37 Taxes of Centre and States

Dr. Smita Sharma

TAXES OF CENTRE AND STATES

INTRODUCTION

Tax is defined as a compulsory payment without any quid pro quo. Quid pro quo is Latin term for something given or received for something else. This implies that the tax payer cannot claim equivalent services from the government. Taxation is an important instrument of fiscal policy. The term fiscal policy has originated from the Latin word ‘fisc’, which means government treasury. Any government (be it democratically elected or autocratic) needs resources to run a nation. Before the great depression of 1930, classical approach of laissez-faire was prevailing. It meant no interference by the government in economic activities. With the Great Depression, policymakers pushed for governments to play a more proactive role and classical economics gave way to Keynesian economics. According to Keynes (1936), whenever an economy faces the problem of recession or unemployment, it becomes responsibility of the government to generate effective demand in the economy. To generate this demand, government spending (also known as public expenditure) plays a major role. To finance this spending, state needs to raise the revenue and hence role of taxation comes to the fore.

List I includes union government taxes which are:

Income (other than agricultural income)
Custom
Excise ( except liquor, Narcotics not contained in medical or toilet preparations)
Estate & Succession duty( except agriculture)
Stamp duty
On Transactions on stock & future market
On Sale & purchase of newspapers/advt.
On Railway freight, fare.
Terminal tax on goods or passengers carried by railway, sea, air
Interstate trade
Corporation tax, etc.

List II includes state government taxes which are:

Land Revenue
Tax on sale and purchase of goods except newspapers
On Agricultural income
On Land and Buildings
Estate duty and succession duty on agricultural Land
Excise on alcoholic liquor and narcotics
Entry of goods in local area
Consumption and sale of electricity
Vehicles, animals, boats
Inland waterways
Luxuries including entertainment, betting and gambling
Toll
Advert. Except newspapers

List III includes taxes on the Union List which are shared with the states partly or fully.

These include:

Collected and appropriated by state: Stamp duties, excise on medical prep containing alcohol and narcotics
Collected by union but 100% to states: Succession and estate duty, terminal tax on goods and passengers, railway freight and fares, sale and purchase of newspapers and adv therein, stock exchange and futures transactions
Collected but shared with states

The taxes of Centre and State governments can be put in two broad categories, direct taxes and indirect taxes. A tax is said to be direct tax if impact and incidence of the tax is on the same person. Impact of tax means imposition of tax on a particular person and incidence means burden of the tax. If a taxpayer A can shift the burden on B, then it will be an indirect tax and vice versa.

II. DIRECT TAXES

Main direct taxes in India are income tax and corporation tax.

Income Tax:

Income tax is mainly imposed by the central government. The income tax is a progressive tax in Indian context) and alternate tax slabs are presented in the annual budget by the finance minister.

Tax on agricultural income is in state domain.

Agricultural income includes

(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes;

(b) Any income derived from such land by—

(i) Agriculture; or

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or

(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause;

(c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on; Provided that—

(i) The building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building, and

(ii) The land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such.

Corporation Tax:

As the name only suggests, corporation tax is levied on the income of registered corporations and companies. Registered Companies (both private and public) under the Companies Act (1956) are liable to pay corporate tax. The rate of corporation tax may vary across the assessment years. In India, rate is different for domestic and foreign companies. In addition to tax, surcharge is levied if net income above Rs 1 crore. Education cess of 3% is levied on the sum of income tax and surcharge irrespective of the level of net income.

Education Cess on income tax and corporation tax:

A Cess is an example of earmarking as the revenue collected through the cess can be used for a specifically earmarked purpose only. Education is considered to be a merit good in public economics as it generates high positive externalities; therefore the role of government in education sector becomes very important. This role is not merely limited to provision of education, but also in generating resources for the financing of education. Considering basic education to be a priority, the idea to impose education Cess of 2% for elementary education was given in 2004-05. Furthermore, in 2007-08, an additional cess of 1 per cent was introduced to fund secondary education and higher education and the expansion of capacity by 54 per cent for reservation for socially and educationally backward classes.

III. INDIRECT TAXES

Indirect tax is a tax levied indirectly, as one levied on commodities before they reach the consumer but ultimately paid by the consumer as part of the market price. In Indian context, principal indirect taxes are Custom Duties, Excise Duties, Service tax and Sales Tax (central sales tax and state value added tax).

