INDEX

SR NO PARTICULARS PAGE NO
DECLARATION
CERTIFICATE
ACKNOWLEDGEMENT
Chapter 1 INTRODUCTION 1
1.1ORIGION AND DEVELOPMENT OF TAX
To
1.2 CONCEPT AND CLASSIFICATION OF TAX
21
1.3 SIGNIFICANCE AND IMPORTANCE
1.4 THEORIES OF TAXATION
1.5 GOVERNMENT GUIDELINES TO FILE ITR
1.6 DRAWBACKS OF TAX ON ECONOMY
Chapter 2 REVIEW OF LIETRATURE 22
2.1 TAXATION AND ECONOMIC GROWTH
To
2.2 EFFECTS OF INCOME TAX CHANGES ON
42
ECONOMIC GROWTH
2.3LATEST INCOME TAX ARTICLES
Chapter 3 RESEARCH METHODOLOGY 43
3.1 INTRODUCTION
3.2 STATEMENT OF PROBLEM To
3.3 OBJECT OF STUDY
3.4 SIGNIFICANCE OF STUDY 50
3.5 SAMPLE UNIT
3.6 SAMPLE SIZE
3.7 SAMPLING TECHNIQUE
3.8 AGE AND GENDER
3.9 DATA AND METHODOLOGY
3.10 RESULT AND DISCUSSION
3.11 LIMITATIONS OF STUDY
 3.12 SCOPE OF STUDY
Chapter 4 DATA ANALYSIS AND INTERPRETATION 51
4.1 TAX AND ROLE OF ANALYTICS
To
4.2 QUESTIONNAIRE
78
4.3 WAYS TO ACHIEVE ECONOMIC GROWTH
4.4 CONCLUSION
Chapter 5 CONCLUSION 79 to 82

Chapter 6 BIBILOGRAPHY 83 to 88
 DECLARATION

I the under signed Miss Kausar Maqbool Shaikh hereby, declare that the work embodied
in the project work entitled ―A study on Taxation as A Tool for Economic Growth and
Development‖, Forms my own contribution the research work carried out under the
guidance of Dr. Vijay G. Chawale is a result of my own research work and has not been
previously submitted to any other university for any degree.

Wherever reference has been to previous works of other, It has been clearly indicated as
such and included in the bibliography.

I hereby further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

Kausar Maqbool Shaikh

(Learner)

Certified By:

Dr. Vijay G. Chawale

 CERTIFICATE

This to certify that Miss Kausar Maqbool Shaikh has worked and duly completed her project work
for the degree of master of commerce under the faculty of commerce in the subject ADVANCE
ACCOUNTANCE and her project is entitled, ―A STUDY ON TAXATION AS A TOOL FOR
ECONOMIC GROWTH AND DEVELOPMENT‖ under my supervision. I further certify that the
entire work has done by the learner under my guidance and that no part of it has been submitted
previously for any degree or diploma of any university.

It is her own work and facts reported by her personal findings and investigation.

Seal of the college Dr. Vijay G. Chawale

Date of submission
 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are numerous and the depth is so enormous.

I would like to Acknowledge the following as being idealistic channels and fresh dimensions in the
completion of this project.

I take this opportunity to thank the Dr. Homi Bhabha state Univeresity, Mumbai for giving me the
chance to do this project.

I would like to thank my Principal, Dr. Madhuri Kagalkar for providing the necessary facilities required
for completion of this project.

I take this opportunity to thank our coordinator DR. Khuspat S. jain. for moral support and

guidance.

I would like to express my sincere gratitude towards my project guide Dr. Vijay G. Chawale whose
guidance and care made the project successful.

I would like to thank my college library, for having provided varies reference books and magazines
related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in the
completion of the project specially my parents and peers who supported me throughout my project.
 CHAPTER 1

 INTRODUCTION:

What Are Taxes?

Taxes are mandatory contributions levied on individuals or corporations by a government entity whether
local, regional, or national. Tax revenues finance government activities, including public works and
services such as roads and schools, or programs such as Social Security and Medicare.

In economics, taxes fall on whoever pays the burden of the tax, whether this is the entity being taxed,
such as a business, or the end consumers of the business‘s goods. From an accounting perspective, there
are various taxes to consider, including payroll taxes, federal and state income taxes, and sales taxes.

KEY TAKEAWAYS

 Taxes are mandatory contributions collected by governments.

 The Internal Revenue Service (IRS) collects federal income taxes in the United States.
 There are many forms of taxes and most are applied as a percentage of a monetary exchange (for
example, when income is earned or a sales transaction is completed).
 Other forms of taxes, such as property taxes, are applied based on the assessed value of a held
asset.
 Understanding what triggers, a tax situation can enable taxpayers to manage their finances to
minimize the impact of taxes.

1
 1.1ORIGION AND DEVELOPMENT OF TAX:

The origin of the word "Tax" is from "Taxation" which means an estimate. These were levied either on
the sale and purchase of merchandise or livestock and were collected in a haphazard manner from time to
time. Nearly 2000 years ago, there went out a decree from Ceaser Augustus that all the world should be
taxed. In Greece, Germany and Roman Empires, taxes were also levied sometime on the basis of turnover
and sometimes on occupations. For many centuries, revenue from taxes went to the Monarch. In Northern
England, taxes were levied on land and on moveable property such as the Saladin title in 1188. Later on,
these were supplemented by introduction of poll taxes, and indirect taxes known as "Ancient Customs"
which were duties on wool, leather and hides. These levies and taxes in various forms and on various
commodities and professions were imposed to meet the needs of the Governments to meet their military
and civil expenditure and not only to ensure safety to the subjects but also to meet the common needs of
the citizens like maintenance of roads, administration of justice and such other functions of the State.
In India, the system of direct taxation as it is known today, has been in force in one form or another even
from ancient times. There are references both in Manu Smriti and Arthasastra to a variety of tax
measures. Manu, the ancient sage and law-giver stated that the king could levy taxes, according to
Sastras. The wise sage advised that taxes should be related to the income and expenditure of the subject.
He, however, cautioned the king against excessive taxation and stated that both extremes should be
avoided namely either complete absence of taxes or exorbitant taxation. According to him, the king
should arrange the collection of taxes in such a manner that the subjects did not feel the pinch of paying
taxes. He laid down that traders and artisans should pay 1/5th of their profits in silver and gold, while the
agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending upon their circumstances.
The detailed analysis given by Manu on the subject clearly shows the existence of a well-planned taxation
system, even in ancient times. Not only this, taxes were also levied on various classes of people like
actors, dancers, singers and even dancing girls. Taxes were paid in the shape of gold-coins, cattle, grains,
raw-materials and also by rendering personal service.

The learned author K.B.Sarkar commends the system of taxation in ancient India in his book "Public
Finance in Ancient India", (1978 Edition) as follows:-
"Most of the taxes of Ancient India were highly productive. The admixture of direct taxes with indirect
Taxes secured elasticity in the tax system, although more emphasis was laid on direct tax. The tax-
structure was a broad based one and covered most people within its fold. The taxes were varied and the
large variety of taxes reflected the life of a large and composite population".

2
It is Kautilya's Arthasastra, which deals with the system of taxation in a real elaborate and planned
manner. This well-known treatise on state crafts written sometime in 300 B.C., when the Mauryan
Empire was as its glorious upwards move, is truly amazing, for its deep study of the civilisation of that
time and the suggestions given which should guide a king in running the State in a most efficient and
fruitful manner. A major portion of Arthasastra is devoted by Kautilya to financial matters including
financial administration. According to famous statesman, the Mauryan system, so far as it applied to
agriculture, was a sort of state landlordism and the collection of land revenue formed an important source
of revenue to the State. The State not only collected a part of the agricultural produce which was normally
one sixth but also levied water rates, octroi duties, tolls and customs duties. Taxes were also collected on
forest produce as well as from mining of metals etc. Salt tax was an important source of revenue and it
was collected at the place of its extraction

He placed land revenues and taxes on commerce under the head of tax revenues. These were fixed taxes
and included half yearly taxes like Bhadra, Padika, and Vasantika. Custom duties and duties on sales,
taxes on trade and professions and direct taxes comprised the taxes on commerce. The non-tax revenues
consisted of produce of sown lands, profits accruing from the manufacture of oil, sugarcane and beverage
by the State, and other transactions carried on by the State. Commodities utilised on marriage occasions,
the articles needed for sacrificial ceremonies and special kinds of gifts were exempted from taxation. All
kinds of liquor were subject to a toll of 5 percent. Tax evaders and other offenders were fined to the tune
of 600 panas.

Kautilya also laid down that during war or emergencies like famine or floods, etc. the taxation system
should be made more stringent and the king could also raise war loans. The land revenue could be raised
from 1/6th to 1/4th during the emergencies. The people engaged in commerce were to pay big donations
to war efforts.

Taking an overall view, it can be said without fear of contradiction that Kautilya's Arthasastra was the
first authoritative text on public finance, administration and the fiscal laws in this country. His concept of
tax revenue and the on-tax revenue was a unique contribution in the field of tax administration. It was he,
who gave the tax revenues its due importance in the running of the State and its far-reaching contribution
to the prosperity and stability of the Empire.

It is truly an unique treatise. It lays down in precise terms the art of state craft including economic and
financialadministration.

3
 Tax revolution from 1985 to 2014;

 1985

 Post of Director General (Investigation) created for more effective checking of tax evasion.
 E.D.(Amendment) Act 1985 discontinues levy of estate duty on deaths occurring on or after
16.03.1985.
 Compulsory Deposit Scheme (Income Tax Payers) Act 1974 discontinued w.e.f. 1.4.1985.
 Interest Tax Act, 1974 discontinued w.e.f. 31.3.1985
 A new "Reward Scheme" for motivating officers introduced w.e.f. 1.4.1985.
 1986

 The I.T. Act and W.T. Act amended by Taxation Laws (Amendment and Miscellaneous
Provisions) Act :-
 Established Settlement Commission.
 Introduced Block assets concept for depreciation.
 Four offices of Appropriate Authority for acquiring property in which unaccounted money is
invested set up in metropolitan cities.
 1987

 Government's approval obtained to set up three new benches of Settlement Commission.

 L.K. Jha Committee set up for simplification and rationalisation of tax laws.
 Office of Directorate General (Tax Exemption) set up at Calcutta.
 The Direct Tax Law(Amendment) Act 1987 introduced uniform previous year and redesignated :-
 Director of Inspection
 Insp. Asstt. Commissioner of I.Tax
 Appellate. Asstt. Commissioner
 Income tax Officer Gr. A
 Income tax Officer Gr. B
 Director of Income Tax
 Dy. Commissioner of Income Tax.
 Asstt. Commissioner of I.Tax
 Income tax Officer
 Expenditure Tax Act 1987 brought into force.

4
  1990

 Gift tax Bill introduced on 31.5.1990.

 Creation of 65 posts of Dy. Commissioner of I.Tax by upgradation of equal number of posts of
Asstt. Commissioner of I.Tax.
 1991

 Interest Tax Act, 1974 revived.

 Directorate of I.Tax(Systems) started reporting directly to Board.
 1992

 Rs. 1400 Presumptive Taxation scheme introduced as a measure to widen tax base.
 The post of Director General of Income-tax (Management Systems) was abolished.
 1993

 40 additional posts of Commissioner of Income-tax (Appeals) created.

 Authority for Advance Rulings set up.
 A comprehensive phased cadre review for Group B, C and D initiated.
 1994

 2068 additional posts in Group B, C and D sanctioned.

 New PAN introduced.
 Regional Computer Centres (RCCs) were set up in Chennai, Delhi and Mumbai.


 1995

 New procedure for search assessment introduced.

 50 years of training commemorated and "Seminar Twenty Five" introduced by National Academy
of Direct Taxes.
 1996

 77 posts of Commissioners of Income-tax created.

 Infrastructure for operational needs strengthened.
 Study report on 4th cadre review of Group 'A' officers (IRS) of the Department prepared by
Directorate of Income Tax (Organisation and Management Services).

5
1998Sec.

 260A introduced enabling direct appeals to High Court.

 1/6 Scheme & penalty for non-filing of return introduced to widen tax base.
 Gift-tax abolished for gifts made after 1.10.1998.
 Kar Vivad Samadhan Scheme 1998 introduced.
 Silver Jubilee of Regional Training Institutes celebrated.
 Designation of Asstt. Commissioner (Senior Time Scale) changed to Dy. Commissioner and that
of Dy. Commissioner (Junior Administrative Grade) to Joint Commissioner.

 1999

 Furnishing details of bank account and credit cards in the prescribed form made mandatory for
refund purpose.
 Prima-facie adjustments to return done away with; acknowledgments to serve as intimations.
 Samman Scheme introduced in 1999 to honour deserving tax payers.
 2000

 The process of implementation of restructuring of the Department commenced to increase

efficiency and to deal with increased workload.
 Total sanctioned work force reduced from 61,031 to 58,315.
 Certain rationalisation measures at structural levels introduced.
 Interest-tax Act terminated with effect from 1-4-2000.
 2001

 The restructuring of the Department resulted in reducing the stagnation at all levels and large
number of personnel were promoted in various grades.
 New posts were created at the level of DGIT/DIT in the areas of Research, International Taxation
and Infrastructure.
 2003

 The National Website of the Department (www.incometaxindia.gov.in) won the Silver Medal in
the category of the 'Government Websites'under the National e-Governance Awards.
 2004

 As a measure of widening of tax base, the concept of AIR (Annual Information Return) was
introduced.
 Securities Transaction Tax (STT) was introduced.

6
2005

 Tonnage Tax was introduced for the Shipping Companies.

 Banking Cash Transaction Tax (BCTT) was introduced w.e.f. 01-06-2005.
 2006

 A project for enabling electronic filing (e-filing) of Income Tax Returns was launched.
 Tax Return Preparer Scheme (TRPS) was launched to assist individuals and HUF taxpayers to file
their Return of Income.
 The institution of Income Tax Ombudsman set up in 12 cities throughout the country to look into
tax related grievances of the common public.
 (ITDMS) for drawing of 360° taxpayer profile was launched.
 2008

 Cyber Forensic Labs were setup to identify relevant digital data during search and survey
operations, recover hidden or password protected or deleted data and store retrieved data in a
manner so that it could be used as evidence in judicial proceedings.
 Electronic filing of Income Tax Returns Project was awarded Silver Award in the category
"Outstanding Performance in Citizen Centric Service Delivery" under the National e-Governance
Awardsfor the year 2007-08.
 2009

 Centralized Processing Centre was setup in Bengaluru for bulk processing of e-filed and paper
returns. The Centre operates without any interface with taxpayers in a jurisdiction – free manner.
 2010

 Integrated Tax Payer Data Management System (ITDMS) was conferred the Prime Minister's
Award for 'Excellence in Governance and Administration'.
 To simplify the 50 years old Income-tax Act, 1961,'The Direct Taxes Code Bill, 2010' was
introduced in the Parliament.
 2012

 Senior Citizens (not having any income from business/profession), were exempted from payment
of advance tax.
 TRACES (TDS Reconciliation, Accounting and Correction Enabling System) launched to serve
an integrated one-stop platform for the stakeholders to facilitate the services related to TDS
operations.

7
2014

 New National Website of the Income Tax Department www.incometaxindia.gov.in launched with
enhanced new features and content.
 SIT to investigate Black Money in Swiss Bank Accounts formed
 Tax Administrative Reforms Commission (TARC) headed by Dr. Parthasarathi Shome submitted
its report of reviewing the applicability of tax policies and tax laws in the context of global best
practices and recommending measures for reforms required in tax administration to enhance its
effectiveness and efficiency.

