Tax Elasticity , Laffer Curve, Tax Buoyancy,

 

TAX ELASTICITY: 

• Tax Elasticity refers to changes in tax revenues in response to changes in tax rate. 
• For example, Changes in Tax revenue when the government reduces corporate income tax from 30 per cent to 25 per cent indicate tax elasticity. 

Tax Elasticity in India:

• Post LPG reforms, the Income Tax rates have reduced while the tax collections have increased. 
• Tax elasticity can be understood through Laffer curve.

Laffer Curve: 

• The Laffer curve, explains the theoretical dynamics of Tax Elasticity ie relationship between rates of taxation and the resulting levels of the government's tax revenue. 
• As per the Laffer curve if the tax rate increases, the government revenue also increases up to an optimum level. 
• Post which, if the government tries to increase taxes, the government revenue will start falling.

So Conclusively, Revenue shortfall can be because of:

                           Increased rates of Tax Rates.

                                     providing 

                    More incentive to evade taxes (illegal).

 TAX BUOYANCY:

• Tax Buoyancy explains relationship between the changes in government’s Tax revenue growth wrt the changes in GDP.
• Tax buoyancy is one of the key indicator to assess the efficiency of a Government’s tax system.
• Tax buoyancy measures the responsiveness of tax mobilization to economic growth.

Tax buoyancy depends largely on –

• Size of the Tax Base
• Friendliness of the Tax Administration
• Simplicity of the tax Rules 

Tax buoyancy in India :

• Tax Buoyancy greater than 1 signifies that tax revenues grow at a faster rate than the growth in national income.
• Direct Tax Buoyancy at 2.52 in F.Y. 2021-22 is the highest Direct Tax Buoyancy recorded over last 15 years and it was on account of low base effect .
• In 2022-23 ,Central Direct Tax Buoyancy = %change in direct taxes / % change in nominal GDP = 17.8% / 15.1% = 1.18

Tobin Tax,Pigouvian Tax,Pink Tax,Border Adjustment Tax

 

Tobin Tax: 

• Proposed by James Tobin, Tobin Tax was proposed to be imposed on all foreign exchange transactions. 
• Tobin Tax is imposed when foreign capital enters a country and leaves the country.
• The aim of Tobin Tax is to check speculative flows of foreign capital. 
• Many times economists have demanded for imposition of Tobin tax like for climate change .
• Securities transaction tax in India is also an example of Tobin tax as it is also used to check speculation in financial markets.

Pigouvian Tax: 

• Pigou in 1920 drew attention to the negative externalities of the economic activities .eg steel production results in emitting foul smoke leading to social cost to the society.
• Private producers would produce steel up to the point where the private marginal cost is equated to the private marginal benefit. 
• Pigou suggested to take its social cost into account  in the form of Pigouvian Tax .
• It is imposed on bodies that have a negative externality affecting the other persons 
• Example of Pigouvian tax are Coal Cess, Extra taxes on Cigarette etc

Pink Tax:

• Pink Tax is a discriminatory practice that acts as a surcharge upon products meant for female similar to their male counterpart eg Microsoft pink mobile mouse is priced 39 % higher than the identical model in blue.
• Women has to bear extra cost in transportation.
• Health premium for women is high given the health complications.
• Women have to divert portion of their income for day to day necessities .
• Lack of access to education make them more vulnerable to the advertisements marketing strategies etc.

Border Adjustment Tax (BAT) :

• Border Adjustment Tax (BAT) is an additional duty that is imposed on imported goods in addition to the customs duty.
• Border Adjustment Tax (BAT) seeks to promote “equal conditions of competition” for foreign and domestic companies supplying products or services within a taxing jurisdiction. 
• Border Adjustment Tax (BAT) is imposed in order to attain a certain objective  like EU imposed BAT to achieve Green commitments and this taxation is being criticized by India .

CAPITAL GAINS TAX,Direct Dividend Tax,Property Tax,Minimum Alternate Tax,Alternative Minimum Tax,SPECIAL ASSESMENT TAX

 

CAPITAL GAINS TAX:

• Capital gains tax is levied on the profits made on sale of capital assets.  
• Capital assets covers real estate, gold, stocks, mutual funds, and various other financial and non-financial assets.
• Capital gain is any profit or gain that arises from the sale of a ‘capital asset’ 
• Capital gains tax can be both short-term or long-term.

