INDIRECT TAX,SECURITIES TRANSACTION TAX, SPECIFIC TAX, ADVALOREM TAX, Angel Tax, CUSTOM DUTY

 

INDIRECT TAX: 

• Those taxes which are not directly levied on the Income of an Individual.
• This tax is indirectly levied on the Expenses incurred by the Individual.
• This tax is basically levied on the seller of goods but finally it is being paid by the end consumer.
• Examples: GST, custom duty

• In case of indirect taxes, Tax impact and Tax incidence are borne by different person through the process of Tax shifting.

EXAMPLES OF INDIRECT TAXES

SECURITIES TRANSACTION TAX: 

• Securities Transaction Tax (STT)is an Indirect Tax levied on the transaction of securities (Tax Laws & Rules > Acts > Securities Transaction Tax (incometaxindia.gov.in) 
• Securities Transaction Tax (STT) is imposed on a broker rather than the investor/trader directly. 
• Broker /Stock Exchange deposit it on the behalf of the investors.
• Securities Transaction Tax (STT) is currently imposed on equity and derivative transactions. 

ADVALOREM TAX: 

• The value of AD VALOREM Tax depends upon the value of a transaction. 
• AD VALOREM Tax is directly proportional to the value of the underlying asset
• AD VALOREM Tax is imposed at the time of transaction .
• The nature of AD VALOREM Tax is progressive in the sense that the value of tax will increase with increase in the price of the asset.
• AD VALOREM Tax is usually expressed in percentage. 
• Example GST in India.

SPECIFIC TAX:

• Specific Tax is per-unit tax, which is a fixed amount of tax imposed on the quantity of a particular good.
• Specific Tax does not depend upon the price of the goods, unlike the advalorem Tax which depends upon the price of a good.
• Specific tax is levied based on the volume of the item purchased.
• Specific Tax is regressive in nature.
• The tax is usually expressed in specific sums. 
• Example: Excise Duty on Petrol. 

Angel Tax:

• Angel tax is an income tax payable on capital raised by unlisted companies from investors .
• Unlisted companies raise money mostly from the angel investors
•  Angel tax is imposed on issue of shares if the sold share price is excess of the fair market value of the shares.
• The excess of share price over the fair market price is treated as income and it is taxed accordingly.

For instance:

• If the fair market value of share price of Zomato is Rs. 100 per share and the company raises fund at Rs. 250 per share which is significantly higher than its fair market value. In this case, the excess premium collected by the company (which is an unlisted company) over its fair market value i.e. Rs. 150 per share will be treated as income from other sources
• Consequently, tax shall be applicable on this surplus amount which is referred to as Angel Tax. 

DYNAMICS OF ANGEL TAX:

• The imposition of angel tax depends upon the fair market valuation of the company.
• Fair market valuation has been a bone of contention between startups and the income tax department. 
• The tax department goes by the rule book and calculates market value based on the net assets of the company.
• On the other hand, future growth prospects of the startup is a major factor in determining the fair market valuation of the startup. 
• Difference in calculation of the market value by the income tax department and the fair value by the investor of the startup results in Angel Tax.
• Angel tax wipes away a major part of the surplus of the startup which can be invested.
• Thus, Angel Tax hurts the growth prospects of the start- ups.

Budget 2024-25 has removed Angel Taxation.

CUSTOM DUTY---

• Custom Duty is an Indirect tax that is levied on imports (and, sometimes, on exports) by the government. 
• The objective of Custom Duty is to protect the domestic industries from predatory competition from abroad and to raise state revenues as well. 
• The rates of customs duties are either specific or on ad valorem basis, that is, it is based on the value of goods. 

Example:

Countervailing duties

Safeguard Duties

Anti-dumping duty

 

TAXATION SYSTEM : PROGRESSIVE TAXATION SYSTEM,PROPORTIONAL TAXATION SYSTEM,REGRESSIVE TAXATION SYTEM,DEGRESSIVE TAXATION SYSTEM

 

                   

TYPES OF TAXATION SYSTEM: 

Tax implication upon the citizens in a country depends upon the types of taxation system prevailing in the country.

Prominently There are four type of Taxation System :

PROGRESSIVE TAXATION SYSTEM:

• In a progressive taxation system, taxation rate is directly proportional to the taxable income.
• Tax Rate increases with the increase of the taxable amount ie the income.
• In a progressive taxation system, People with lower incomes pay a lower percentage of tax in comparison to the person with higher income.
• In India, we are having progressive taxation system as tax rates are directly proportional to the incomes of individual.