1.2 CONCEPT AND CLASSIFICATION OF TAX:

Classification of taxes

The tax levied on the individuals and business entities are divided into two categories:

1. Direct Tax: As the name suggests, it is paid directly to the government. Direct taxes are levied
on income and property, which are directly assessed by the government. The tax rates are
determined by the Ministry of Finance in the budget for the financial year. It includes income
tax, expenditure tax and interests tax. The Income Tax Act, 1961 (―act‖) governs the
implication of direct taxes in India. Direct taxation in India is progressive as the tax rate
increases with the increase in income.

2. Indirect Tax: It is the indirect levy paid to the government on the sales of goods and services. It
is governed by the Goods and Services Act, 2017. The execution of the goods and services act,
plays an important role in the determination of India as a federal state wherein the Central
Goods and Services Tax (CGST) and Integrated Goods and Services Tax (IGST) is paid to the
Union and State Goods and Services Tax (SGST) is paid to the state. It includes the Goods and
Services Act, 2017, The Central Excise Act 1944, and The Customs Act 1962.

Heads of income for the computation of the total income

As per the provisions of the act, salary, income from house property, profits and gains of
business or profession, capital gains and income from other sources are taken into consideration for the
purposes of the computation of tax.

8
1.INCOME FROM HOUSE PROPERTY:

Section 18 of the act provides that the annual value of any building or land appurtenant of which the
assessee is the owner is subjected to tax under this act. It exempts the portion of such building or land
appurtenant which is used by the assessee in business or profession for which he pays the tax on profits
arising out of that business or profession. This principal section is read with section 22 to 27 of the act.

2.INCOME FROM SALARY:

Section 15 of the act provides that salary that is due but not paid by the employer, paid but not due or
paid before it became due or arrears of salary that were not paid in the previous year by the employer.
However, the salary paid in advance is not taken into consideration for the purposes of computation of the
total income. The salary of the partner by the firm is not a salary for the purpose of this Act. This
principal section is read with section 16 and 17 of the act.

3.PROFITS AND GAINS OF BUSINESS AND PROFESSION:

Section 28 of the act provides that profits and gains of business or profession are subjected to tax under
this act during the previous year.

4.CAPITAL GAIN

Section 45 of the act provides that profits or gains arising out of the transfer of capital assets in the
previous year are taxable under this tax. In addition, money or assets received from the insurer to the
assessee in the previous year on account of flood, typhoon, hurricane, cyclone, earthquake or another
convulsion of nature; riot, civil disturbance; accidental fire, explosion; or action by an enemy is taxable
under this act.

5.INCOME FROM OTHER SOURCES:

As per section 56 of the act, any income which is not covered under the head ―Income from other
sources‖ is subjected to be taxable under this head. For example, it includes dividend income, interest
from government bonds, gifts received other than from the relatives, lottery etc.

9
1.3 SIGNIFICANCE AND IMPORTANCE:

The purpose and impact of taxation can be divided into four categories:

 Generating Resources
 Equity and Growth
 Behaviour
 Social Contract

 Generating Resources:

The most important purpose of taxation is to raise resources for governments to deliver essential public
services. Taxes pay for many of the things that are fundamental to functioning societies around the world,
such as health care, schools, and social services. Studies have shown that the bare minimum tax revenue
for countries is at least 15 per cent of gross domestic product in order to be able to provide basic services
to their citizens.

But it is important to look at both sides of the equation – not only taxes collected, but also how the money
is spent to improve citizens‘ lives and well-being. Many scholars suggest that there is a strong correlation
between taxation and happiness. Year after year, countries that rank in the top ten of happiest countries
around the world, are those with the highest tax rates.[2] The positive link between tax and happiness is
fully mediated by citizens‘ satisfaction with public services. In short: because of higher taxes paid by
citizens, the government can provide a better life for its citizens with social benefits, healthcare,
education, employment, and better infrastructure among others – resulting in happier citizens.

10
 Equity and Growth:

Next to being a source of revenue, taxation has the potential to be a powerful tool for stimulating
development in a country. Corbacho et al. make a case for the reform of fiscal and tax systems to
progressive systems that help promote economic growth, mobility, and social equality. ―Taxation is more
than revenue. It is a tool for development.‖[3] All governments need revenue, but the challenge lies in
carefully choosing not only the level of tax rates but also the tax base. Participants of the global
conference of the Platform for Collaboration on Tax (PCT) voiced the concern that the trend toward
lower taxation of capital (to encourage growth) is making it harder to counter the growing inequality of
income and wealth.[4] These growing income and wealth gaps can undermine social cohesion and
ultimately undermine economic growth as well. It should be a priority to ensure an appropriate
distribution of the tax burden among taxpayers with a system that helps to preserve the income of poorer
households.

In addition, it is important that governments design a tax compliance system that does not discourage
taxpayers from participating. Tax rates that are too high can hold back the development of the private
sector and the formalization of businesses. Lower tax rates are particularly important to smaller-sized
businesses. Even though businesses of this size do not add significantly to government tax revenue, they
have a vital contribution to economic growth and employment.

 Behaviour:

Historically, taxes have been used in many countries to encourage healthy behaviours and deter less
healthy ones. Examples are tobacco taxation to lower tobacco consumption and green taxes to help the
environment. In doing so, taxation can have a powerful impact on the outcome of human development.
Another example is the potential impact taxation has on the development of gender equality, a subject that
is receiving increased attention in the policy debate on public finance and the responsibility of the
government towards its citizens.[5] It has been proven that taxes influence people‘s behaviour and choices,
with implications for health outcomes, gender equity, and the environment. The choices a government
makes will make or break a society.

11
  Social Contract

Lastly, effective tax administration can change the relationship between citizens and the government.
Taxation not only pays for public goods and services; it is a major ingredient in the social contract
between citizens and government. ―How taxes are raised and spent can determine a government‘s very
legitimacy‖.[6] When citizens see the tax system as being fair and find value in the public services they
receive, they are more likely to comply with tax laws. Trust in government is essential to create tax
morale: the extent to which people accept a moral obligation to pay taxes as their contribution to society.
It is therefore important for governments to continue to build public trust by improving the design and the
administration of their tax systems.

 That’s Why Tax Matters

Hopefully, the four impacts of taxation described above help to soften the blow the next time you pay
your taxes. We all have to pay our fair share, allowing the government to generate enough resources to
fund the priorities of society. In turn, the government‘s duty is to improve the lives and well-being of its
citizens. This involves strengthening tax administration so that all citizens and businesses meet their tax
obligations. And, establishing tax systems that are better structured and more effective in creating
sustainable improvement for society as a whole.

1.4 THEORIES OF TAXATION

Several theories of taxation exist in public economics. Governments at all levels (national, regional and
local) need to raise revenue from a variety of sources to finance public-sector expenditures.

tax levels are automatically determined, because taxpayers pay proportionately for the government
benefits they receive. In other words, the individuals who benefit the most from public services pay the
most taxes. Here, two models adopting the benefit approach are discussed: the Lindal model and the
Bowen model.

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  Lindahl's model:

Lindahl tries to solve three problems:

 Extent of state activity

 Allocation of the total expenditure among various goods and services
 Allocation of tax burden

In the Lindahl model, if SS‘ is the supply curve of state services it is assumed that production of social
goods is linear and homogenous. DDa is the demand curve of taxpayer A, and DDb is the demand curve
of taxpayer B. The Horizontal summation of the two demand curves results in the community‘s total
demand schedule for state services. A and B pay different proportions of the cost of the services which is
vertically measured. When ON (O = graph origin, at axes intersection) is the amount of state services
produced, A contributes NE and B contributes NF; the cost of supply is NG. Since the state is non-profit,
it increases its supply to OM. At this level, A contributes MJ and B contributes MR (the total cost of
supply). Equilibrium is reached at point P on a voluntary-exchange basis.

The Lindahl equilibrium proposes that individuals pay for the provision of a public good according to
their marginal benefits in order to determine the efficient level of provision for public goods. In the
equilibrium state, all individuals consume the same quantity of public goods but may face different prices
because some people may value a particular good more than others. The Lindahl equilibrium price is the
resulting amount paid by an individual for his or her share of the public goods.

13
  Bowen's model:

Bowen‘s model has more operational significance, since it demonstrates that when social goods are
produced under conditions of increasing costs, the opportunity cost of private goods is foregone. For
example, if there is one social good and two taxpayers (A and B), their demand for social goods is
represented by a and b; therefore, a+b is the total demand for social goods. The supply curve is shown by
a'+b', indicating that goods are produced under conditions of increasing cost. The production cost of
social goods is the value of foregone private goods; this means that a'+b' is also the demand curve of
private goods. The intersection of the cost and demand curves at B determines how a given national
income should (according to taxpayers' desires) be divided between social and private goods; hence, there
should be OE social goods and EX private goods. Simultaneously, the tax shares of A and B are
determined by their individual demand schedules. The total tax requirement is the area (ABEO) out of
which A is willing to pay GCEO and B is willing to pay FDEO.

Advantages and limitation:

The advantage of the benefit theory is the direct correlation between revenue and expenditure in a budget.
It approximates market behaviour in the allocation procedures of the public sector. Although simple in its
application, the benefit theory has difficulties:

 It limits the scope of government activities

 Government can neither support the poor nor take steps to stabilize the economy
 Applicable only when beneficiaries can be observed directly (impossible for most public services)
 Taxation in accord with the benefit principle would leave distribution of real incomes unchanged

14
1.5 GUIDELINES TO FILE ITR:

 Filing your IT
 Filing of income tax return online has been made mandatory for all classes of taxpayers barring
few exceptions :

Taxpayers aged 80 and above need not filed return online. Taxpayers having an income less than Rs 5
lakhs and not claiming a refund need not file return online. For the rest, online filing is mandatory. Do
note that deadlines for filing of returns have also been prescribed. For most individual taxpayers, the due
date for filing return of income is 31 July immediately following the concerned financial year. If you do
not file on time, here are some disadvantage:

 You will be denied carry forward of losses (except house property loss) to future years
 Delay processing of refund claims if any
 Difficulty on getting home loans
 Levy of late filing fee upto Rs 10,000 under Section 234F
 Levy of interest under 234A if there are taxes due as on 31 July(
 E-filing online is a more complete and better alternative to filing on the income tax website. Also
it is for more than just e-filing your income tax return. Clear helps you claim all the deductions
you‘re eligible for and helps you invest. Once you file your return online, you either e-verify the
same or take a print of the ITR V and send it to CPC, Bengaluru for processing of your return.
Read our detailed article on e-verification of return of income.
Here‘s a guide to e-filing your first tax return on Clear.

 Income Tax Return

The taxpayer shall file an income tax return every year via ITR forms prescribed by the income tax
department. The government has prescribed seven ITR forms through which the taxpayer can file his
income tax return. The taxpayer has to choose the appropriate ITR forms and file his income tax return.

15
  Income Tax Forms List:
The seven ITR forms are:

ITR-1: Individuals (residents) having income from salary, one house property, other sources, agricultural
income less than Rs 5,000 and with a total income of up to Rs 50 lakh

ITR-2: Individuals/HUFs not having any business or profession under any proprietorship

ITR-3: Individuals/HUFs having income from a proprietary business or profession

ITR-4: Individuals/HUFs having presumptive income from business or profession

ITR-5: Partnership firms or LLPs

ITR-6: Companies

ITR-7: Trusts

 Documents Required for ITR Filing

Form 16, Form 26AS, Form 16A, proof of tax saving investments made, bank account details etc are
some of the crucial details / documents that you need to be ready with before filing your return. Further
the documents you are going to need to file your tax return are largely going to depend on your source of
income. Here is our detailed article on documents you need for filing of your return of income

 How can I calculate my income tax?

Individuals should calculate income tax depending on the nature of income. The salaried individual can
take the eligible exemptions available for various allowances received. Individuals/HUF can take a
deduction under Sections 80C to 80U, deduct it from the gross total income, and calculate the income tax
liability. Also, the total income tax liability should be adjusted by the taxes paid, such as advance tax,
TDS, etc. Also, the taxpayer should apply the effect of rebate under Section 87A and relief under Section
89, Section 90, and Section 91 to arrive at the net amount of income tax payable.

Every income that your receive should form part of your income tax return. Of course, the law does
provide for exemption of certain incomes eg. dividend income from an Indian company, LTCG on listed
equity shares upto Rs 1 lakh in any financial year etc. Therefore, here is a quick guideline you can
probably follow to compute taxes due on your income:

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List down all your income – be it salary, rental income, capital gains, interest income or profits from your
business or profession

 Remove incomes that are exempt under law:

 Claim all applicable deductions available under every source of income . eg claim standard
deduction of Rs 50,000 from salary income, claim municipal taxes from rental income, claim
business related expenses from your business turnover etc.
 Claim all applicable exemptions under every head of income eg. amount reinvested in another
house property can be claimed as exemption from capital gains income etc
 Claim applicable deductions from your total income eg the 80 deductions
like 80C, 80D, 80TTA, 80TTB etc

You will now arrive at your taxable income. Check the tax slab you fall under and accordingly arrive at
your income tax payable.

The government keeps introducing and altering tax slabs, schemes and tax benefits, so it‘s a good idea to
keep up with the Budget.

 What is computation of income?

The process of calculating taxable income after taking into account the income from all the five heads
(salary, house property, capital gains, business or profession, and other sources), exemptions, deductions,
rebate, set off of losses, etc., is called computation of income. After computation of income, the taxpayer
can compute the income tax liability as per the Income Tax Act.

 Rebate u/s 87A

Rebate under Section 87A allows taxpayers reduce their income tax liability. If you are a resident
individual and the amount of your total income after reducing Chapter VI-A deductions (Section 80C,
80D, 80U, etc) does not exceed Rs 5 lakh in a financial year, you can claim a tax rebate up to Rs 12,500.
This means, if your total tax payable is less than Rs 12,500, then you will not have to pay any tax.

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  Important Income Tax Dates 2022:

 15th June 2022 – Due date for the first instalment of advance tax for the FY 2022-23

 15th July 2022 – Income tax return filing for FY 2021-22 for individuals and entities not liable for

 tax audit and who have not entered into any international or specified domestic transaction

 15th September 2022 – Due date for the second instalment of advance tax for the FY 2022-23

 30th September 2022 – Submission of audit report (Section 44AB) for AY 2022-23 for taxpayers
liable for audit under the Income Tax Act.

 31st October 2022 – ITR filing for taxpayers requiring audit (not having international or specified
domestic transactions).

 31st October 2022 – Submission of audit report for AY 2022-23 for taxpayers having transfer
pricing and specified domestic transactions

 30th November 2022 – ITR filing for taxpayers requiring audit (not having international or
specified domestic transactions).

 15th December 2022 – Due date for the third instalment of advance tax for the FY 2022-23

 31st December 2022 – Last date for filing a belated return or revised return for FY 2021-22.

Budget 2022 – All Income Tax Related Announcements

 New updated return: A new provision is introduced to allow taxpayers to update the return and
include any omitted income on payment of additional tax. The updated return needs to be filed
within two years from the end of the relevant assessment year.
 Surcharge: Corporate surcharge to be reduced from 12% to 7%.

 Startups: The eligible startups under Section 80-IAC benefits are now extended to the eligible
startups incorporated until March 31, 2023.

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  Alternate Minimum Tax: AMT to be reduced to 15% for co-operative societies.

 Crypto taxation: Income from transfer of digital assets such as crypto to be taxed at 30%. No
deductions will be allowed except the cost of acquisition of digital assets. Loss on sale of digital
assets cannot be set off against any other income. TDS at 1% will be levied if income is over the
threshold.

