Forward Charge Mechanism vs Reverse Charge Mechanism, Inverted duty structure (IDS)

 

                    

Forward Charge Mechanism :

• In Forward Charge Mechanism, the  supplier of the goods is liable  for collecting taxes and remitting it to the government
• Receiver of the goods is not involved in the direct tax payment though the ultimate  Tax implication is upon the recipient .
• Forward Charge Mechanism is being followed in GST regime.

Reverse Charge Mechanism:

• In the normal economic transactions, Forward charge mechanism is to be followed in which the supplier of goods or services is liable to pay GST.
• In Reverse charge Mechanism , the liability to pay tax rests on the recipient of  goods or services rather than that of the supplier.

 Reverse charge Mechanism is applicable:

1.if the supplier is not registered with GST like goods purchased from any foreigner and the foreigner who is a s supplier is not registered with GST.

2.In certain goods as specified in the list by Central Board of Indirect Taxes and Customs (CBIC) in line with powers conferred in section 9(3) of CGST Acts.

• In case of Reverse Charge Mechanism, the seller can not claim Input Tax Credit.
• The buyer has to claim the Input Tax Credit (Understanding Economy from basics to an expert perspective from a Guide ,Teacher and Practitioner: INPUT TAX, Input Tax Credit) in Reverse Charge Mechanism.
• The buyer can avail of Input Tax Credit under RCM if and only if such goods or services are used for business purposes.
• As buyer has to claim Input Tax Credit, Self Invoicing is to be done by the buyer to claim Input Tax Credit.

Inverted duty structure under GST (IDS):

Inverted duty structure (IDS) refers to Tax structure where the tax rate on purchased  goods is more than the tax rate on finished goods . For Example :

                   Distributor of LPG cylinder pays 18 % on  purchase of  LPG 

                                                           While 

                   Domestic consumer has to pay 5 % on purchase of  LPG cylinder .

So, Tax rate on raw material ie LPG is more than the sale of the Good ie LPG sale to the consumer ,a case of Inverted duty structure (IDS).

The Inverted duty structure (IDS) creates  administrative problems in the sense that:

(1) There is accumulation of credits in the form of refund claims in the name of tax payer (distributor in the example).

(2) Inverted duty structure (IDS) is a revenue loss for the government as it has to refund the tax already paid (in inputs).

(3) Under GST, the inverted duty structure is identified for goods and not for services.

INPUT TAX, Input Tax Credit

 

INPUT TAX:

Under GST regime, Input tax is tax charged on supply of goods and/or services to the manufacturer which are used in the course of his business .

Input Tax Credit (ITC):

• Input Tax Credit is the reducing of Tax liability by claiming the tax (Input Tax) which has been paid by the businessman at the purchase of the items used for manufacturing.
• This adjustment takes place in the GST wallet of businessman automatically when these transactions take place.

In the example, Let the manufacturer uses inputs A,B and C to produce an output:

Taxes paid by manufacturer are:

        Tax paid on A:100

        Tax paid on B:120

        Tax paid on C:80

This Total tax ie Rs 300 paid by the manufacturer is INPUT TAX.

Now, if manufacturer produces item such that total tax implication on output: Rs 450

Tax to be paid by Manufacturer: Rs 450

Tax already paid ie Tax Input by manufacturer on the inputs: Rs 300

Tax to be paid by manufacturer after Input tax credit = Rs 450-Rs 300 

                                                                                                 =Rs 150

This process of refund of  Tax Rs 300 by the Income Tax Department is said to be Input Tax credit .

• Input Tax credit (ITC) lowers the total tax liability as Input Tax is returned back.
• Input Tax credit (ITC) increases the cash flow with business man as it refunds the tax amount to the businessman.

VALUE ADDED TAX vs GOODS AND SERVICES TAX, PRINCIPLES OF GST, Main Features of GST,

 

VALUE ADDED TAX (VAT) vs GOODS AND SERVICES TAX (GST):

• Value Added Tax, is precursor to the GST regime. 
• Value Added Tax is applicable at the sale of goods while GST is applicable for both goods and services.
• Value Added Tax and Goods and Services Tax (GST), both are charged on the increase in value of an article at each stage of its production or distribution. 