PROPORTIONAL TAXATION SYSTEM:

• In a proportional tax system, taxation rate remains irrespective of the income or wealth of the individual. 
• Proportional tax system is also said to be flat tax system as taxation rate does not depends upon income or wealth of the individual, rather remains constant.
• Taxpayers pay a set percentage of their income regardless of total income earned.
• For example, an income tax of 10% does not increase or decrease for individuals with different incomes. 

REGRESSIVE TAXATION SYTEM:

• In Regressive tax system, the tax rate is uniform irrespective of the income. 
• Tax rates being uniform, Low incomes earning individuals pay a higher percentage of that income in taxes  in comparison to the individuals who are having high-incomes. 
• Regressive taxation is just opposite to the progressive taxes. 
• For example, if there is  a sales tax of 7% on food items ,then it  has a greater burden on lower-income earners than it does on the wealthy because the ability to pay is not considered in case of indirect taxes. Many states follow Regressive Taxation in US.

DEGRESSIVE TAXATION SYSTEM:

• In degressive tax system, the tax rate decreases as the taxable amount of income increases. 
• Tax rate are higher when taxable income are lower.
• Tax rates are lower when taxable income are higher. 
• It is in contrast to a progressive tax system .
• Degressive taxation is antipoor in the sense that it redistribute the wealth of poor amongst riches.
• Degressive taxation was implemented in swiss but there federal court strike it down.

Surcharge , CESS, Tax Deduction at Source (TDS), Withholding Tax, TAX Collection at Source,

 

Surcharge:

• Surcharge is tax on tax .
• Surcharge is charged on the paid income tax and not on the taxable income
• Surcharge is normally paid by the taxpayers, who fall in a particular tax bracket. 
• Eg. Say you have an income of Rs 100, on which you have to pay Rs 30 as tax. So the surcharge will be 10% on the 30 rupees tax that you have to pay, i.e. Rs 3. 

CESS: 

• Cess is a form of tax which is an additional levy by the Central Government to raise funds for a specific purpose like education cess.
• Cess is imposed only when there is a need to meet the exclusive expenditure for public welfare.
• In India, GST compensation cess and Education Cess are examples of cess.

Tax Deduction at Source (TDS) /Withholding Tax:

• Tax Deduction at Source (TDS) is the tax which is deducted on a payment made by a company to an individual, 
• Tax Deduction at Source (TDS) is applicable when the payment amount exceeds a certain limit fixed by the Government.

Withholding Tax:

• Tax Deduction at Source (TDS) when deducted from the income of NRI is said to be Withholding tax.
• Nature of Tax Deduction at Source (TDS) and Withholding taxes are  similar, Tax Deduction at Source (TDS) becomes Withholding when applicable to NRI.

TAX Collection at Source (TCS):

• TAX Collection at Source (TCS) is the tax that some specified sellers are required to collect from their buyers on exceptional transactions.
• TAX Collection at Source (TCS) is not applicable to every items of use rather on the sale of specific goods.

Tax Deduction at Source (TDS) /Withholding Tax vs TAX  Collection at Source (TCS):

• Tax Deduction at Source (TDS) deduction is applicable on payments such as salaries, rent, professional fee, brokerage, commission, etc. 
• TAX  Collection at Source (TCS) deduction is applicable on sales of specific goods like timber, scrap, mineral wood, and Motor vehicles exceeding Rs. 10 lakhs .
• Tax Deduction at Source (TDS) is applicable only on payments that exceed a certain amount and is collected by the seller as a means to track buyers and minimize tax evasion.
• TDS is direct tax and is deposited by deductor on the behalf of deductee while deductee can claim as income tax paid at the time ITR filing.

MONEY LAUNDERING, money laundering process

 

MONEY LAUNDERING:

The process of making huge amounts of money generated by criminal activity – such as drug trafficking, terrorist funding, corruption, etc – appear as if it is generated from a legitimate source.

HOW MONEY LAUNDERING GOT THE NAME MONEY LAUNDERING:

• The process of money laundering is not new to the people as its a common tendency of people to hide money earned from illegitimate sources .
• But the term money laundering got its name "Money laundering" because of drug dealer Al Capone.
• Al-Capone in early 20th century used to invest the illegal money in  buying the laundries in cash invisible. 
• These laundries became the front for investment of his money earned from illegal activities.
•  And it was because of the investment of this illegal money by al Capino in laundries ,the process got its name "Money laundering" as if the dirty money was cleaned by the process of investment in Laundries.

