TAXATION

Presented By:

Gaurav Yadav

Rishabh Sharma

Sandeep Singh

CONTENTS Taxation

Public Finance

Public Revenue

Objectives of taxation

Classification of taxation

Canons of taxation

Individual Income tax rates in India

Exemptions and Deductions from tax

Conclusion

References

Taxation

The most important source of revenue of the government

is taxes. The act of levying taxes is called taxation. A tax

is a compulsory charge or fees imposed by government

on individuals or corporations. The persons who are

taxed have to pay the taxes irrespective of any

corresponding return from the goods or services by the

government. The taxes may be imposed on the income

and wealth of persons or corporations and the rate of

taxes may vary.

What is Public Finance?

Public finance is the branch of knowledge which is concerned with

the income and expenditure of public authorities and with the

adjustment of one to another.’ It deals with the study of revenue and

expenditure of the government at the centre, state and local bodies.

The public authorities have to perform various functions such as

maintenance of law an order, provision of defense, production for

bringing in economic development. The performance of these

functions require large amount of funds which is raised through

taxes, fees, fines, commercial revenues and loans.

Public Revenue

This is one of the branches of public finance. It deals

with the various sources from which the state might

derive its income. These sources include incomes from

taxes, commercial revenues in the form of prices of

goods and services supplied by public enterprises,

administrative revenues in the form of fees, fines etc and

gifts and grants.

Difference between Public revenue and

Public receipts

Public revenue includes that income which is not

subject to repayment by the government. Public receipts

include all the income of the government including

public borrowing and issue of new currency. In this way

public revenue is a part of public receipts.

Public Receipts = Public revenue + Public borrowing +

issue of new currency

Objectives of Taxes

Raising Revenue

Regulation of Consumption and Production

Encouraging Domestic Industries

Stimulating Investment

Reducing Income Inequalities

Promoting Economic Growth

Development of Backward Regions

Ensuring Price Stability

Tax

Direct

Tax

Indirect

Tax

Taxes can be classified into two

types :

Direct Taxes

A direct tax is that tax whose burden is borne by the same

person on whom it is levied. The ultimate burden of taxation

falls on the person on whom the tax is levied. It is based on the

income and property of a person.

The examples of Direct taxes are :

• Corporation Tax

• Income Tax

• Wealth Tax

• Gift Tax

• Property Tax

Indirect Taxes

An indirect tax is that tax which is initially paid by

one individual, but the burden of which is passed

over to some other individual who ultimately bears

it. It is levied on the expenditure of a person.

Examples of Indirect Taxes are:

Excise Duty

Sales Tax

Custom Duties

Value Added Tax(VAT)

On the basis of degree of progression of tax, it

may be classified into:

Proportional tax

Progressive tax

Regressive tax

Degressive tax

Proportional TaxationA tax is called proportional when the rate of taxation remains

constant as the income of the tax payer increases. In this system all

incomes are taxed at a single uniform rate, irrespective of whether

tax payer’s income is high or low. The tax liability increases in

absolute terms, but the proportion of income taxed remains the

same.

Progressive TaxationWhen the rate of taxation increases as the tax payer’s income

increases, it is called a progressive tax. In this system, the rate of tax

goes on increasing with every increase in income.

Regressive TaxationA regressive tax is one in which the rate of taxation decreases as

the tax payer’s income increases. Lower income is taxed at a

higher rate, whereas higher income is taxed at a lower rate.

However absolute tax liability may increase.

Degressive TaxationA tax is called degressive when the rate of progression in taxation

does not increase in the same proportion as the increase in

income. In this case, the rate of tax increases upto a certain limit,

after that a uniform rate is charged. Thus degressive tax is a

combination of progressive and proportional taxation. This type of

taxation is often used in case of income tax. This is the case of

income tax in India as well.

Canons of Taxation

A good tax system should adhere to certain principles

which become its characteristics. A good tax system is

therefore based on some principles. Adam Smith has

formulated four important principles of taxation. A

few more have been suggested by various other

economists. These principles which a good tax system

should follow are called canons of taxation.