 Gifting of digital assets will be taxable in the hands of the recipient.

NPS: The Finance Ministry has proposed to increased the deduction limit of employers
contribution to the National Pension Scheme (NPS) Tier-I account for state government
employees from 10% to 14%.

 Section 80DDB: The parent/guardian of the differently-abled can take a tax deduction for payment
to the insurance scheme that provides for the payment of the annuity or lump sumto the
differently-abled dependant during the lifetime of the parent and guardians on attaining their age
of sixty years or more, and the payment or deposit to such scheme has been discontinued.

 Eligible business deductions: Any surcharge and cess levied on income are not allowed as
business expenditure.

 Losses set off rules: Brought forward loss cannot be set off against undisclosed income detected
during any survey or search.

1.6 DRAWBACK OF TAXATION IN ECONOMY:

The most important objective of taxation is to raise required revenues to meet expenditures. Apart from
raising revenue, taxes are considered as instruments of control and regulation with the aim of influencing
the pattern of consumption, production and distribution. Taxes thus affect an economy in various ways,
although the effects of taxes may not necessarily be good. There are same bad effects of taxes too.

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 Effects of Taxation on Production:
Taxation can influence production and growth. Such effects on production are analysed under three
heads:
(i) effects on the ability to work, save and invest

(ii) effects on the will to work, save and invest

(iii) effects on the allocation of resources.

 Effects on the Ability to Work Save:

Imposition of taxes results in the reduction of disposable income of the taxpayers. This will reduce their
expenditure on necessaries which are required to be consumed for the sake of improving efficiency. As
efficiency suffers ability to work declines. This ultimately adversely affects savings and investment.
However, this happens in the case of poor persons.

Taxation on rich persons has the least effect on the efficiency and ability to work. Not all taxes, however,
have adverse effects on the ability to work. There are some harmful goods, such as cigarettes, whose
consumption has to be reduced to increase ability to work. That is why high rate of taxes are often
imposed on such harmful goods to curb their consumption.

But all taxes adversely affect ability to save. Since rich people save more than the poor, progressive rate
of taxation reduces savings potentiality. This means low level of investment. Lower rate of investment
has a dampening effect on economic growth of a country.Thus, on the whole, taxes have the disincentive
effect on the ability to work, save and invest.

 Effects on the will to Work, Save and Invest:

The effects of taxation on the willingness to work, save and invest are partly the result of money burden
of tax and partly the result of psychological burden of tax

Taxpayers have a feeling that every tax is a burden. This psychological state of mind of the taxpayers has
a disincentive effect on the willingness to work. They feel that it is not worth taking extra responsibility
or putting in more hours because so much of their extra income would be taken away by the government
in the form of taxes.

However, if taxpayers are desirous of maintaining their existing standard of living in the midst of
payment of large taxes, they might put in extra efforts to make up for the income lost in tax.

20
It is suggested that effects of taxes upon the willingness to work, save and invest depends on the income
elasticity of demand. Income elasticity of demand varies from individual to individual.

 Effects on the Allocation of Resources:

By diverting resources to the desired directions, taxation can influence the volume or the size of
production as well as the pattern of production in the economy. It may, in the ultimate analysis, produce
some beneficial effects on production. High taxation on harmful drugs and commodities will reduce their
consumption.

This will discourage production of these commodities and the scarce resources will now be diverted from
their production to the other products which are useful for economic growth. Similarly, tax concessions
on some products are given in a locality which is considered as backward. Thus, taxation may promote
regional balanced development by allocating resources in the backward regions.However, not necessarily
such beneficial effect will always be reaped. There are some taxes which may produce some unfavourable
effects on production. Taxes imposed on certain useful products may divert resources from one region to
another. Such unhealthy diversion may cause reduction of consumption and production of these products.

 Effects of Taxation on Income Distribution:

Taxation has both favourable and unfavourable effects on the distribution of income and wealth. Whether
taxes reduce or increase income inequality depends on the nature of taxes. A steeply progressive taxation
system tends to reduce income inequality since the burden of such taxes falls heavily on the richer
persons.

But a regressive tax system increases the inequality of income. Further, taxes imposed heavily on luxuries
and nonessential goods tend to have a favourable impact on income distribution. But taxes imposed on
necessary articles may have regressive effect on income distribution.

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 CHAPTER 2

2.1 Taxation and Economic Growth: Theoretical and Empirical

Literature.

Review

 ABSTRACT:
This is the review of literature on the relationship between tax and economic growth from the theoretical
side and the empirical side.the main aim of this isto add the current debate on this relationship. The paper
reveals that neither the theoretical literature nor the empirical literature provides conclusive evidence of
the nature of this relationship. There are three points of views in the theoretical literature: the positive
effects, the negative effects, and nonlinear effect of taxation on economic growth. However, although the
majority of empirical studies support the negative impact, empirical evidence for increased nonlinearity
is increasing. In general, the theoretical and empirical literature gives different result due to various
factors such as the selection of the countries samples, the development level of countries, the period of
time, the control variables included, and the methodology used. Therefore,in order to obtain more reliable
results, the most advanced methods should be used in future research .

 INTRODUCTION:
the debate on government interventions on dates back to the 18th century. However, the recent global
economic crisis and the wide variation in levels of economic growth across the world's economies have
led to renew the debate about the government's role in the economy. the impact of government
interventions on economic growth through fiscal policy instruments such as government spending,
taxation, and public debt remains a significant economic policy issue in the global economy.
Nevertheless, the debate on this issue still continues in both theoretical and empirical literature. this, in
turn, is reflected in the increasing disparity between policy approaches across countries. this article
reviews the theoretical and empirical literature on the impact of taxation, as one of the most important
instruments of fiscal policy, on economic growth. the rest of this article is divided into three sections.
While the first section reviews the theoretical literature on the relationship between taxation and
economic growth, the second section reviews the empirical literature on this relationship. the last section
concludes the article.

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 theoretical Review of Taxation and Economic Growth:
As mentioned above, the relationship between taxation and economic growth was and still is not the
subject of agreement among economists. From the theoretical literature side, we can state that there
are several different schools of thought as follow.

 Neutral Impact of Taxation on Economic Growth:

the neoclassical growth model of Solow and Swan suggests that tax does not aspect the steady-state. that
is, the effect of taxation on economic growth is neutral in the long-term. In contrast, the endogenous
growth theory of Romer suggests that economic growthmay be affected by taxation on economic growth
in the long-run.

 Negative Impact of Taxation on Economic Growth:

One of the views states that the taxation is determinant to the investment, thereby, is harmful to economic
growth, as taxation prevents individuals or businesses from creativity and deprives them of rewards. So,
supporters of this view, such as Judd, Chamley, Barro, and King and Rebelo, recommend lower tax in
order to encourage people to be creative .

Furthermore, Engen and Skinner, for instance, claim that taxation can affect negatively on economic
growth through five channels.
Namely (1) discouraging the investment, (2) affecting the labor supply, (3) decreasing the growth
productivity, (4) diminishing the marginal productivity of capital, and (5) reducing the effective
utilization of human capital.

 Positive Impact of Taxation on Economic Growth:

Another view argues that we do not have to think in taxation without considering the environment and the
institutions around us. the tax revenues finance public services and goods, such as infrastructure,
education, health care, and so on, which innovators and businesses get the benefits from and rely on.

therefore, tax increases are desirable if they support public goods that raise the revenues of entrepreneurs.
Also, this line of thought suggests that higher tax and redistribution lead to increase investment
opportunities in an economy.

Moreover, Romer and Romer argue that taxation (1) sustains and the economic growth and strengthens
the global competitiveness, (2) provides stable and predictable fiscal circumstances; consequently, helps
to accumulate funds to finance the social and physical infrastructural needs.

(3) reduces the long-run dependence on aid, and (4) ensures good governance through strengthening the
accountability of governments .

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 Empirical Review of Taxation and Economic Growth:
As mentioned before, neither the theoretical literature nor the empirical literature is conclusive about the
relationship between taxation and economic growth. the empirical literature provides various results, such
as the positive, negative, or non-linearity relationship between taxation and economic growth.

In this section, we review the empirical studies interested in the effect of taxation on economic growth.

Andrašić, Kalaš, Mirović, Milenković, and Pjanić, Gashi, Asllani, and Boqolli, Stoilova, and Takumah
and Iyke and the positive relationship between taxation and economic growth. In contrast, Baiardi,
Profeta, Puglisi, and Scabrosetti, Zhao, Zhang, and Lv, and Grdinić, Drezgić, and Blažić observe the
negative correlation between taxation and economic growth. On the other hand, Aydin and Esen and the
non-linearity relationship between taxation and economic growth.

 Empirical Studies Observe Positive Impact of Taxation on Economic Growth:

For more discussion about the empirical literature on the relationship between taxation and economic
growth, we start with the studies that and a positive effect of taxation on economic growth. As mentioned
before, Andrašić, Kalaš, Mirović, Milenković, and Pjanić (2018), Gashi, Asllani, and Boqolli, Stoilova,
and Takumah and Iyke and the positive relationship between taxation and economic growth although they
use different samples, different periods, various methods, and so on.

An example for research that ends a positive result is the study of Andrašić, Kalaš, Mirović, Milenković,
and Pjanić titled "Econometric modeling of tax impact on economic growth: Panel evidence from OECD
countries". It uses a sample of 35 OECD countries in the period from 1996 to 2016 and the fixed effect
model.

the result is that a 1 percent increase in tax revenue enhances economic growth by 0.29 percent. Another
example, Gashi, Asllani, and Boqolli study titled "the effect of tax structure in economic growth"
examine the effect of the tax structure in the economic growth in Kosovo in the period 2007-2015. they
find that most of the taxes have a positive influence on economic growth .

Also, the study of Stoilova titled "Tax structure and economic growth: Evidence from the European
Union" shows that tax structure, in general, based on selective consumption taxes, taxes on personal
income and property is more supportive to the economic growth.

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Stoilova employs pooled panel data, the Ordinary Least Squares (OLS) method, and two-stage least
squares (2SLS) in the period 1996–2013.

Moreover, the work of Takumah and Iyke titled "the links between economic growth and tax revenue in
Ghana: An empirical investigation".

they observe evidence of positive and unidirectional causal flow from tax revenue to economic growth
by using the Toda-Yamamoto test and a quarterly dataset in the period 1986Q1–2014Q4.

 Empirical Studies Observe Negative Impact of Taxation on Economic Growth:

On the other hand, the studies that find a negative effect of taxation on economic growth such as Baiardi,
Profeta, Puglisi, and Scabrosetti, Zhao, Zhang, and Lv, and Grdinić, Drezgić, and Blažić employ different
samples, different periods, various methods, and so on.

For example, Baiardi, Profeta, Puglisi, and Scabrosetti work titled "Tax policy and economic growth:
does it really matter?"

conclude that the relationship between tax revenue and economic growth is negative and statistically
significant. they study this relationship in 21 OECD countries in 1971–2004 using the PMG estimator.

Another example, Zhao, Zhang, and Lv using the panel (panel IV) instrumental variable method to study
the effects of infrastructure and tax burden on economic growth in China's provincial in 2002-2014.
they find that tax revenue has a significant negative impact on economic growth in the period after 2008.

Another example, is the work of Grdinić, Drezgić, and Blažić titled "An empirical analysis of th
relationship between tax structures and economic growth in CEE countries".

they apply the Pooled Mean Group estimator (PMG) to the sample of 20 selected countries (EU-13 and
selected former Soviet Union countries and Albania) in the period from 1990 to 2010. they notice that all
the tax forms have a negative impact on economic growth .

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 Empirical Studies Observe Nonlinear Impact of Taxation on Economic Growth
Also, the studies that and a non-linearity relationship between taxation and economic growth such as
Aydin and Esen utilize different samples, different periods, various methods, and so on.

For example, the study of Aydin and Esen titled "Optimal tax revenues and economic growth in
transition economies: A threshold regression approach" confirms the non-linear relationship. It applies the
dynamic panel threshold model to examine the non-linear relationship between tax revenue and economic
growth in 11 central and south-eastern European and Baltic countries in 1995-2014. It shows that the
optimal level of taxation is approximately 18.00 percent, 18.50 percent, 23.00 percent of GDP for full
transition economies, developing economies and developed economies, respectively. These results
indicate that the positive effect of taxation on economic growth below the threshold point will become to
be negative beyond threshold point.

2.2 Effects of Income Tax Changes on Economic Growth:

 ABSTRACT:

This paper examines how changes to the individual income tax affect long-term economic growth. The
structure and financing of a tax change are critical to achieving economic growth. Tax rate cuts may
encourage individuals to work, save, and invest, but if the tax cuts are not financed by immediate
spending cuts they will likely also result in an increased federal budget deficit, which in the long-term
will reduce national saving and raise interest rates.

The net impact on growth is uncertain, but many estimates suggest it is either small or negative. Base-
broadening measures can eliminate the effect of tax rate cuts on budget deficits, but at the same time they
also reduce the impact on labor supply, saving, and investment and thus reduce the direct impact on
growth. However, they also reallocate resources across sectors toward their highest-value economic use,
resulting in increased efficiency and potentially raising the overall size of the economy. The results
suggest that not all tax changes will have the same impact on growth. Reforms that improve incentives,
reduce existing subsidies, avoid windfall gains, and avoid deficit financing will have more auspicious
effects on the long-term size of the economy, but may also create trade-offs between equity and
efficiency.

26
I.INTRODUCTION:

Policy makers and researchers have long been interested in how potential changes to the personal
income tax system affect the size of the overall economy. Earlier this year, for example, Representative
Dave Camp (R-MI) proposed a sweeping reform to the income tax system that would reduce rates, greatly
pare back subsidies in the tax code, and maintain revenue- and distributionalneutrality (Committee on
Ways and Means 2014). In this paper, we focus on how tax changes affect economic growth. We focus on
two types of tax changes—reductions in individual income tax rates and ―income tax reform.‖ We define
the latter as changes that broaden the income tax base and reduce statutory income tax rates, but
nonetheless maintain the overall revenue levels and the distribution of tax burdens implied by the current
income system. Our focus is on individual income tax reform, leaving consideration of reforms to the
corporate income tax (for which, see Toder and Viard 2014) and reforms that focus on consumption taxes
for other analysis. We examine impacts on the expansion of the supply side of the economy and of
potential Gross Domestic Product (GDP). This expansion could be an increase in the annual growth rate,
a one-time increase in the size of the economy that does not affect the future growth rate but puts the
economy on a higher growth path.

Our focus on the supply side of the economy and the long run is in contrast to the short-term
phenomenon, also called ―economic growth,‖ by which a boost in aggregate demand, in a slack economy,
can raise GDP and help align actual GDP with potential GDP. The importance of the topics addressed
here derive from the income tax‘s central role in revenue generation, its impact on the distribution of
after-tax income, and its effects on a wide variety of economic activities. The importance is only
heightened by recent weak economic performance, concerns about the long-term economic growth rate,
and concerns about the long-term fiscal status of the federal government. We find that, while there is no
doubt that tax policy can influence economic choices, it is by no means obvious, on an ex ante basis, that
tax rate cuts will ultimately lead to a larger economy. While the rate cuts would raise the after-tax return
to working, saving, and investing, they would also raise the after-tax income people receive from their
current level of activities, which lessens their need to work, save, and invest. The first effect normally
raises economic activity (through so-called substitution effects), while the second effect normally reduces
it (through so-called income effects). In addition, if they are not financed by spending cuts, tax cuts will
lead to an increase in federal borrowing, which in turn, will further reduce long-term growth. The
historical evidence and simulation analysis is consistent with the idea that tax cuts that are not financed by
immediate spending cuts will have little positive impact on growth.

