tax System:
GST Rationalization: The government is working on simplifying the Goods and Services Tax (GST) by rationalizing tax rates and reducing complexities in compliance.
Pre-filled Income Tax Returns: The income tax department pre-fills return forms with readily available information, reducing paperwork and simplifying filing for taxpayers.
Online Tax Filing and Payment: The government encourages online filing and payment of taxes, making the process more convenient and efficient for taxpayers
References
https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1945072
Practice Question
Analyse the recent trends in India’s direct tax collection, highlighting the key factors driving growth and the potential implications for fiscal consolidation. [250 words]