GOODS AND SERVICES TAX (GST): 

• Goods and Services Tax (GST) is single indirect tax for the whole nation, making India one unified common market. 
• Goods and Services Tax (GST) was implemented on 1st July 2017 
• Goods and Services Tax (GST) replaced the multiple indirect taxes and surcharges eliminating the cascading effects of taxation.

Central Indirect Taxes which are included in GST regime:

•  Central Excise duty, 
• Central Sales Tax
• Additional duties of excise,
•  Excise duty levied under Medicinal & Toilet Preparation Act,
• Additional duties of customs (CVD & SAD) ,
• Service Tax and Surcharges & Cess

State Indirect Taxes which are included in GST are :

• State VAT / Sales Tax
• Purchase Tax 
• Entertainment Tax (other than those levied by local bodies) 
• Luxury Tax 
• Entry Tax (All forms)
• Taxes on lottery,
•  betting & gambling  and  
• Surcharges & Cess.

PRINCIPLES OF GST:

• The Centre will levy and collect the Central GST. 
• The States will levy and collect the State GST on the supply of goods and services within a state.
• The Centre will levy the Integrated GST (IGST) on the interstate supply of goods and services.
• A part of Integrated GST (IGST) is given to the state where the good or service is consumed. 

Main Features of GST :

Applicable On supply side:

GST is applicable on ‘supply’ or consumption side of goods or services unlike the previous concept of Excise Tax on the manufacture of goods or on sale of goods .

Destination based Taxation: 

GST is based on the principle of destination-based taxation as against the present principle of origin-based taxation.

Dual GST: 

• GST  can be imposed by the Centre and the States simultaneously .
• GST levied by the Centre is called Central GST (CGST) and GST levied by the States is called State GST (SGST).
• Integrated GST (IGST) is to be levied upon Interstate sale.
• Import of goods or services is treated as inter-state supplies and hence subjected to Integrated Goods & Services Tax (IGST) in addition to the applicable customs duties.

GST rates to be mutually decided: 

CGST, SGST & IGST are levied at rates to be mutually agreed upon in GST Council.

Multiple Rates:

• GST slabs for any regular taxpayers are pegged at 0% (nil-rated), 5%, 12%, 18% & 28%. 
• Lesser-used GST rates are at 3% and 0.25%. 

There are certain taxes which are still not under GST:

• Alcohol and Tax on Petroleum Product
• Entry Taxes, Mandi Charges, and Toll 
• Entertainment Tax (Levied by Local Bodies) 
• Road Tax or Vehicle Tax, 
• Tax on Sale and Consumption of Electricity
• Stamp Duty and Custom Duty

Tax Mitigation,Tax Expenditure/Expenditure forgone, Fiscal Drag

 

                               

Tax Mitigation: 

• Tax mitigation is a legitimate method by which an individual reduces its Tax burden.
• Taxpayer takes advantage of a fiscal incentive afforded to him by the tax legislation. 
• Tax mitigation is an acceptable practice and is facilitated by Government.
• An example of tax mitigation is the setting up of a business undertaking in Special Economic Zone (SEZ) to avail various tax incentives.  

Tax Mitigation vs Tax Avoidance:

• Tax avoidance involve specific loopholes in the law, such as tax havens while Tax Mitigation involves all the legitimate methods.
• Tax Avoidance is negative in the sense that it is associated to exploit the tax system for personal gain while Tax mitigation is allowed by the Government itself for a specific reason.

Tax Expenditure/Expenditure forgone: 

• Tax expenditure are concessions and exemptions provided to the tax payers by the government so as to promote certain type of activities like R&D, businesses, public welfare etc. 
• These tax exemptions can also be to the corporate to help out them or to promote particular areas and industries. 
• Tax Expenditure shows the extent of indirect subsidy enjoyed by the tax payers in the country.

Fiscal Drag: 

• When income of an individual increases, then the individual enters into higher tax bracket resulting into more tax payments to the government. 
• This situation results in less money with individual to spend and hence less liquidity in the economy leading to slow down.

During the economic boom

:

                                              Incomes of an individual increases  

Tax Payment of individual increases

                             More money going in the form of taxes to the government

                                                                            

                                                        Less Money left with Taxpayer 

                                                                            

                            Less money left with the Tax Payer to spend in the economy 

                                                                            

                                                         Slow down in the economy.

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.