27
On the other hand, tax rate cuts financed by immediate cuts in unproductive spending will raise output.
Tax reform is more complex, as it involves tax rate cuts as well as base-broadening changes.

There is a theoretical presumption that such changes should raise the overall size of the economy in the
long-term, though the effect and magnitude of the impact are subject to considerable uncertainty. One fact
that often escapes unnoticed is that broadening the tax base by reducing or eliminating tax expenditures
raises the effective tax rate that people and firms face and hence will operate, in that regard, in a direction
opposite to rate cuts. But base-broadening has the additional benefit of reallocating resources from sectors
that are currently tax-preferred to sectors that have the highest economic (pre-tax) return, which should
raise the overall size of the economy.

A fair assessment would conclude that well designed tax policies have the potential to raise economic
growth, but there are many stumbling blocks along the way and certainly no guarantee that all tax
changes will improve economic performance. Given the various channels through which tax policy
affects growth, a growthinducing tax policy would involve (i) large positive incentive (substitution)
effects that encourage work, saving, and investment; (ii) income effects that are small and positive or are
negative, including a careful targeting of tax cuts toward new economic activity, rather than providing
windfall gains for previous activities; (iii) a reduction in distortions across economic sectors and across
different types of income and types of consumption; and (iv) minimal increases in the budget deficit.

Section II discusses the channels through which tax changes can affect economic performance. Section III
explores empirical evidence from major income tax changes in the United States. Section IV discusses the
results from simulation models. Section V discusses cross-country evidence. Section VI concludes.

II FRAMEWORK:

 A.Reductions in income tax rates:

Reductions in income tax rates affect the behavior of individuals and businesses through both income
and substitution effects. The positive effects of tax rate cuts on the size of the economy arise because
lower tax rates raise the after-tax reward to working, saving, and investing. These higher after-tax rewards
induce more work effort, saving, and investment through substitution effects. This is typically the
―intended‖ effect of tax cuts on the size of the economy.

28
Another positive effect of pure rate cuts is that they reduce the value of existing tax distortions and
induce an efficiency-improving shift in the composition of economic activity (even holding the level of
economic activity constant) away from currently tax-favored sectors, such as health and housing.

But pure rate cuts may also provide positive income (or wealth) effects, which reduce the need to work,
save, and invest. An across-the-board cut in income tax rates, for example, incorporates all of these
effects. It raises the marginal return to work—increasing labor supply through the substitution effect. It
reduces the value of existing tax subsidies and thus would likely alter the composition of economic
activity. It also raises a household's after-tax income at every level of labor supply, which in turn, reduces
labor supply through the income effect. The net effect on labor supply is ambiguous. Similar effects also
apply to the impact of tax rate cuts on saving and other activities. The initial tax rate will affect the impact
of a tax cut of a given size.

For example, if the initial tax rate—on wages, say—is 90 percent, a 10 percentage point reduction in
taxes doubles the after-tax wage from 10 percent to 20 percent of the pre-tax wage. If the initial tax rate is
20 percent, however, the same 10 percentage point reduction in taxes only raises the after-tax wage by
one eighth, from 80 percent to 90 percent of the pre-tax wage. Although income effects would be the
same in the two cases, the substitution effect on labor supply and saving would be larger when tax rates
are higher, so that the net gain in labor supply from a tax cut would be larger (or the net loss would be
smaller in absolute value) when tax rates are high.

In addition, because the economic cost of the tax rises with the square of the tax rate, the efficiency gains
from reducing tax rates are larger when tax rates are higher to begin with.

1. Gravelle (2014) provides extensive discussion of the channels through which tax changes affect
economic growth, revenues, and other factors.

B. Tax Reform :

Tax reform, as defined above, involves reductions in income tax rates as well as measures to broaden the
tax base; that is, to reduce the use of tax expenditures or other items that narrow the base.2 By removing
the special treatment or various types of income or consumption, base-broadening will tend to raise the
average effective marginal tax rates on labor supply, saving and investment. This has two effects: the
average substitution effect will be smaller from a revenue-neutral tax reform than from a tax rate cut,
because the lower tax rate raises incentives to work, etc. while the base-broadening reduces such
incentives; and the average income effect from a truly revenue-neutral reform should be zero.

29
Base-broadening has an additional effect that should help expand the size of the economy. Specifically, it
would also reduce the allocation of resources to sectors and industries that currently benefit from
generous tax treatment. A flatter-rate, broader-based system would encourage resources to move out of
currently tax preferred sectors and into other areas of the economy with higher pre-tax returns. The
reallocation would increase the size of the economy.

C. Financing:

Besides their effects on private agents, tax changes also affect the economy through changes in federal
finances. If the change is revenue-neutral, there is no issue with financing effects, since the reformed
system would raise the same amount of revenue as the existing system.

However, any tax cut must be financed by some combination of future spending cuts or future tax
increases—with borrowing to bridge the timing of spending and receipts. Because fiscally unsustainable
policies cannot be maintained forever, the financing of a tax cut must be incorporated into analyses of the
effect of the tax cut itself. In the absence of spending changes, tax cuts are likely to raise the federal
budget deficit.3 The increase in federal borrowing will likely reduce national saving, and hence the
capital stock owned by Americans and future national income.

In most economic environments, the increase in the deficit is also likely to raise interest rates. These
changes – lower national saving and the associated increase in interest rates – create a fiscal drag on the
economy‘s ability to grow (Congressional Budget Office 2013; Economic Report of the President 2003;
Gale and Orszag 2004a; Engen and Hubbard 2004; Laubach 2009).

D. Other governmental entities:

Federal tax cuts can also generate responses from other governmental entities—including the central
bank, state governments, and foreign governments. The Joint Committee on Taxation (2014), for
example, examines how different Federal Reserve Board policies would affect the impact of
Representative Camp‘s tax reform proposals on economic growth. The potential responses of foreign
governments are often overlooked. Cuts in U.S.

taxes that induce capital inflows from abroad, for example, may encourage other countries to reduce their
taxes to retain capital or attract U.S. funds. To the extent that other countries respond, the net effect of
income tax cuts on growth will be smaller than otherwise.

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III.Empirical Analyses Ultimately

the impact of tax changes on the size of the economy is an empirical question. Rigorous empirical
studies of actual U.S. tax changes are relatively rare, however, for several reasons. The U.S. has only
had a few major tax policy changes over the past 50 years. Most major tax changes alter many features
of the code simultaneously. It is difficult to isolate the impact of tax changes relative to other changes in
policy and the economy. The recent debate between researchers at the Tax Foundation and the Center on
Budget and Policy Priorities is emblematic of the difficulties of interpreting the evidence, with the
authors reaching strongly different conclusions and interpretations of the literature (McBride 2012;
Huang and Frentz 2014). While we find the evidence presented in those studies as relatively
unconvincing of the view that tax cuts promote growth, the larger problem is that, in the absence of
clearly exogenous shifts in tax policy, it is often difficult to draw clear conclusions. In this section, we

examine analysis of historical trends as well as studies of specific tax policy changes.

A. Historical Trends:

U.S. historical data show huge shifts in taxes with virtually no observable shift in growth rates. From
1870 to 1912, the U. S. had no income tax, and tax revenues were just 3 percent of GDP. From 1913 to
1946, the economy experienced an especially volatile period, including two World Wars and the Great
Depression, along with the introduction of the income and payroll taxes and expansion of estate and
corporate taxes. By 1947, the economy had entered a new period with permanently higher taxes and
government spending.

From 1947 to 2000, the highest marginal income tax rate averaged 66 percent, and federal revenues
averaged about 18 percent of GDP (Gale and Potter 2002). In addition, estate and corporate taxes were
imposed at high marginal rates and state-level taxes rose significantly over earlier levels. The vast
differences between taxes before 1913 and after World War II can therefore provide at least a first-order
sense of the importance tax policy on growth.

However, the growth rate of real GDP per capita was identical – 2.2 percent – in the 1870-1912 period
and between 1947 and 1999 (Gale and Potter 2002). More formally, Stokey and Rebelo (1995) look at
the significant increase in income tax rates during World War II and its effect on the growth rate of per
capita real Gross National Product (GNP).

31
 Figure 1 (next page) shows the basic trends they highlight – namely, a massive increase in income tax
and overall tax revenues during World War II that has persisted and since proven to be more or less
permanent. There is, as shown in Figure 1, no corresponding break in the growth rate of per capita real
GNP before or after World War II (though it is less volatile).

A variety of statistical tests confirm formally what Figure 1 shows; namely, the finding that the increase
in tax revenue around World War II had no discernible impact on the long-term per-capita GNP growth
rate. The pre- and post-World War II comparisons noted above focus on the growth rate, as opposed to
one-time changes in the size of the economy that put the economy on a new growth path even without
altering the annual long-term growth rate. GDP growth did spike downward immediately after the war,
but that was related to a massive demilitarization effort. Overall, the economy grew massively during
World War II (for reasons other than taxes, of course) and then maintained its former growth rate in the
relatively-high-tax post-WWII period .

32
Hungerford (2012) plots the annual real per-capita GDP growth rate against the top marginal income tax
rate and the top capital gains tax rate from 1945 to 2010 (see Figure 2 next page), a period that spanned
wide variation in the top rate. The fitted values suggest that higher tax rates are not associated with higher
or lower real per-capita GDP growth rates to any significant degree. In multivariate regression analysis,
neither the top income tax rate nor the top capital gains tax rate has a statistically significant association
with the real GDP growth rate. An obvious caveat to this result is that the share of households facing the
top rate is generally quite small.

However, historically, the highest several marginal tax rates were moved together, so that changes in the
top rate per se proxy for changes in a broader set of higher tax rates that do affect many taxpayers. A
second caveat is a potential concern about the power of a fairly short time series of annual data to
distinguish alternative hypotheses. There are two final concerns regarding the historical record of tax
changes and economic growth. First, historical reforms do not represent ―pure‖ textbook tax reform
efforts, since they all took place in the real world, subject to the compromises that the political process
impose. However, future tax reforms will also be affected by political factors, so the history of reform
efforts is relevant. Second, many factors affect economic growth rates.

Nonetheless, if taxes were as crucial to growth as is sometimes claimed, the large and permanent
historical increases in tax burdens and marginal tax rates that occurred by the 1940s and the historic
reduction in marginal tax rates that has occurred since then might be expected to affect the aggregate
statistics reflecting the growth rate of the economy.

B. Effects of Tax Cuts and Tax Increases:

Several studies have aimed to disentangle the impact of the major tax cuts that occurred in 1981, 2001,
and 2003, as well as the tax increases that occurred in 1990 and 1993. The Economic Recovery Act of
1981 (ERTA) included a 23 percent across-the-board reduction in personal income tax rates, a deduction
for two-earner families, expanded IRAs, numerous reductions in capital income taxes, and indexed the
income tax brackets for inflation..Many features of ERTA, particularly some of the subsidies for capital
income, were trimmed back in the 1982 and 1984 tax acts.

33
Feldstein (1986) provides estimates indicating that

all of the growth of nominal GDP between 1981 and 1985 can be explained with changes in monetary
policy. Of the change in real GNP during that period, he finds that only about 2 percentage points of the
15 percentage point rise cannot be explained by monetary policy. But he also notes that the data do not
strongly support either the traditional Keynesian view that the tax cuts significantly raise aggregate
demand or traditional supply-side claims that they significantly increase labor supply. He finds, rather,
that exchange rate changes and the induced changes in net exports account for the small part of growth
not explained by monetary policy.

Feldstein and Elmendorf (1989) find that the 1981 tax cuts had virtually no net impact on economic
growth. They find that the strength of the recovery over the 1980s could be ascribed to monetary policy.
In particular, they find no evidence that the tax cuts in 1981 stimulated labor supply. The Center on
Budget and Policy Priorities looks at the relationship between the 1993 tax hikes and the 2001 tax cuts
with respect to employment and GDP growth over the periods following the respective reforms (Huang
2012).

34
As Figure 3 shows, job creation and economic growth were significantly stronger in the years following
the marginal income tax increases enacted in 1993 (the top marginal tax rate went up from 31 percent to
39.6 percent) than they were following the 2001 tax cuts (described below). While correlation does not
imply causation, and while the 1993 and 2001 tax changes occurred at different times in the business
cycle, making comparisons between the two of them more difficult, the evidence presented above at the
very least discredits the argument that higher growth cannot take place during a period of higher tax rates.

Employment and GDP Growth Following the 1993 Tax Increases and the 2001 Tax Cuts

The tax cuts in 2001 (EGTRRA) reduced income tax rates, phased out and temporarily eliminated the
estate tax, expanded the child credit, and made other changes. The 2003 tax cut (JGTRRA) reduced rates
on dividends and capital gains. The impact on growth of these changes appears to have been negligible.
First, a cursory look at growth between 2001 and 2007 (before the onset of the Great Recession) suggests
that overall growth rate was both mediocre – real per-capita income grew at an annual rate of 1.5 percent
during that period, compared to 2.3 percent from 1950 to 2001 – and was concentrated in housing and
finance, two sectors that were not favoured by the tax cuts. There is, in short, no first-order evidence in
the aggregate data that these tax cuts generated growth.

35
More careful microeconomic analyses give similar conclusions. Given the structure of the 2001 tax cut,
researchers have generally found that the positive effects on future output from the impact of reduced
marginal tax rates on labour supply, human capital accumulation, private saving and investment are
outweighed by the negative effects of the tax cuts via higher deficits and reduced national saving.

Gale and Potter (2002) estimate that the 2001 tax cut would have little or no net effect on GDP over the
next 10 years and could have even reduced it; that is, they find that the negative effect of higher deficits
and the decline in national saving would outweigh the positive effect of reduced marginal tax rates. Based
on analysis in Gale and Potter (2002) and Gale and Orszag (2005a), the 2001 tax cut raised the cost of
capital for investments in residential housing, sole proprietorships, and corporate structures because the
higher deficits raised interest rates.

By contrast, the cost of capital for corporate equipment fell slightly because the tax act also contained
provisions for bonus depreciation that more than offset the rise in interest rates. It might also be thought
that the 2003 tax cut would have more beneficial effects on investment, since it focused on dividend and
capital gains tax cuts. But Desai and Goolsbee (2004) find that the 2003 tax cuts had little impact on
investment. In addition, Gale and Orszag (2005b) show that the combined net effect of making EGTRRA
and JGTRRA permanent would be to raise the cost of capital once the effect on higher deficits on interest
rates are taken into account.

These findings imply that making all of the tax cuts permanent and continuing the deficit financing of
those cuts would have reduced the long-term level of investment, which is consistent with a negative
effect on national saving and growth (Gale and Orszag 2005b). As it stands, ATRA 2012 made most of
the tax cuts permanent, except those affecting only the top two income tax brackets. In summary, the
2001 and 2003 tax cuts contained several potentially pro-growth features – like lower high-income tax
rates and lower rates on dividends and capital gains, but they also contained some anti-growth features.

Most prominent among these were tax cuts that helped lower- and moderate-income households, such as
the creation of the 10 percent bracket (which reduced incentives to work for people above the 10 percent
bracket because of the income effect) and the expansion of the child credit (which created significant
income effects but not substitution effects for labor supply).

The tax cuts created large deficits, which burdened the economy with lower national saving and higher
interest rates, all other things equal.

36
They provided only small reductions in marginal tax rates, blunting the potential positive incentive
effects. They created positive income effects, but small or no substitution effects, for a substantial number
of taxpayers, which discouraged labor supply and saving.