Custom Duty

Custom duty is a tax which a nation collects on goods imported or exported out of the boundaries of the country. It forms a significant source of revenue for all countries especially in developing countries like India. The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods. Besides, all imports are sought to be subject to a duty with a view to affording protection to indigenous industries as well as to keep the imports to the minimum in the interests of securing the exchange rate of Indian currency. Duties of customs are levied on goods imported or exported from India at the rate specified under the customs Tariff Act, 1975 as amended from time to time or any other law for the time being in force.

Custom duty is levied on:-

Import of Goods – Territorial water extend up to 12 nautical miles into the sea from the coast of India and so the liability to pay import duty commences as soon as goods enter the territorial waters of India. No duty is leviable on goods which are in transit in the same ship or if goods are in transit from one ship to another. In India, import duty is levied mostly on ad valorem rates, though on some commodities specific import duties are also levied either singly or in addition to ad valorem duties. Import duty contributes mainly towards trade regulation only. Therefore central government provides the information about the purpose of each import duty in the budget.

Export of Goods – Export duty is levied on export of goods. The main objective of this duty is to simply restrict exports of certain goods. At present very few articles like skin and leather are subject to export duty. The liability to pay export duty commences as soon as goods leave the territorial waters of India.

Emergency powers are granted to the Central government to increase import or export duties if a need arise to do so. The increase in these duties should be notified in the session of Parliament or should be placed within seven days before the next session of the Parliament. The notification is not considered to be valid if it is not approved within a span time of fifteen days. The different duties under custom duty in India are Basic Duty, Additional Duty (Countervailing Duty), Anti-dumping Duty, Protective Duty and Export Duty. Customs duties in India are administrated by Central Board of Excise and Customs under Ministry of Finance.

Central Excise Duty

Central excise revenue is the biggest single source of revenue in indirect taxes, and second biggest in total taxes after corporation tax. Excise Duty is an indirect tax levied and collected on the goods manufactured in India. It is a commodity tax because it is levied on production and has no connection with its actual sale. But from the point of view of tax shifting and determination of incidence, there is little difference between an excise duty and a sales tax. Generally, manufacturer of goods is responsible to pay duty to the Government. This indirect taxation is administered through an enactment of the Central Government i.e., The Central Excise Act, 1944 and connected Rules – which provide for levy, collection and connected procedures. The rates at which the excise duty is to be collected are stipulated in the Central Excise Tariff Act, 1985.It is mandatory to pay duty on all goods manufactured, unless exempted. For example, duty is not payable on the goods exported out of India. Similarly exemption from payment of duty is available, based on conditions such as kind of raw materials used, value of turnover in a financial year, type of process employed etc. Excise duty on commodities other than alcoholic liquor and narcotics are levied by Central government.

The Central Excise Department spread over the entire country administers and collects the central excise duty. The apex body that is responsible for the policy and formulation of connected rules is the Central Board of Excise and Customs which functions under the control of the Union Finance Ministry.

The Indirect Taxation Enquiry Committee (1976), under the chairmanship of L.K. Jha was constituted to suggest reforms in the indirect taxation system. The committee recommended that the central excise duty gradually be transformed into a value added tax at the manufacturer’s level (with zero rating of exports), while states were advised to adopt a retail sales tax. In its opinion, ad valorem taxes were superior to specific taxes due to their higher income elasticity. Moreover it stressed on exemption of inputs from indirect taxes. Aware of the administrative difficulties involved in introducing this tax system, the Jha committee recommended that its introduction only at the manufacturing stage (MANVAT) should be given a serious consideration. The first major act of reform at the central level was introduction of the scheme of modified value added tax or MODVAT in1986.Under this scheme manufacturer could get the credit for taxes paid on inputs against the tax payable on outputs. But MODVAT did not cover all goods and originally duties paid on capital goods (plants and machinery etc.) were not eligible for credit. In 2000-01, MODVAT was replaced by CENVAT (Central Value Added Tax). Under the CENVAT Scheme, a manufacturer of final product or provider of taxable service was allowed to take credit of duty of excise as well as of service tax paid on any input received in the factory or any input service received by manufacturer of final product. Central Excise Tariff (‘Tariff Act’) has been further amended for alignment with the Harmonized System of Nomenclature (HSN).