Adam Smith’s four canons of taxation

Canon of Equality

Canon of Certainty

Canon of Convenience

Canon of Economy

Canon of EqualityThis states that persons should be taxed according to their ability to

pay taxes. That is why this principle is also known as the canon of

ability. Equality does not mean equal amount of tax, but equality in

tax burden. Canon of equality implies a progressive tax system.

Canon of CertaintyAccording to this canon, the tax which each individual is required

to pay should be certain and not arbitrary. The time of payment, the

manner of payment and the amount to be paid should be clear to

every tax payer. The application of this principle is beneficial both

to the government as well as to the tax payer.

Canon of Convenience

According to this canon, the mode and timings of tax payment

should be convenient to the tax payer. It means that the taxes

should be imposed in such a manner and at the time which is most

convenient for the tax payer. For example, government of India

collects the income tax at the time when they receive their salaries.

So this principle is also known as ‘the pay as you earn method’.

Canon of Economy

Every tax has a cost of collection. The canon of economy implies

that the cost of tax collection should be minimum.

Income exempt from Tax

Dividends paid by companies and mutual funds

Insurance proceeds from an Insurance company

Maturity proceeds of a Public provident fund (PPF

account)

Deductions from taxable income

Section 88 of the Income Tax Act 1961(rebate on certain

investments)

Section 80C deductions

Section 80D(Medical insurance premiums)

Interest on Housing loans

Conclusion

To conclude, we can say that the instrument of taxation is of

great significance on

• increasing the level of economic activity - Regressive taxation

• reducing income inequalities - progressive taxation

• promoting economic growth – Funds could be reinvested

Social-Welfare Objective - Tax payment helps reduce the gap

between the haves and have-nots. As it helps in mobilizing the

surplus income from the haves and reinvesting them for public

welfare, it helps these surplus funds to reach the have-nots.

Quiz Time

Q. Public Revenue is a branch of .

A. Government Finance.

B. Public Finance.

C. Public Deposit.

D. Public Investment.

B. Public Finance.

Q. Who gave the concept of four Canon’s of

Taxation?

A. Adam Smith.

B. William Hogarth.

C. Tory Taylor.

D. Jonathan Swift.

A. Adam Smith

Q. Which committee established for the

recommendation of Value Added Tax.

A. Dr. C Rangarajan Committee.

B. Raja Chelliah Committee .

C. M.B shah Committee.

D. None of these

B. Raja Chelliah Committee.

Q. Who is known as the Father of Economics?

A. Dada Bhai Nauroji

B. George Akerlof

C. Adam Smith

D. Hugh Dalton

C. Adam Smith

Q. Funds for expenditure on maintenance of

law an order, provision of defense,

Infrastructure is raised through ?

A. Charity.

B. Taxes.

C. Shares.

D. Public Funding.

B. Taxes.

Q. Objective of Tax is to

A. Generate Government Revenue

B. Foreign Trade

C. Political Campaigns

D. FDI

A. Generate Government Revenue

Q. Income Tax is a kind of ?

A. Indirect Tax.

B. Direct Tax.

C. Both of the above.

D. None of the above.

B. Direct Tax.

Q. Indirect Tax is levied on the of a person.

A. Savings.

B. Income.

C. Expenditure.

D. Investment.

C. Expenditure.

Q. Tax helps to reduce the gap between the

and .

A. Haves and Have-not.

B. Politicians and Public.

C. Government and Citizens.

D. None of the above.

A. Haves and Haves-not

Q. Which of the following is exempted from Tax ?

A. Salary.

B. Insurance proceeds from an Insurance

company.

C. Proceeds from Fixed Deposits.

D. None of the above.

B. Insurance proceeds from an Insurance

company.

References

http://finance.indiamart.com/taxation/income_tax/rates.html

http://en.wikipedia.org/wiki/Income_tax_in_India