They also created windfall gains for the owners of old capital, which further discourage productive
supply-side responses. The intuition behind these results is noteworthy. Gale and Potter (2002) do not
show that reductions in tax rates have no effect, or negative effects, on economic behavior. Rather, the
improved incentives of reduced tax rates—analyzed in isolation—increase economic activity by raising
labor supply, human capital, and private saving. Indeed, these factors are estimated to increase the size of
the economy in 2011 by almost 1 percent.

But EGTRRA and JGTRRA were sets of tax incentives financed by increased deficits. The key point is
that the tax cut reduced public saving (through higher deficits) by more than it increased private saving.
As a result, national saving fell, which reduced the capital stock, even after adjusting for international
capital flows, and lowered GDP and GNP. Thus, the effects on the deficit are central to the findings.

C. Tax Reform:

If ―tax reform‖ is defined as base-broadening, ratereducing changes that are neutral with respect to the
pre-existing revenue levels and distributional burdens of taxation, then tax reform is a rare event in
modern U.S. history. While virtually every commission that looks at tax reform suggests proposals along
these lines—see, for example, the Bowles-Simpson National Commission on Fiscal Responsibility and
Reform (2010), the DomeniciRivlin Debt Reduction Task Force (2010), and President Bush‘s tax reform
commission (President‘s Advisory Panel 2005)—policy makers rarely follow through. Indeed, only the
Tax Reform Act (TRA) of 1986 would qualify, among all legislative events in the last fifty years.

Representative Camp‘s recent proposal would also qualify, but of course it has not been enacted.
Auerbach and Slemrod (1997) address numerous features of TRA on economic growth and its
components. They suggest that, although there may have been substantial impacts on the timing and
composition of economic activity—for example, a reduction in tax sheltering on wages (capital income)
induced by EGTRRA and JGTRRA.

See Gale and Potter (2002) for additional discussion of the Engen and Skinner results and differences
between the tax cuts they analyze and the 2001 and 2003 tax changes.

37
Favero and Giavazzi (2009) suggest that the multipliers for the tax shocks identified by Romer and
Romer are considerably smaller if one models the shocks as explanatory variables in a multivariate model
rather than regressing output on the tax shocks.

The source of this difference is not clear, although the authors suggest that their results reject the
assumptions by Romer and Romer that such shocks are independent of other explanatory variables. In
addition, Favero and Giavazzi (2009) split the sample by time period and show that the multiplier is less
than one for the period before 1980 and is not significantly different from zero for the period after 1980.
activity—that there was little effect on the overall level of economic activity.

They conclude that there were small impacts on saving, labor supply, entrepreneurship and other
productive activities. Although they do not provide an overall estimate for the impact on economic
growth, it seems clear from their conclusions about microeconomic impacts and from the lack of
aggregate growth in the data that any growth impact of TRA was quite small. Evidence from one
historical episode is always subject to qualification and one-time circumstances. Nevertheless, the
Auerbach-Slemrod analysis is important to consider precisely because TRA considerably broadened the
tax base and substantially reduced marginal income tax rates, consonant with the very notion of tax
reform.

IV.Simulations:

Given the various difficulties of empirically estimating the impacts of tax cuts and tax reform using
historical data, economists have often turned to simulation analyses to pin down the impacts. The
advantage of simulation analysis is the ability to hold other factors constant. The disadvantage is the need
to specify a wide variety of features of the economy that may be tangential to tax policy and/or for which
little reliable evidence is available.

A.Tax Cuts or Increases:

Formal analyses confirm the intuition developed above that deficit-financed tax cuts are poorly designed
to stimulate long-term growth and that tax cuts financed by spending cuts are more likely to have a
positive impact on economic growth.

A simple extrapolation based on earlier published results from the Federal Reserve Board model of the
U.S. economy implies that a cut in income tax rates that reduces revenues by one percent of GDP will
raise GDP by just 0.1 percent after 10 years if the Fed follows a Taylor (1993) rule for monetary policy
(Reifschneider et al. 1999).

38
Elmendorf and Reifschneider (2002) use a large-scale econometric model developed at the Federal
Reserve and find that a reduction in taxes that is somewhat similar to the personal income tax cuts in the
2001 law reduces long-term output and has only a slight positive effect on output in the first 10 years.

The study uses three different models to examine the long-term effects: a closed- economy overlapping
generations (OLG) model; an open economy OLG model; and the Ramsey model. The authors assume
that the tax cuts are financed with deficits for 10 years; then the budget gaps are closed gradually with
either by reductions in government consumption or increases in tax rates. Thus, deficits are allowed to

build for the first decade of the tax cut and much of the second decade as well.

B. Effects of Tax Reform:

There is a cottage industry in economics of simulating the impact of broad-based income tax reform on
growth. The analysis of tax reform can be broken up conceptually into two distinct parts – how the tax
changes affect individual or firm choices regarding the level of work, saving, and investment, and how
the changes affect the allocation of such activity across sectors of the economy.

There is a long tradition of studies implying that the impact of tax reform on the changing sectoral
allocation of resources can be important, starting from Harberger‘s (1962) classic analysis of the
corporate tax and including Fullerton and Henderson (1987), Gravelle and Kotlikoff (1989), and Diamond
and Zodrow (2008).

2.3Latest Income Tax News Articles

 Learn how to claim Section 80G deduction as per changed income tax rules [17 May 2022]
If you want to claim a deduction under Section 80G for donations made to specified institutions
during the financial year 2021-22, you can do so if Form 10BE is issued by the charitable
organisation. The income tax rules to claim 80G deduction are changed from the assessment year
2022-23.

 Important Cash Transaction Limits and Penalties Under Income Tax That You Need to Know
About [14 April 2022]

 In India, there are a lot of transactions that go unaccounted for, with people often transacting in cash
to avoid the government‘s radar. To curtail the black money menace, the government has put several
limits that individuals and businesses need to adhere to when they transact in cash.

39
 Loss from one crypto asset cannot be adjusted with gains from another [23 March 2022]
The government had clarified the crypto taxation provisions introduced in Budget 2022. As per the
new law on crypto taxation, the taxpayer has to pay 30% tax on the income earned from the transfer
of crypto assets. No deductions are allowed to be taken from the income except the acquisition cost.

 5 Methods to Verify Your Income Tax Return Other Than by Aadhaar [22 March 2022]
ITR verification through a one-time password linked to an individual‘s Aadhaar is one of the popular
and quicker ways to do it. But here are 5 other ways in which a taxpayer can verify their income tax
return.

 Pay the last advance tax instalment for FY 2021-22 by 15th March [14 March 2022]
The last advance tax instalment for FY 2021-22 is due on 15th March 2022. The advance tax payment
helps you stay a step ahead of your tax liabilities so that you are not left worrying about how much
you owe to the income tax department.

 Tax deductions available to the taxpayers on home loan [11 February 2022]
For the homeowners, interest paid on housing loans can maximise their income tax savings. Let‘s see
how much a home loan can reduce your taxable income.

 know the income tax exemption applies for gifts received as crypto assets [24 February 2022]
In Budget 2022, the government has proposed that the gifts received as cryptocurrency, Non-Fungible
Tokens (NFTs), etc. or the transfer of such assets without consideration shall be taxable in the hands
of the recipient. The Finance Bill 2022 has defined cryptocurrency, NFTs, etc., as ‗Virtual digital
assets‘ (VDA).

 Know the taxation rules for income F&O trading [15 February 2022]
Futures and options are stock derivatives that are traded in the stock market. It is a contract between
two parties for trading stock or index at a particular price or level at a future date. While many people
trade in futures and options, it is advisable to understand the income tax implications before investing
in them. Here is what you need to know.

 Union Budget 2022: Key Amendments in Taxation Decoded for the Taxpayers [01 February 2022]
The Finance Minister presented the Budget 2022 speech today. There were no changes in the
individual taxpayer‘s tax slab rates, but the finance minister provided new taxation rules for the
income generated from virtual digital assets.
40
 .V.References:

 Altig, David, Alan J. Auerbach, Laurence J. Kotlikoff, Kent A. Smetters, and Jan Walliser. 2001.
―Simulating U.S. Tax Reform.‖ American Economic Review 91 (3): 574-95.
 Congressional Budget Office. 2013. ―The 2013 Long-Term Budget Outlook.‖
 Auerbach, Alan J. 2002. ―The Bush Tax Cut and National Saving.‖ Berkeley: University of
California, Berkeley and NBER.
 Auerbach, Alan J., Laurence J. Kotlikoff, Kent A. Smetters and Jan Walliser. 1997. ―Fundamental
Tax Reform and Macroeconomic Performance.‖ Washington, D.C: Congressional Budget Office.

 Auerbach, Alan J., and Joel Slemrod. 1997. ―The Economic Effects of the Tax Reform Act of 1986.‖
Journal of Economic Literature 35 (2): 589-632.
 Committee on Ways and Means. 2014. ―Tax Reform Act of 2014: Discussion Draft.‖ Washington,
D.C: 113th Congress. 2nd Session.
 Congressional Budget Office. 2005. ―Taxing Capital Income: Effective Rates and Approaches To
Reform.‖
 Congressional Budget Office. 2006. ―Computing Effective Tax Rates on Capital Income.‖

 Congressional Budget Office. 2010. ―The Budget and Economic Outlook: An Update.‖

 Dennis, Robert, et al. 2004. ―Macroeconomic Analysis of a 10 Percent Cut in Income Tax Rates.‖
Technical Paper Series. Washington, D.C: Congressional Budget Office.
 Debt Reduction Task Force. 2010. ―Restoring America‘s Future: Reviving the Economy, Cutting
Spending and Debt, and Creating a Simple, Pro-Growth Tax System.‖ Washington, D.C: Bipartisan
Policy Center.
 Desai, Mihir A., and Austan D. Goolsbee. 2004. ―Investment, Overhang, and Tax Policy.‖ Brookings
Papers on Economic Activity 2004 (2): 285 – 355.
 Diamond, John W., and Alan D. Viard. 2008. ―Welfare and Macroeconomic Effects of Deficit-
Financed Tax Cuts: Lessons from CGE Models.‖ Tax Policy Lessons from the 2000s: 145-193.
Washington, D.C: The AEI Press.

 Diamond, John W., and George Zodrow. 2008. ―Consumption Tax Reform: Changes in Business
Equity and Housing Prices‖ Fundamental Tax Reform: Issues, Choices and Implications. Cambridge:
MIT Press
 Economic Report of the President. 2003. Washington, D.C: United States Government Printing
Office.

41
 Elmendorf, Douglas W., and N. Gregory Mankiw. 1999. ―Government Debt.‖ Handbook of
Macroeconomics 1C. Edited by John B. Taylor and Michael Woodford. Amsterdam: Elsevier Science
B.V.
 Elmendorf, Douglas W., and David Reifschneider. 2002. ―Short Run Effects of Fiscal Policy with
Forward-Looking Financial Markets.‖ National Tax Journal 55 (3): 357-86.
 Engen, Eric, and R. Glenn Hubbard. 2004. ―Federal Government Debts and Interest Rates.‖
Cambridge: National Bureau of Economic Research Working Paper 10681.
 Engen, Eric M., and Jonathan Skinner. 1992. ―Fiscal Policy and Economic Growth.‖ Cambridge:
National Bureau of Economic Research Working Paper 4223.
 Engen, Eric M., and Jonathan Skinner. 1996. ―Taxation and Economic Growth.‖ National Tax Journal
49 (4): 617-42.
 Favero, Carlo, and Francesco Giavazzi. 2009. ―How Large Are The Effects of Tax Changes?‖
Cambridge: National Bureau of Economic Research Working Paper 15303.
 Feldstein, Martin. 1986. ―Supply Side Economics: Old Truths and New Claims.‖ American Economic
Review 76 (2): 26-30.

42
 CHAPTER 3

RESEARCH METHODOLOGY:

 ABSTRACT
This research work examine as a significant tool for economic development. It concludes that a tax has
played an important role in the economic development of a state. Tax policy has not been effective in
enhancing social development in terms of distributing social income or encouraging social desirably
activities. The relationship between taxation and the economic development is perhaps not as obvious. A
case can be made that tax policy has had a positive impact on the development of the state. Data for this
study were collected through questionnaire on 45 respondents drawn from internal revenue service, Uyo,
Akwa Ibom State. The researcher questions were raised and the hypothesis was tested through the use of
correlation analysis. The result of the research study shows that taxations has a significant contribution on
economic development of a state and citizens are liable taxes because there is nothing free.

3.1INTRODUCTION:

 BACKGROUND OF THE STUDY

 Taxation is an important tool to meet the needs of the people of resource producing state. It is a major
national issue in most countries and is often problematic in its imposition, administration and usages.
It‘s nature contrast with its obvious benefits to society.
 The introduction of taxation could be traced back to ancient days when kings levied their subject to
provide for the benefit of the people.
 In Nigeria, the imposition of tax is traced right from the colonial government when Lord Fredrick
Lugard introduced tax to people in order to generate revenue to run his administration. It is reported
that his policy of taxation was not accepted by the citizens and these subsequently led to riot in 1929.
 Government, though its agent have come to play the larger role in controlling our national economy.
She has to Consider the aspect in which taxes helps in achieving her economic goals.
 Taxation has been introduced to enable the government generate revenue to implement certain
function for the citizens of the country. This functions of taxation in Nigeria include wealth
redistribution, economic growth, employment generation, price stability and etc.
 Taxation in ancient period and in present time has been used to bring improvement in finance of the
country. The tax collected has been used as revenue to the government.

43
Also, taxation has helped to discourage the consumption of certain goods and service. It helped to bring
government planning into implementation because it generate revenue, allow for investment in certain
areas, like foreign goods and encourage agriculture and industries. Consequently, for some infant
industries, there is a period of tax holiday which could last for five years to enable such industries or
company nature

 HISTORICAL BACKGROUND OF THE STUDY:

Historically, internal revenue service was a department of ministry of Finance before the civil war in
1960. It was called as at then ‖Revenue Department‖, after the civil war in 1970, the name was changed
to South Eastern State Board of Internal Revenue Service, according to South Eastern State Edict No.8 of
1969. The South Eastern State was changed to Cross River state Law Cap. 45. This gave birth to the state
Board of Internal Revenue Services, the legal backing to administer personal income tax.

But on creation of Akwa Ibom State but in 1987, the State established its own Board of internal Revenue
Service from the Cross River State Cap 45 as applicable here in. this law prevailed until the promulgation
of personal income tax decree 104 of 1993 (Now Act 104, 1993). The functions were collection of pay As
you Earn Tax (PAYA).

Direct Assessment Tax, collection of Tax example: pool betting, fines, registration and renewed of motor
vehicle licenses, driver‘s licenses, sales of badges and plate numbers, collection of other taxes and
revenue that belongs to the State.

However, internal Revenue Service is the engine room, generating money for the Government of Akwa
Ibom State. Its directorate work to make sure that all tax payers defaulters are prosecuted. Gives and
stamp duties are general for state.

In the area of manpower, as at year 2008, the total staff strength was 850, which was not still enough,
with recent developments in generation of funds for the state government.

Funds is needed because data collection, compilation and regression method of statistical analysis needs
more fund to go and obtain for accurate and regular publication in which a standby vehicle is necessary to
meet the current demands of taxation.

3.2 STATEMENT OF THE PROBLEM:

problem that prompt this research is that some of the tax payers do not know that taxation is a significant
tool for economic development, and as such the tax payers tends to be evade and avoid taxes.

44
 And so, this research intends to disclose the significant of paying taxes to answer the question of
evasion which will allow for economic development.