Service Tax

In India, the goods are taxed since a long time, but the same cannot be said for services. Service Tax was brought into force with effect from 1 July 1994. Service Tax is a form of indirect tax imposed on specified services called “taxable services”. It cannot be levied on any service which is not included in the list of taxable services. All service providers in India, except those in the state of Jammu and Kashmir, are required to pay a Service Tax in India.

In India, initially only three services (telephones, non-life insurance and stock brokerage) were brought under the net of service tax .Over the past few years, service tax been expanded to cover new services excluding the services mentioned in the negative list.

Central Sales Tax

CST is the tax levied on inter-state sale of goods to registered dealers. It is levied under the Central Sales Tax Act 1956.All business like trade, commerce, manufacture, ect. and any incidental or ancillary activities related to main business are covered into it. The profit motive is not compulsory for sales tax purpose as tax is levied on sales and not on profit. While working on the introduction of Goods and Service tax (GST) ,on the basis of the discussions between the Empowered Committee (EC) of State Finance Ministers and the Union Finance Minister regarding the compensation package, the Government of India, Ministry of Finance, Department of Revenue issued a notification to bring into effect the new reduced rate of CST. This reduction forms a part of the roadmap for phasing out CST in preparation of introducing Goods & Services Tax (GST) in 2017.

Value Added Tax (VAT)

From 1st April 2005, like central excise duty, state sales tax has also been converted into value added tax framework.

IV. GOODS AND SERVICE TAX (GST)

The government is planning to merge all taxes like Service Tax, Excise and VAT into a common Goods and Service Tax (GST) by the year 2017. Goods and Service Tax is a tax on goods and services, which is liveable at each point of sale or provision of service, in which at the time of sale of goods or providing the services the seller or service provider can claim the input credit of tax which he has paid while purchasing the goods or procuring the service. In this system not only goods but also services are involved and the rate of tax on goods and services are generally the same.

When GST will be introduced, the service tax provisions as contained in Finance Act – 1994 and Service Tax Rules – 1994 will be replaced by the provisions of a Central Goods and Service Tax Act and Rules. GST is basically an indirect tax but since the last burden of this tax is borne by the ultimate consumer hence for a consumer it is a tax on him. The GST will work only as a centralised taxation system with collection of all the Tax going to the Central Government and then shared by the states.

The introduction of GST will certainly change the Federal system of Governance in our country in which states also have the right to collect taxes on goods. When GST will be introduced it will replace the Central excise, services tax, VAT and CST. Till date the Centre has the monopoly power of the tax on services and states have the power to tax the sale of goods.

GST: The Constitution (122nd Amendment) Bill (2014) mentions introducing GST by replacing central sales tax, central excise duty (CENVAT), state sales tax (VAT) and service tax. i.e.,

CST+ CENVAT+ VAT +Service Tax

GST will be a central domain as well as in state domain, therefore it is also being called as Dual GST. Only the centre may levy an integrated GST (IGST) on the interstate supply of goods and services, and imports. The exports will be zero rated. This will be a harmonised system of taxation by subsuming all indirect taxes under one tax and move from source based to destination based taxation.

Main merits of GST are:

Broadening the tax base,
eliminating cascading of taxes,
increasing compliance, and
Reducing economic distortions caused by inter-state variations in taxes.

The GST Council will consist of the Union Finance Minister, Union Minister of State for Revenue, and state Finance Ministers. The Bill empowers the centre to impose an additional tax of up to 1%, on the inter-state supply of goods for two years or more. This tax will accrue Income tax is mainly to states from where the supply originates. Parliament may, by law, provide compensation to states for any loss of revenue from the introduction of GST, up to a five year period.

V. SUMMARY

India has federal structure of government and the taxes of the centre as well as states are clearly specified in the constitution. VIIth schedule of constitution classifies all taxes into three lists. List I includes union government taxes, List II includes state government taxes and List III includes taxes on the Union List which are shared with the states partly or fully. The taxes of Centre and State governments can be put in two broad categories, direct taxes and indirect taxes. A tax is said to be direct tax if impact and incidence of the tax is on the same person. Main direct taxes in India are income tax and corporation tax.

imposed by the central government. Tax on agricultural income is in state domain. As the name only suggests, corporation tax is levied on the income of registered corporations and companies. In Indian context, principal indirect taxes are Custom Duties, Excise Duties, Service tax and Central and state Sales Tax (VAT).The government is planning to merge all taxes like Service Tax, Excise and VAT into a common Goods and Service Tax (GST) by the year 2017.