The basic money laundering process has three steps:

Placement: 

• This is the first step of money laundering in which dirty money is initiated to get legitimate.
• In this, the launderer deposits the dirty money into a legitimate financial institution.
• This process of depositing the money is a repeated process and deposits are in the form of cash
• This is the most dangerous stage of the laundering process as large amounts of cash are visible
• The role of banks is very crucial in this stage as banks must be cautious of such high value cash transactions and report high-value transactions.

Layering: 

• This process is to change the form of deposited money in the first stage .
• Deposited Money is transacted through various financial instruments to change its form and make it difficult to track.
• Layering can include several bank-to-bank transfers, wire transfers between different accounts in different names in different countries
• These deposits and withdrawals at this stage constantly vary in terms of amount, currency of the money in an order to manipulate the system.
• This is the most complicated step in any laundering scheme, and it makes original dirty money as difficult to track it .

Integration: 

• This is the final stage of making dirty money to clean money.
• At this stage, the money appears to come from a legal transaction and enters the mainstream economy.
• The money finally is used for entering into mainstream economy by getting invested in any economic activity.
• This stage makes the illegal money the legal money as it is now part of mainstream Economy.
• The preferred economic activities where this money is invested are restaurants, nightclubs, charity trusts casinos art or jewelry etc .

Place of Effective Management (PoEM) ,PATENT BOX REGIME

 

Taxation of MNC's is very contentious issue . Residential status of a company is crucial in deciding of tax rates. Place of Effective Management (PoEM) is one such arrangement which defines the residential status of a company and thus taxability of a company .

Place of Effective Management (PoEM) : 

• Place of Effective Management (PoEM) is an internationally recognized test for determining the residential status of a company incorporated in foreign jurisdiction. 
• This concept is crucial for all the tax treaties entered into by India as it helps to implication of taxes on companies.

INDIA AND Place of Effective Management (PoEM):  

• Under Income Tax Act, 1961, it is very important to determine the residential status of any person as it helps in determining the scope of taxable income in India.
•  Until 2015, the concept of determination of residential status of foreign companies was very simplified and a company was considered as Indian resident if:

• It is incorporated in India; or 
• Its control and management is situated wholly in India. 
• Therefore, most of the companies used these simplified provisions as a loophole to prevent residential status in India by shifting insignificant or isolated events related to control and management outside India in tax havens.
• The objective of shifting residential status to outside India is merely to reduce tax liablity as Corporate tax in India is one of the highest rates in comparison to Tax havens.

NEED OF REVISITING THE DEFINITION OF Place of Effective Management (PoEM) : 

• The existing definition of Place of Effective Management (PoEM) was manipulated by companies.
• Companies having shell companies in tax havens have structured their operations in such a manner that  companies were present or active in a country without paying applicable taxes. 
• Company were having key managerial people stationed in India with substantial asset base and operations  in India but selling goods through a subsidiary in Tax haven.
• As per the definition of Place of Effective Management (PoEM) , companies claimed that it has no effective management in India and hence, it could end up paying very little tax.

REVISED DEFINITION OF Place of Effective Management (PoEM) :

The Finance Act, 2015 introduced the concept of Place of Effective Management (POEM) while determining residential status of companies in India and as per amended provisions, a company is considered as resident if:

• It is an Indian Company; or 
• Its place of effective Management in that year is in India

• So at present, if any company is having management and operations in India, along with shell company outside India (just to evade taxes), then as per Place of Effective Management (PoEM), company will be treated as resident of India and hence will be taxed as per tax laws of India.
• It will not be in a position of taking the tax benefits merely by having shell company in tax haven.

 

PATENT BOX REGIME:

• Patent Box regime was introduced in India by Finance Act, 2016 by enacting new Section 115BBF. 
• This box is applicable for all patents registered after April 1, 2016. 
• Under Patent Box regime, any company has to pay 10% tax on total income earned by the   commercialization of patents which are developed and registered in India. 
• The condition is that such patent must have been developed and registered in India under Patents Act, 1970.