Long-term Capital Gains Tax: 

It is a levy on the profits from the sale of assets held for more than a year. 

Short-term Capital Gains Tax: 

It applies to assets held for a year or less and is taxed as ordinary income.

Direct Dividend Tax :

• The Finance Act, 2020 came up with the taxation of dividends.
• All dividends received by investors/shareholders from Indian companies are taxable in the hands of the recipient.

Property Tax: 

• Property Tax is imposed on real estate owners by the municipal authorities like panchayat, municipality or municipal corporation.
• Property Tax is used for maintenance and upkeep of the local civic amenities .

SPECIAL ASSESMENT TAX:

• Special assessment tax is imposed upon property owners so as to develop local infrastructure in the local vicnity.
•  Special assessment tax is applicable in USA and not in India.
• Special assessment tax can be compared with Property Tax in India.

Minimum Alternate Tax (“MAT”):

• Minimum Alternate Tax is a way of making companies pay minimum amount of tax.
• Minimum Alternate Tax is levied on the corporates.
• In the Indian Income-Tax Act, there are large number of exemptions, deductions which are permitted from the gross total income. 
• Such exemptions, deductions, and other incentives results in the emergence of zero tax companies. 
• Target of Minimum Alternate Tax are the zero tax companies.
• Minimum Alternate Tax targets companies that show profits on their books and declare dividends, but pay minimal or no tax. 
• Income tax is paid on total income while Minimum Alternate Tax is to be paid on Booked profit (Booked Profit = Revenues – Expenses). 

Alternative Minimum Tax (AMT):

• Alternative Minimum Tax (AMT) is Minimum Alternate Tax version for individuals.
• Minimum Alternate Tax is applicable for companies and Alternative Minimum Tax (AMT) is applicable to individuals. 
• The non-corporate taxpayers are entitled to Alternative Minimum Tax (AMT) provisions in a modified pattern. 

CUSTOM DUTY, DUMPING, ANTI DUMPING DUTY, Countervailing Duties, Anti Dumping Duty vs Countervailing duties, Safeguard duty

 

                              

CUSTOM DUTY---

• Custom Duty : Indirect tax 
• levied on imports and exports by the government. 
• Custom Duty is to protect the domestic industries from competition from abroad and to raise state revenues as well. 
• Customs Duties can be either specific tax or on ad valorem basis depending upon the product.

 DUMPING:

• Dumping takes place when the goods are exported by a country (exporting country) to another country (importing country) at a price lower than the price it normally charges in its own (exporting country) home market. 
• Dumping is an unfair trade practice which can have a distortive effect on international trade.
• Anti Dumping Duty (ADD) is an antidote imposed by Importing country to deal with the issue of  Dumping 

ANTI DUMPING DUTY :

• Imposition of Anti Dumping Duty (ADD) is a measure to deal with the situation arising out of the dumping of goods and its trade distortive effect thereafter.
• Anti Dumping Duty (ADD) is a protectionist tariff imposed by government imposes on foreign imports to deal with the situation of dumping.
• Anti Dumping Duty (ADD) as an instrument is allowed under the umbrella of World Trade Organisation.

Countervailing Duties:

• Countervailing duties (CVDs) are trade import tariffs imposed to nullify the adverse effects of subsidies, hence called as anti-subsidy duties
• Countervailing duties (CVDs) are allowed under World Trade Organisation (WTO) regime.
• Countervailing duties (CVDs) are levied when an importing country finds out that exporting country is subsidizing its exports thus harming its domestic suppliers.

Anti Dumping Duty (ADD) vs Countervailing duties (CVDs) :

*Anti Dumping Duty is a customs duty on imports providing a protection against the dumping of goods at prices substantially lower than the normal value whereas Countervailing duty is a customs duty on goods that have received government subsidies in the originating or exporting country.

Safeguard duty:

• Safeguard measures are the tariffs imposed by the importing countries to restrict entry of the imported product when it is observed that there is increased imports of particular products causing serious damage to the domestic industry.
• The provision is facilitated in GATT (General Agreement on Tariffs and Trade), 1994.
• In contrast to antidumping duties and countervailing duties, safeguard measures are, in principle, applied regardless of the exporting country.

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.