3.3 OBJECTIVES OF THE STUDY:

The objective of this study includes the following:

1. To determine the significance of taxation in an economy.

2. To assess the contribution of taxes towards the state economic growth and development.
3. To identify the problems (if any) associated with tax implementation and
4. To make recommendations based on research findings.

3.4 SIGNIFICANCE OF THE STUDY:

This study would be of value in the following ways:

1. It will be a source of reverence materials to subsequent researcher in this field.

2. It will enlighten the tax payers of the importance of the paying.
3. It will broaden the researcher‘s scope on the theory of taxation.
4. The result of this research will help the aggrieved tax payer to know how his/her quota is being
used.
5. The findings and recommendations of this study will assist the Board of Internal Revenue (BIR) in
developing and improving upon their tax machineries and policies.

3.5 SAMPLE UNIT:

Tax payers of the country are the sample units of research.
The population which is able to pay tax or eligible to pay tax are the units .

3.6 SAMPLE SIZE:

Sample size of this research are 100 respondents from different location in Mumbai.

3.7 SAMPLING TECHNIQUES:

Convenient sampling.

45
3.8. AGE AND GENDER OF SAMPLE:
An earning child over the age of 18 is required to file their own income taxes. They are no longer their
parent's liability and, as a result, they have to file their own Income taxes.
Gender include male ,female and others.

3.9 DATA AND METHODOLOGY:

To study the effect of tax policy on economic performance in India, we employed three models and
included each tax instruments in the models separately to avoid the problem of Multicollinearity.
Following the works of Arnold et al. (2011) and Acosta-Ormae chea and Yoo (2012), the tax structure is
measured by the share of individual tax to the total state tax revenues.
We investigate the tax–growth relationship with the following equation.

Here, Y is the growth rate of Per capita net state domestic product (NSDP), SGI is the
it
state gross investment as a percentage of state domestic product, TAX is one of the tax shares (Property,
Commodity & Services and Income), Tax Burden is the ratio of total tax revenues to state domestic
product and ϵ is the error term. Per the work of Acosta-Ormaechea and Yoo (2012).

this study is more concerned with the impact of tax struc ture on growth rate rather than level effect. In
model 1, we include property tax share,
and in model 2 and model 3, we incorporate commodity & service tax and income tax,
respectively.

By following the approach of Arnold et al. (2011), we include total tax burden as a control variable which
will reduce the biases that may occur from correlation in between tax mix and tax burden.
We also included Secondary Enrolment Rate as a proxy variable for human capital in our model, but the
inconsistent and insignificant results make us drop the variable from the final estimation model.
In search of a possible non-linear relationship, we introduce a separate panel regression by introducing
the square of each tax share into the models.

If the coefficient of α significant and carries an opposite sign to α , then we can conclude that there is
3 2
non-linear relationship exist.

46
In this study, we included 14 Indian states for the period 1991 to 2016 and excluded North-Eastern states
due to their relatively small tax revenue collections. Data have been taken from the Centre for Monitoring
Indian Economy (CMIE) and Handbook of Statistics on the Indian States, published by Reserve Bank of
India. the states that are included in this study are Andhra Pradesh (undivided), Assam, Gujarat, Haryana,
Himachal Pradesh , Jammu & Kashmir, Karnataka, Kerala, Maharashtra, Punjab, Tamil Nadu, Orissa,
Rajasthan and West Bengal.

All the states are included in model 1 and model 2. For model 3, due to the data availability, we include
only seven states namely Andhra Pradesh, Assam, Gujarat, Karnataka, Kerala, Maharashtra, and West
Bengal.the selection of the study period is primarily driven by the argument provided by Rao and Rao
(2006) that after the market-oriented economic reform of 1991, more systematic and long-term goal-
oriented tax reforms were initiated in state level for India.

the economic reform also brings rapid growth in India and it becomes very interesting to look at the tax–
growth nexus after the economic reform. the second restriction related to the use of long data span is the
availability of data for each tax head for each of the states under this study.

 Unit root:

Pool Mean Group (PMG) specification is very fruitful and widely used model to capture the dynamic
behaviour of policy variables. this model is very powerful as it can investigate both I (0) and I (1)
variables in a single autoregressive distributive lag (ARDL) model setup. A necessary condition in the
ARDL model is that the model cannot deal with the I(2) variables. thus, the investigation of stationarity
becomes a compulsion. We used popular panel unit root tests like LLC (Levin et al. 2002), the IPS (Im et
al. 2003), the ADF-Fisher Chi square (Maddala and Wu 1999) and PP-Fisher Chi square (Choi
2001) in this study.

 Panel PMG model:

the Mean Group (MG) estimator was developed by Pesaran and Smith (1995) to solve the issue of bias
related to heterogeneous slopes in dynamic panels. Traditional panel models like instrumental variables‘
estimator of Anderson and Hsiao (1981, 1982) and Arellano and Bond (1991) may produce inconsistent
results in a dynamic panel framework (Pesaran et al. 1999). MG estimator takes the average value of
every cross-section and provides the long-run estimate for ARDL or PMG.

47
On the other hand, Pooled Mean Group (PMG) estimator developed by Pesaran et al. (1999) assumes
slope homogeneity in the long run but heterogeneous slopes in the short run for cross-section units.

Dynamic Fixed Effect (DFE) also works like PMG and restricts co integrating vector to be equal across
all panels and restricts the speed of adjustment to be equal.

Under these assumptions, PMG is more efficient estimator than to MG and DFE estimator. the prime
requirement for PMG estimator is that T should be sufficiently large to N. Panel ARDL or PMG works
through maximum likelihood. Our basic PMG begins with the following equation.

Here, x is the vector explanatory variables and y is the lag dependent variable. X allows
it i it
the inclusion of both I (0) and I (1) variables. State fixed effect is captured through μ .
i
Above equation can be re-parameterized to ARDL format.

ɸ measures the state-specific speed of adjustment and known as Error Correction Term. Β is the vector
i i
of long-run relationships and α and θ are the vectors of short-run dynamic relationships. Pesaran et al.
ij ij
(1999) did not provide any statistical test for checking long-run relationship but it can be concluded form
sign and magnitude of Error Correction Term (ECT). If it is negative and less than − 2, a long-run
relationship can be established.

3.10 Results and discussion:

Panel unit root test results from Table 1 suggest that in the case of Model 1 & 2, the Growth rate of Per
Capita Net State Domestic Product (PC-NSDP), Property tax and commodity taxes are stationary at
level.Gross investment and total tax revenue share to GDP are stationary at the 1st difference in all
models and income tax share is also sta-tionary at the same order.

 PMG model results:

We have reported MG, PMG and DFE estimation in the Tables 2 and 3. the Hausman test indicates that
the PMG model is the best model for our data than to MG model. Negative and significant error
correction terms in all the models show the long-run relationship in between variable.

48
One major issue related to the tax–growth equation is the problem of endogeneity of the variables. As
growth in per capita GDP is our dependent variables, there is a possibility that tax collections behave
along with business cycles. therefore, we tested the weak/strong exogeneity of the tax variables through
the correlation analysis between business cycles and tax shares. Business cycles have been calculated
using the Hodrick Prescott (HP) Filter. We have found that all the tax instruments are very weakly related
to the business cycles movement and thus, we conclude that variables are not truly endogenous.the speed
of adjustment in PMG model 1, 2 and 3 are 78.9%, 78.4% and 79.6%, respectively. For the sake of
completeness, we have reported MG and DFE model results also.

But we are more concerned with the results of PMG estimator as Hausman test suggested that PMG is a
better model than to MG. the sign of the property tax is positive and significant in the long run as well as
in the short run. Results are in line with the findings of Acosta Ormaechea and Yoo (2012). Property tax
generally considered a good revenue source for state and municipal governments for providing economic
and social services in the city.

this tax is also able to establish costbenefit linkages and feasible decisions for the citizens. the positive
impact of property taxes indicates that the revenue generation and productive utilization of these revenues
exceed the distortionary effect in these states.

As we expected, the tax burden is negatively associated with growth performance in both long run and
short run. the relationship is showing the distortionary effect of the tax collection in the state economy. In
all models, gross investment enhancing the growth in per capita SDP in the long run. Signs are readily
justified as enlargement of capital formation has a positive impact on output and employment
which channelized to the development outcomes (Swan 1956, Solow 1956).

3.11 LIMITATION OF THE STUDY:

In the course of carrying out this research work, there were a lot of factors which acted in opposite
directions towards the completion of this research work.

The following setbacks were encountered be the researcher:

1. Inaccessibility of relevant materials in the school library and other library.

2. Difficult in collecting Data.
3. Insufficient time for the research work as the result of short academic calendar.
4. Lack of sufficient fund in conducting the research process.

49
3.12 SCOPE OF STUDY:
The scope of the study refers to the whole country because of logistics and financial constraint, the
researcher therefore restrict her scope to Internal Revenue Service, Uyo, and despite other tools for
economic development, for the purpose of this research the scope of this study is restricted
to ‖TAXATION‖.

 DEFINITION OF TERMS: There were many terms used in this write up which need to be
defined to avoid doubt in the mine of the readers. the following terms are defined as they reflect
their application in this study.
TAX: it is a levy imposed by the Government against the income, profits or wealth of the individuals,
partnership and corporate ‗organization. (Tabansi, 2001).

TAXATION: is the process or machinery by which committees, group of persons of individuals are
made to contribute part of their income in some agreed rate and methods for purpose of administration
and development of the society. (Okorle Onovo, 2007).

ECONOMIC DEVELOPMENT: According to Agu (2000), is the process whereby the level of national
production (that is national income) or per capital income increase over a period of time
.INCOME TAX: According to Okerie Onovo (2007), it is a tax levied on the income of an individual.

TAX EVASION: is a deliberate act of a tax payer to escape tax either by running away from collectors or
under-declaring his/her income, omission or misstatement of items from returns. this act is illegal and is
punishable if discovered (Tabansi, 2001).
TAX AVOIDANCE: this is generally considered as a way of identifying the loop-hole in the tax law
and then taking advantage of such a loop-hole to reduced the tax payable. (Tabansi, 2001).

TAX PAYER: it refers to employer or labour, Government Ministry and department, parastatals,
statutory bodies, institutions and other established organization approved for the operation.
BOARD: this refers to the bodies which is authorized and empowered by law for the responsibility of the
collection of taxes, they are sub-head quarter offices located at all the Local Government Area in the
country.(Wikipedia, 2007).

TAX ADMINISTRATION: Cater (2000) defines it as the management of human and material resources
to bring about efficient, fair and effective tax assessment, collection and accountability so as to achieved
other economic socio-political objectives of the Government.

50
 CHAPTER 4

4.1 DATA ANALYSIS AND INTERPRETATION:

Tax data analytics can help address these expanding requirements and open new avenues for tax
executives and their teams to engage with the broader business. Tax data analytics combines tax technical
knowledge, large sets of data, and new technologies such as visualization tools to generate insights and
deeper understanding. Tax analytics can help an organization‘s tax function make smarter, real-time
decisions to improve business performance and drive strategy. A recent Deloitte Dbriefs webcast
provided an overview of tax data analytics concepts and components, along with areas of potential value
creation through use of analytics. Also presented were practical examples of how companies can apply
analytics in combination with visualization tools to identify and explore key tax issues and opportunities.

 The tax function — a late analytics adopter:

Despite being a quantitative field, tax has been hesitant to embrace analytics. But there are signs of
growing interest. Participants were polled during a Deloitte Dbriefs webcast. Of those who provided an
opinion on their tax function‘s focus on analytics, nearly 60 percent of respondents indicated their
organization is either exploring the use of data analytics or is extremely focused on using it to drive
effectiveness and strategy. Among areas where analytics is used, direct tax compliance and provision
were most common, cited by 49 percent of respondents. Several factors may contribute to this slower
uptake in tax as opposed to other parts of the business. Most tax software is compliance oriented rather
than analytics focused. Numerous legal entities exist within the enterprise, sometimes on different ERP
systems and with different tax issues. Tax law is complex, and too little data is available to analyze tax
structures. In the Dbriefs poll, data issues were cited most frequently (32 percent) as the biggest challenge
in executing analytics strategy.

Despite these hurdles, executive-level demand for strategic tax information and insights is beginning to
build momentum. In some instances, as well, regulators are ahead of companies in analytics deployment.

51
  Which of the following best describes your tax function’s focus around data
analytics?

13.90%
Our tax function is extremely focused
40.40% on analytics and using core data to
drive our effectiveness and strategy
Our tax function is exploring the use of
data analytics but it's still early
45.70%
Our tax function has not embraced the
use of data analytics to any great
extent

 Are you using tax analytics to address any of the following tax areas? Choose your
top area if there is more than one.

Column1

20.20%

Indirect taxes (sales & use tax, VAT,

48.90% 6.50% GST, customs duties)
BEPS: The OECD's base erosion and
profit shifting project
Transfer pricing and intercompany
24.40% transactions
Direct taxes, including tax compliance
or tax provision

52
4.2 Tax and the role of analytics:

The tax function gathers data from various sources and systems across the enterprise, uses it to solve
problems and find answers, and then delivers information in the form of return filings, reports, and
presentations. Data analytics is fundamentally changing tax‘s role by providing the ability to explore and
explain data in new ways.

 Visualization:

Visualization can be a useful technology any time humans look at data output and make decisions based
on it. Visualization oriented tools, as well as visualization capabilities found in statistical and business
intelligence tools, can help equip tax specialists to explore and explain data in new ways and allow users
to understand data better by seeing it in context. Visual analytics helps users reach insights more quickly
by more readily presenting factors and insights. Visualization can be used to explore the interplay of
different scenarios on the global tax footprint, providing the ability to change the assumptions of one
scenario and quickly see the impact across others. Visualization can also highlight anomalies in large sets
of transactional data, improving the ability to investigate discrepancies.

 Sound data management:

Sound data management is both essential to effective use of tax analytics and potentially a substantial
challenge. Along with the large, disparate data volumes involved, tax calculations are routinely created in
multiple instances of spreadsheet programs and stored in separate systems, and often the data generated
isn‘t fed back into source systems. Important data from different areas of a company can also have errors
or inconsistencies or be incomplete, making it more difficult to extract, analyse, and manage data.

 People:

Another important resource is people. Finding people who understand both tax law and analytics is
proving difficult for some organizations. In response, some companies are hiring quantitative
professionals or data scientists and teaching them about tax, rather than vice versa, or they are recruiting
people from elsewhere in the organization who possess these skills.

53
 Tax data infrastructure:

One resource particularly important to development and use of tax data analytics is a tax data
infrastructure that harmonizes and integrates tax data across the organization to achieve a single working
version for tax purposes. While the reliance on spreadsheets noted previously can impede such an effort,
establishing a tax data warehouse can be a helpful step. In many cases, though, tax data needs to be
integrated with other types of data, including financial, supply chain, and inventory. Combining tax data
with other data in an enterprise data warehouse can increase the value of the data infrastructure.

4.3 QUESTIONNAIRE:

Q1. What is Income Tax?

Ans. Income tax is a type of direct tax the central government charges on the income earned during a
financial year by the individuals and businesses. It is calculated based on the tax slabs defined by Income
Tax Department.

Q2. Who should pay Income Tax?

Ans. The Income tax Act has classified the types of taxpayers in categories so as to apply different tax
rates for different types of taxpayers.

Q3. What is the Types of Tax Payers?

Ans. Individuals

 Hindu Undivided Family (HUF)

 Association of Persons(AOP)
 Body of Individuals (BOI)
 Firms
 Companies

Q4. Resident individuals pay tax on which income?

Ans. Resident individuals are liable to pay tax on their global income in India i.e. income earned in India
and abroad.

Q5. Non-resident individuals pay tax on which basis?