NEED OF PATENT BOX REGIME:

• This is a concessional tax regime because otherwise, the 30% Income tax was applicable to income from patents/ royalty / intellectual property in the country. 
• In view of the high tax rates, companies register patent in tax havens.
• Thus the countries where these patents were developed were not benefitted by the patent development, even if the patent were developed in their country.
• Thus, with a view to retain the intellectual property in the country where it was developed and to promote innovation and research, many countries started to introduce beneficial taxation regime for income generated from such Intellectual Property. 

TAXATION, CANONS OF TAXATION,TAX IMPACT,TAX INCIDENCE,TAX SHIFTING,DIRECT TAX,INDIRECT TAX

 

Funds are required by the government to carry out their functions ie developmental as well as day to day functions. Taxation provides funds for carrying out such functions.

TAXATION:

• Taxation is a legal compulsory payment by the citizens to the government.
• There is no quid pro quo relationship between a taxpayer and the collecting authority.
• Taxpayer can neither claim any specific benefit against paid taxes nor it can ask its taxes back if desired services are not provided by the government.

CANONS OF TAXATION:

The most fundamental classification of taxes is based on who collects the taxes from the tax payer.

As Per Adam smith, Taxation should follow the following canon of taxation :

• Canon of ability :taxes should be paid as per the ability .
• Canon of certainty :rate of taxes should be clear with out any ambiguity .
• Canon of convenience :The tax collection method should be convenient so that people can pay taxes easily.
• Canon of economy: Government should impose only those taxes whose collection costs are very less and cheap as there are collection costs undertaken by the government.

Anecdotes related to Taxation: 

In Mahabharat:

Krishna started his campaign against kansa by not paying Income tax imposed by Kansa and krishna argued that kansa has abdicated his responsibility as a king so people should not pay the taxes.

In Ramayana:

• Shri Rama pointed out that it was necessary to collect tax from the subjects.
• But the tax should be taken by a king in the same way as the sun absorbed water from the earth.
• In reservoirs and rivers, where there was more water, it took more; from the land where there was less water, it took little. 
• In the same way it was   also the duty of the ruler to make it clear that the tax collected from the rich people of the state should be distributed equally for the works in the larger interest of the people.

TAX IMPACT:

• The term Tax impact is used to express the immediate result of imposition of  the tax.
• The impact of a tax is on the person on whom it is imposed first.
• Thus, the person who is liable to pay the tax to the government bears its impact.

TAX INCIDENCE:

Tax incidence is liability of the tax payment on the man’ who ultimately bears the

burden of the tax.

TAX IMPACT vs TAX INCDENCE:

• Tax Impact refers to the initial burden of the tax, while Tax incidence refers to the ultimate burden of the tax.
• Tax Impact is at the point of imposition while incidence occurs at the point of settlement.
• Tax impact of a tax falls upon the person from whom the tax is collected and the incidence rests on the person who pays it eventually.
• Tax Impact may be shifted but Tax Incidence cannot be shifted.

TAX SHIFTING:

• Tax Shifting is passing of the tax from the one who first pays it to the one who finally bears it.
• It is through this process of Tax Shifting that the impact of a tax is transformed to Tax incidence.
• Tax Incidence is the end of the shifting process.
• Direct tax are example where Tax impact and Tax incidence are borne by the same person

                                                        while

• In case of indirect taxes, Tax impact and Tax incidence are borne by different person through the process of Tax shifting.

TYPES OF TAXATION:

Taxation can be in the form of: Direct Tax and Indirect tax.

DIRECT TAX:

• Direct Tax is a tax that is paid directly by an individual or organization to the imposing entity .
• There is no Tax Shifting as tax impact and tax incidence is on the same person.
• A taxpayer pays direct tax to the government for different purposes.
• Tax payment cannot be shifted to another individual or entity.
• Direct taxes include income tax, Property tax, capital gains tax, Direct Dividend Tax, corporate tax etc.
• Income tax is the most popular direct tax.

IMPLICATIONS OF HIGHER DIRECT TAXATION:

• Direct tax collection accounted for 55% in FY 2022-23 which was 4 year high .
• A higher direct tax to indirect tax is considered as progressive in the sense that indirect taxation hurts the poor more intensely.

INDIRECT TAX: 

• Those taxes which are not directly levied on the Income of an Individual.
• This tax is indirectly levied on the Expenses incurred by the Individual.
• This tax is basically levied on the seller of goods but finally it is being paid by the end consumer.
• Examples: GST, custom duty