Ans. those who qualify as Non-residents need to pay taxes only on income earned or accrued in India.

54
Q6 .How residential status is determined?

Ans. The residential status has to be determined separately for tax purposes for every financial year on
the basis of the individual tenor of stay in India.

Q7.What is the 5 heads of income?

Ans. Everyone who earns or gets an income in India is subject to income tax.(Yes, be it a resident or a
non-resident of India ).For simpler classification, the Income tax department breaks down income into
five main heads.

Q8.what does Income from Other Sources includes?

Ans. Income from savings bank account interest, fixed deposits, winning in lotteries is taxable under this
head.

Q9.What does Income from House Property includes?

Ans. Income earned from renting a house property is taxable under this head of income.

Q10. What are the Existing / Old Income Tax Regime?

Ans. The old tax regime provides 3 slab rates for levy of income tax which are 5%, 20% tax rate and
30% for different brackets of income. The individuals have been given the option to continue with this
Old tax regime and they can claim deductions of allowances like Leave Travel Concession (LTC), House
Rent Allowance (HRA), and certain other allowances.

Q11.What is Tax slab rates applicable for Individual taxpayer below 60 years for Old
tax regime?

Ans. Income Range Tax rate Tax to be paid Up to Rs.2,50,0000No tax Between Rs 2.5 lakhs and Rs 5
lakhs5%5% of your taxable income Between Rs 5 lakhs and Rs 10 lakhs20%Rs 12,500+ 20% of income
above Rs 5 lakhs Above 10 lakhs30%Rs 1,12,500+ 30% of income above Rs 10 lakhs.

Q12. What documents are to be enclosed along the return of income?

Ans. There is no need to enclose any documents with the return of income. However, one should retain
the documents to produce before any competent authority as and when required in future .

55
Q13. What are the exemptions and deductions available under the new regime are?

Ans.. Transport allowances in case of a specially-abled person.

 Conveyance allowance received to meet the conveyance expenditure incurred as part of the
employment.
 Any compensation received to meet the cost of travel on tour or transfer.
 Daily allowance received to meet the ordinary regular charges or expenditure you incur on
account of absence from his regular place of duty.

Q14. Can i file return of income even if my income is below taxable limits?

Ans. Yes, you can file return of income voluntarily even if your income is less than basic exemption
limit

Q15. What is Income Tax Slabs under New Tax Regime?

Ans. New regime slab rates

 Income from Rs 2.5 lakh to Rs 5 lakh 5% tax.

 Income from Rs 5 lakh to Rs 7.5 lakh 10% tax.
 Income from Rs 7.5 lakh to Rs 10 lakh 15% tax.
 Income from Rs 10 lakh to Rs 12.5 lakh 20% tax.
 Income from Rs 12.5 lakh to Rs 15 lakh 25%tax.

Income above Rs 15 lakh 30% tax..

Q16. Should I disclose all my income in the return even if it is exempt?

Ans. Yes. Income from every source including exempt income must be disclosed. The same can be
shown under the Schedule EI.

Q17.How does taxation relate to government revenue?

Ans.in modern economies, taxes are the most important source of governmental revenue. However,
taxation is not a government's only source of revenue. Taxes differ from other sources of revenue in that
they are compulsory levies and are unrequited (except payroll taxes)—i.e., they are generally not paid in
exchange for some specific thing.

56
Q18.Does indirect taxations play any significance role in economic development?
Ans. Indirect tax have been put in place to ensure that resources are used efficiently by individuals and
organizations as lower expenditure on raw materials will mean lower margins lost on taxes.
 In turn, lowered costs of production will raise profits and foster healthy competition among rival
organizations thereby developing the economy.
 This also provides consumers with a wider variety of options catered to their needs, facilitating
improvements in standards of living.
 The burden of taxation falls on the consumers in the end, as most retailers, manufacturers and
service providers will attempt to recover taxes on initial expenses in the sales price itself.
 Hence the importance of taxes of this kind lies in how it incentivizes organizations to make their
operations as efficient as possible.

Q19.What is the role of taxation in economic development?

Ans. The infrastructure is developed by governments and when the government collects money from
taxes, it ploys this money into the development of this infrastructure and in turn promotes economic
activity throughout the country.

Q20.Do tax play an important role in economy?

Ans. In modern economies, taxes are the most important source of governmental revenue. However,
taxation is not a government's only source of revenue.

Q21.What impact can taxes have on the economy?

Ans. They also largely indicate that tax increases can generate increased revenue for government but
often at the expense of economic growth and mobility for taxpayers. Conversely, tax cuts tend to
produce short-lived revenue decreases while promoting long-term economic growth.

Q22.Does direct taxations play any significance role in economic development?

Ans. Direct taxation is one of the main sources of income for the government.
 It also affects inflation, demand and supply within the economy by regulating disposable incomes
across the board.
 Luxury goods and services are the most affected by this regulation and so, the tax rates have to
strike a balance between providing administrative funds, limiting inflation and leaving enough
disposable income to encourage consumption.

57
  Deductions on certain services such as insurance or some types of loans will attract individuals
and organizations to invest in the Indian economy and generate usable capital.
 This will allow for greater stability in the economy while also providing stakeholders with a
greater degree of financial security.
 More capital flowing into the country will increase revenue and in turn affect tax collection,
providing the government with a higher budget for expenditure on developing the nation‘s
infrastructure, as well as its natural, manmade and human resources.

Q23.To what extent does the Government utilized revenue derived for the
development of the economy?

Ans. Governments collect revenues mainly for two purposes: to finance the goods and services they
provide to citizens and businesses, and to fulfill their redistributive role.

Q24.What is the meaning of tax collection?

Ans. Tax collections means all payments received on or with respect to the Included Leases or the
related Equipment that are Excluded Amounts attributable to any taxes, fees or other charges imposed by
any Governmental Authority.

Q25.What are the problems associated with tax collection in the country?

Ans. Lack of accountability, embezzlement, poor accounting records, deficit of empowerment

programs and absence of awareness are the key reasons why people and businesses in IE do not pay
tax.

Q26.What are the challenges faced by the developing countries regarding taxation
system?

Ans .For many developing countries the challenge is not so much whether to increase revenues -- in
most cases they must do so if they are to grow and prosper -- but rather how to do so. Essentially, there
are only three possibilities: raise rates, expand bases, and improve administration.

58
Q27.What is the challenges associated with tax reforms in Ghana?

Ans. However, there are significant problems that constrain the ability to improve efficiency in tax
administration and generate more revenue at existing tax rates: The institutional structure for tax
collection is weak. Low skill levels of staff mean that a significant proportion of taxpayers remain
outside the tax net.

Q28.What was one problem with the tax system?

Ans. Many taxpayers consider the tax system unfair. They are critical of the fact that it enables many
high-income individuals to pay the government a smaller percentage of their incomes than the
percentage required from taxpayers with lower incomes.

Q29.What are the three 3 types of taxes that are collected?

Ans. progressive tax—A tax that takes a larger percentage of income from high-income groups than
from low-income groups. proportional tax—A tax that takes the same percentage of income from all
income groups. regressive tax—A tax that takes a larger percentage of income from low-income groups
than from high-income groups.

Q30.What is the reasons for tax collection?

Ans. Collecting taxes and fees is a fundamental way for countries to generate public revenues that
make it possible to finance investments in human capital, infrastructure, and the provision of
services for citizens and businesses.

Q31.What is the five main problems facing developing countries?

Ans. These include soaring debt, export marginalization, energy poverty and climate vulnerability.

 Soaring debt. ...

 Export marginalization. ...
 Energy poverty. ...
 Climate vulnerability. ...
 Chance to redefine development strategies.

59
Q32.How can tax problems be solved?

Ans. These 5 Methods Can Solve Most Tax Problems

1) File All Unfiled Returns. ...

2) Negotiate an Offer in Compromise With the IRS. ...
3) Set Up an Installment Agreement. ...
4) Consider a Partial Payment Installment Agreement. ...
5) File for First-Time Penalty Abatement. ...
Start Resolving Your Tax Issues Today With Help From S.H.

Q33.What is the challenges with using tax cuts to expand the economy?

Ans. Tax cuts reduce government revenues and create either a budget deficit or increased
sovereign debt. Critics often argue that the tax cut benefits the rich at the expense of those with fewer
resources as services beneficial to those in a lower income bracket are cut.

Q34.What is taxation issues?

Ans. Tax problems come in different forms; IRS tax problems, State tax problems, and Sales tax
problems. Tax authorities are constantly increasing their tax enforcement efforts through tax collection
and tax audit.

Q35.What is the most common mistake made on taxes?

Ans. Common tax return mistakes that can cost taxpayers

 Filing too early. ...

 Missing or inaccurate Social Security numbers (SSN). ...
 Misspelled names. ...
 Entering information inaccurately. ...
 Incorrect filing status. ...
 Math mistakes. ...
 Figuring credits or deductions. ...
 Incorrect bank account numbers.

60
Q36.Why does the government make taxes so difficult?

Ans. Our tax system could be simple if its only purpose were to raise revenue. But it has
other goals, including fairness, efficiency, and enforceability. And Congress has used the
tax system to influence social policy as well as to deliver benefits for specific groups
and industries.

Q37.What are the methods of tax collection?

Ans. Income Tax Collection: How is Income Tax Collected?

 TDS. TDS or Tax Deducted at Source is the tax deduction that occurs at the source itself. ...
 TCS. Sellers collect TCS or Tax Collected at Source from buyers. ...
 Online/Offline Tax Payments.

Q38.What are the different types of taxes collected by government?

Ans. Some important Direct taxes include:

 Income tax.
 Wealth tax.
 Gift tax.
 Capital Gains tax.
 Securities Transaction tax.
 Corporate tax.

Q39. What are the causes of tax disputes?

Ans. There are various causes of tax disputes including incorrect/arbitrary application of the tax laws by
tax officers; issuing tax assessments using incorrect information or without consideration of tax paid; time
barred assessments (assessments issued outside the allowed timeframe by the tax laws);

Q40. Why should tax collections be improved?

Ans. Low tax collection rates have devastating consequences on development. They mean that
governments aren't able to invest in public goods such as health, infrastructure and education.

61
Q41.What is the different types of taxes the government collects?

Ans. Taxes on What You Earn:

 Individual Income Taxes. ...

 Corporate Income Taxes. ...
 Payroll Taxes. ...
 Capital Gains Taxes. ...
 Sales Taxes. ...
 Gross Receipts Taxes. ...
 Value-Added Taxes. ...
 Excise Taxes.

Q42.What is dispute resolution methods?

Ans. The term ‗alternative dispute resolution‘ (ADR) refers to ways of resolving disputes without going
to court. We use 4 different methods to help parties resolve their disputes as efficiently as possible,
without the need for a lawsuit. These are:

 arbitration
 mediation
 conciliation
 case appraisal.

All of the services that we provide are technically ADR processes. However, we treat arbitration
differently because it:

 is more formal
 can be quite similar to a court case with witnesses and expert evidence
 involves the NST Member making a decision that is final, binding and enforceable.

Q43.What is the 3 most common types of conflict?

Ans. 3 Types of Conflict and How to Address Them

 Task Conflict. ...

 Relationship Conflict. ...
 Value Conflict.
62
Q44.What are the 7 common causes of conflict?

Ans. Causes of Conflict

 Bell & Hart's 8 causes of conflict: Bell (2002) suggested six key reasons for conflict occurring in
the workplace and in 2009 Hart added two more. ...
 Conflicting resources. ...
 Conflicting styles. ...
 Conflicting perceptions. ...
 Conflicting goals. ...
 Conflicting pressures. ...
 Conflicting roles. ...
 Different personal values.

Q45. What steps has the Government taken to arrest the problems of tax evasion
in the country?
Ans. Measures Taken by Indian Government to Curb Tax Evasion:

Prosecution and Penalties are imposed under different acts by government. Income tax reward
scheme has been introduced by Income Tax Department which gives rewards to informers about tax
evasion.

Q46. What is tax evasion and how it is done?

Ans. Tax evasion is illegal action in which a individual or company to avoid paying tax liability. It
involves hiding or false income, without proof of inflating deductions, not reporting cash transaction etc.
Tax evasion is serious offense comes under criminal charges and substantial penalties.

Q47.What is the solution of tax evasion?

Ans. Lowering tax rates. Simplify rules/laws and the system as much as possible. Create a well-
structured tax administration organization. Reinforce anti-corruption policies.

63
Q48.What is the methods of tax avoidance?

Ans. Tax avoidance can be done by increasing expenditure on savings schemes, claiming tax credits,
enhancing deductions as per government rules, starting a business to enjoy tax-deductible expenses,
investing in municipal bonds, spending on healthcare plans, aiming at long-term capital gains, etc.

Q49.How can we reduce tax evasion in democracy 4?

Ans. Abolishing the corporate tax and lowering the income tax to 66% or lower should discourage
people from tax evasion. However, Public Tax Returns can prevent tax evasion from happening or make
evasion easily spotted.

Q50.What is some of the most popular tax management strategies?

Ans. Here are a few common tax planning strategies that all businesses can consider.

 Utilize Depreciation. ...

 Section 199A and the 20% Pass-Through Deduction. ...
 Timing Considerations. ...
 Accounting Method Planning. ...
 Utilize Charitable Contributions. ...
 Pass-through Entity Taxes. ...
 Reporting Foreign Assets. ...
 The Importance of Tax Planning.

Q51. What will the government do to taxes if the economy is slowing down?

Ans. During a recession, the government may lower tax rates or increase spending to encourage
demand and spur economic activity. Conversely, to combat inflation, it may raise rates or cut spending to
cool down the economy
Q52.What are the five general tax reduction strategies?

 Minimize taxable income while saving for retirement. ...

 Maximize deductions. ...
 Consider charitable donations. ...
 Review interest expenses. ...

64
  Review social security benefits. ...
 Pay attention to recordkeeping. ...
 Review Form 1040 for missed tax opportunities. ...
 Municipal bonds

Q53.How does the government solve economic problems?

Ans. In the United States, the government influences economic activity through two
approaches: monetary policy and fiscal policy. Through monetary policy, the government exerts its
power to regulate the money supply and level of interest rates. Through fiscal policy, it uses its power to
tax and to spend.
Q54.What are 2 ways the government measures the economy?

Ans. Different methods, such as Gross National Product (GNP) and Gross Domestic Product
(GDP) can be employed to assess economic growth. Gross Domestic Product measures the value of
goods and services produced by a nation.
Q55.How can the governments help to reduce economic inequality?

Ans. One key finding is that education and anti-discrimination policies, well-designed labour
market institutions and large and/or progressive tax and transfer systems can all reduce income
inequality.
Q56.Does housewife need to file ITR?

Ans. Here the housewife is not required to file the ITR. In cases of gifts received from anyone other
than the specified relatives, gifts exceeding a value of ₹50000 shall be considered as a part of the income
of the housewife.
Q57.Sources of government revenue
Ans. 1.Tax:
 2.Rates:
 3.Fees
 Licence fee:
 Surplus of the public sector units
 Fine and penalties:
 Gifts and grants:
 Printing of paper money:
 Borrowings:
65
Q58. What is TAX?

Ans. A tax is a compulsory levy imposed by a public authority against which tax payers cannot claim
anything. It is not imposed as a penalty for only legal offence. The essence of a tax, as distinguished from
other charges by the government, is the absence of a direct quid pro quo (i.e., exchange of favour)
between the tax payer and the public authority.

Q59.WHAT IS RATES?

Ans. Rates refer to local taxation, i.e., taxation levied by (or for) local rather than central government.
Normally rates are proportional to the estimated rentable value of business and domestic properties. Rates
are often criticised as being unrelated to income.

Q60.What is fees?

Ans. Fee is a payment to defray the cost of each recurring service undertaken by the government,
primarily in the public interest.

Q61.what is licence?

Ans. A licence fee is paid in those instances in which the government authority is invoked simply to
confer permission or a privilege.

Q62.what is surplus of the public sector?

Ans. The government acts like a business- person and the public acts like its customers. The government
may either sell goods or render services like train, city bus, electricity, transport, posts and telegraphs,
water supply, etc. The government also earns revenue from the production of commodities like steel, oil,
life-saving drugs, etc.

Q63. what is fine and penalties?

Ans. They are the charges imposed on persons as a punishment for contravention of a law. The main
purpose of these is not to raise revenue from the public but to force them to follow law and order of the
country.

66
Q64. What are gifts and grants?

Ans. Gifts are voluntary contribution from private individuals or non-government donors to the
government fund for specific purposes such as relief fund, defence fund during war or an emergency.
However, this source provides a small portion of government revenue.

Q65. What is printing of paper money?

Ans. It is another source of revenue of the government. It is a method of creating extra resources. This
method is normally avoided because if once this method of financing is started, it becomes difficult to
stop it.

Q66. What are borrowings?

Ans. Borrowings from the public is another source of government revenue. It includes loans from the
public in the form of deposits, bonds, etc. and also from the foreign agencies and organisations.

Q67.Why is revenue a good measure of success?

Ans. Measuring revenue is key to being able to understand the profitability of your business. You
calculate the most common measure of profitability, the profit ratio, by dividing net income by sales
revenue. This metric will tell you how much of every dollar in sales flows to the bottom line.
Q68.What is meant by government revenue?

Ans. Government Revenue refers to the revenue of the government finance by means of participating in
the distribution of the social products, which is the financial resource for ensuring the government to
function. The contents of government revenue have been changed several times.

Q69.What is the impact of government expenditure on economic growth?

Ans. According to the Keynesian theory, government spending has a positive impact on economic
growth. The Keynesian theory postulates that the more a government spends, the higher the economic
growth is as a result of expansionary fiscal policy (Romer, 1986).

Q70.How does increasing government spending help the economy?

Ans. By boosting inflation and expected inflation, government spending can have the beneficial effect
of lowering real interest rates and stimulating the economy further.
67
Q71. What is the importance of government budgeting and expenditure to our
development?

Ans. Why is government budgeting important? Government budgeting is important because it enables
the government to plan and manage its financial resources to support the implementation of various
programs and projects that best promote the development of the country.

Q72.What is the positive impact of government expenditure?

Ans. Government expenditures stimulate the economy in long run through increase in aggregate
demand.

Q73. What are the main income tax provisions?

Ans. Provision for Income Tax is the tax that the company expects to pay in the current year and is
calculated by making adjustments to the net income of the company by temporary and permanent
differences, which are then multiplied by the applicable tax rate.

Q74.What are the 4 main types of taxes?

 Ans. Income tax: This tax stems from revenue earned through a job or a personal venture. ...

 Payroll tax: This tax is deducted from an employee's pay check. ...

 Capital gains tax. ...

 Estate tax: This tax is imposed after an individual dies and their property is transferred to a living
person.

Q75.Which is the main objective of tax?

Ans. The main objective of taxation is to fund government expenditure. But it is not the only
objective; taxation policy has some non-revenue objectives. These objectives are: Economic development
Resource mobilization for economic development is done through taxation.

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Q76. What factors affect taxation?

Ans. Here are six of the biggest factors in calculating income tax:

 Taxable Income. The federal tax system is progressive, meaning that generally your tax rate
increases as your income increases. ...

 Filing Status. Besides income, the taxes you pay depend on your filing status. ...

 Adjustments. ...

 Exemptions. ...

 Tax Deductions. ...

 Tax Credits.

Q77. What is a good tax system?

Ans. A good tax system is one which has predominantly good taxes and which fulfills most of the
canons of taxation: it must yield sufficient revenue, but cause minimum aggregate sacrifice to the people
and minimum obstruction to incentives for production.

Q78. How do I get 100% tax exemption?

Ans. Obtain Form 58A for Donations Eligible for 100% Deduction.
If your donation is eligible for 100% deduction under the Income Tax Act, ensure that you obtain a signed
Form 58A from the fund or institution. Without Form 58A, a donation will not be eligible for 100%
deduction.

Q79.How much donation is tax free in India?

Ans. Donations can be made in the form of a cheque, a draft, or cash. However, cash donations over Rs
2,000 are not allowed as deductions. 100% of the amount donated or contributed is eligible for
deductions.

Q80.Can I claim donations without receipts?

Ans. Yes, you may still qualify for the charitable donations deduction without a donation receipt.
However, there are certain specifications around the donation, including cash limits and type of donation.

69
Q81.Can parents give money tax free India?

Ans The monetary gift to your father will not be treated as income in India, as gift from specified
relatives, including children, is outside the scope of provisions of Section 56(2) of the Income-tax Act,
1961, which provides for taxation of gifts at the hands of the recipient.

Q82.What is the maximum charitable deduction for 2022?

Ans. Individuals may deduct qualified contributions of up to 100 percent of their adjusted gross
income. A corporation may deduct qualified contributions of up to 25 percent of its taxable income.

Q83.Can I gift my wife money tax free India?

Ans. Experts say that cash gift up to Rs 50,000 from anyone will not have tax implications in normal
circumstances. However, in case of cash gift from husband, there is no such limit on how much cash can
be gifted without tax implications. In other words, a man can gift any amount to his wife without any tax
implication.

Q84Does tax cause inflation?

Ans. Higher corporate taxes would also reduce the profitability of new investments, further dampening
the incentive to increase production. It's true that less investment means less business spending, but
because less investment also leads to less supply, the net effect could be to increase inflation pressures.‖

Q85.Who is not eligible for ITR?

Ans. ITR-1 cannot be filed by any individual who: Is a Resident Not Ordinarily Resident (RNOR),
and Non-Resident Indian (NRI).has total income exceeding Rs 50 lakh.

Q86.Is it mandatory to file ITR if tax is zero?

Ans. Filing a NIL income tax return is not mandatory if your total income is below the basic
exemption limit as per the income tax act. But it is always recommended that you file an ITR if there is
any source of income earned by you in a financial year.
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Q87.Can salaried person claim 80G?

Ans. This Deduction for Donation can be claimed by any taxpayer (whether Individual/ Partnership Firm
HUF /Company/ LLP etc) irrespective of whether he is earning income from salary or business. The
deduction available under Section 80G is over and above the deduction of Rs. 1,50,000 allowed under
Section 80C.

Q88. How does tax affect poor?

Ans . Individual taxation Taxes and benefits have an impact on income being shared more equally
between households. Both cash benefits and income tax lead to an overall reduction in income
inequality. Although richer households pay more in indirect taxes than poorer ones, they pay less as a
proportion of their income.

Q89.What tax affects the poor the most?

Ans. In contrast, the average payroll tax rate for households in the lowest income quintile is 6.9 percent
(the same as the 6.9 percent average rate for all households). The payroll tax is by far the most significant
federal tax for households in the lowest income quintile, in terms of how much they pay.

Q90.Why poor people pay more taxes?

Ans. Taxes: Sales taxes are highly regressive, with poor families in the U.S. paying nearly eight times
more of their income in sales taxes than the wealthiest families due to spending more of their smaller
paychecks on buying goods, and having less left over to save and invest.

Q91.Why do rich people pay less taxes than poor people?

Ans. Because of a tax code feature known as ―stepped-up basis,‖ unrealized gain on an asset is never
subject to income tax if the asset is not sold during the owner's lifetime. As a result, much of the income
of the wealthiest families in the country never appears on their income tax returns.

Q92.How are the rich and poor impacted by proportional tax?

Ans. Regressive taxes have a greater impact on lower-income individuals than on the wealthy.
Proportional tax, also referred to as a flat tax, affects low-, middle-, and high-income earners relatively
equally. They all pay the same tax rate, regardless of income.
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Q93.How tax can reduce the problem of poverty and income inequality?

Ans. Taxation and income transfers to the poorest segment of society are the most direct way to
keep inequality in check and reduce poverty in the short term. These instruments are particularly
appropriate when the benefits of growth fail to reach the poor.

Q94.How is taxation a possible solution to poverty?

Ans. One way the U.S. federal income tax system provides low-income families with financial support is
through refundable tax credits. Families can claim refundable tax credits even if they do not owe any
tax liability, which allows families with the lowest incomes to receive benefits.

Q95.How do taxes and transfers impact poverty and inequality in developing countries?

Ans. Taxes and transfers reduce inequality in disposable income relative to market income. The
effect varies, however, across OECD countries. The redistributive impact of taxes and transfers depends
on the size, mix and the progressivity of each component.

Q96.Why is India a developing country?

Ans. Demographically speaking, India has a high density of population with high infant mortality
rates and comparatively lower life expectancy as compared to the developed countries. This makes it
an underdeveloped economy.

Q97.Is India growing so fast?

Ans India is already the fastest-growing economy in the world, having clocked 5.5% average gross
domestic product growth over the past decade. Now, three megatrends—global offshoring, digitalization
and energy transition—are setting the scene for unprecedented economic growth in the country of more
than 1 billion people.

Q98 why people don't like to pay tax?

Ans. .On one side we don't have any surety that whatever I have paid as taxes will be used for
genuine purposes or not. Secondly, there is no direct relationship between my tax payment and benefits
I get in return.
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Q99.Why do people fail to pay taxes?

Ans. There could be a death, illness, cancer, divorce, or a loss of job that derailed them from
performing their normal compliance requirements. Harlan Levinson, a Los Angeles-based CPA,
says he gets numerous calls each year on late tax payments, both individually and for businesses:
The reasons are myriad.
Q100. What per cent of Indian population pays tax in India?

Ans. 5% of Indians actually pay tax. A maximum of around 8 crore people out of 130 crore Indians.

4.4 WAYS TO ACHIEVE ECONOMIC GROWTH

KEY TAKEAWAYS:

 Economic growth is driven oftentimes by consumer spending and business investment.

 Tax cuts and rebates are used to return money to consumers and boost spending.
 Deregulation relaxes the rules imposed on businesses and have been credited with creating
growth but can lead to excessive risk-taking.
 Infrastructure spending is designed to create construction jobs and increase productivity by
enabling businesses to operate more efficiently.

Economic growth is measured by an increase in gross domestic product (GDP), which is defined as the
combined value of all goods and services produced within a country in a year. Many forces contribute to
economic growth. However, there is no single factor that consistently spurs the perfect or ideal amount
of growth needed for an economy. Unfortunately, recessions are a fact of life and can be caused by
exogenous factors such as geopolitical and geo-financial events.

Politicians, world leaders, and economists have widely debated the ideal growth rate and how to achieve
it. It's important to study how an economy grows, meaning what or who are the participants that make an
economy move forward.

In the United States, economic growth is driven oftentimes by consumer spending and business
investment. If consumers are buying homes, for example, home builders, contractors, and construction
workers will experience economic growth. Businesses also drive the economy when they hire worker
raise wages, and invest in growing their business.

73
A company that buys a new manufacturing plant or invests in new technologies creates jobs, spending,
which leads to growth in the economy.

Other factors help promote consumer and business spending and prosperity. Banks, for example, lend
money to companies and consumers. As businesses have access to credit, they might finance a new
production facility, buy a new fleet of trucks, or start a new product line or service. The spending and
business investments, in turn, have positive effects on the companies involved. However, the growth
also extends to those doing business with the companies, including in the above example, the bank
employees and the truck manufacturer. In this article are a few of the measures that are often employed
to increase and promote economic growth.

 Tax Cuts and Tax Rebates:

Tax cuts and tax rebates are designed to put more money back into the pockets of consumers. Ideally,
these consumers spend a portion of that money at various businesses, which increases the businesses'
revenues, cash flows, and profits. Having more cash means companies have the resources to procure
capital, improve technology, grow, and expand. All of these actions increase productivity, which grows
the economy. Tax cuts and rebates, proponents argue, allow consumers to stimulate the economy
themselves by imbuing it with more money.

In 2017, the Trump administration proposed, and Congress passed the Tax Cuts and Jobs Act.1 The
legislation lowered corporate taxes to 20%— the highest corporate income tax rate was 35% before the
bill. Various personal income tax brackets were lowered as well. The bill cost $1.5 trillion and is
designed to increase economic growth for the next ten years.23

As with any stimulus used to spur economic growth, it's often difficult to pinpoint how much growth
was created by the stimulus and how much was generated by other factors and market forces.

 Stimulating the Economy With Deregulation:

Deregulation is the relaxing of rules and regulations imposed on an industry or business. It became a
centrepiece of economics in the United States under the Reagan administration in the 1980s, when the
federal government deregulated several industries, most notably financial institutions. Many economists
credit Reagan's deregulation with the robust economic growth that characterized the U.S. during most of
the 1980s and 1990s. Proponents of deregulation argue tight regulations constrain businesses and
prevent them from growing and operating to their full capabilities.

74
This, in turn, slows production and hiring, which inhibits GDP growth. However, economists who favor
regulations blame deregulation and a lack of government oversight for the numerous
economic bubbles that expanded and subsequently burst during the 1990s and early 2000s.

Many economists cite that there was a lack of regulatory oversight leading up to the financial crisis of
2008. Subprime mortgages, which are high-risk mortgages to borrowers with less-than-perfect credit,
began to default in 2007. The mortgage industry collapsed, leading to a recession and subsequent
bailouts of several banks by the U.S. government.

New regulations were implemented in the years to follow that imposed increased capital requirements
for banks, meaning they need more cash on hand to cover potential losses from bad loan.

 Using Infrastructure to Spur Economic Growth:

Infrastructure spending occurs when a local, state, or federal government spends money to build or
repair the physical structures and facilities needed for commerce and society as a whole to
thrive. Infrastructure includes roads, bridges, ports, and sewer systems. Economists who favor
infrastructure spending as an economic catalyst argue that having top-notch infrastructure increases
productivity by enabling businesses to operate as efficiently as possible. For example, when roads and
bridges are abundant and in working order, trucks spend less time sitting in traffic, and they don't have to
take circuitous routes to traverse waterways.

Additionally, infrastructure spending creates jobs as workers must be hired to complete the green-lighted
projects. It is also capable of spawning new economic growth. For example, the construction of a new
highway might lead to other investments such as gas stations and retail stores opening to cater to
motorists.

During the Great Recession, the Obama administration, along with Congress proposed and passed The
American Recovery and Reinvestment Act of 2009.4 The stimulus package was designed to spur
economic growth in the economy since business and private investment was waning. The Obama
stimulus as it's commonly referred to included federal government spending exceeding $80 billion for
highways, bridges, and roads. The stimulus was designed to help create construction jobs that were hit
hard due to the impact from mortgage crisis on residential and commercial construction.5

75
4.5 Conclusion:

Rather than assuming that income tax is a burden, citizens should contribute to the progress of a nation by
paying income tax. The general population should endeavor to comprehend the significance of income tax
and the perceived role their money plays in the country‘s growth. As a responsible citizen, one must
always pay their income tax on time because it is only via tax payments that our country can stay up with
other industrialized nations and progress further. If people begin to perceive income tax as a hardship and
avoid having to pay it, our nation‘s growth will suffer, as would social disintegration so in order to avoid
the same paying of income tax on time is consequential.

The outbreak of COVID-19 has been the largest shock to economic activity in India in at least 60 years.
The current crisis will exacerbate pre-existing vulnerabilities, including a lack of fiscal space and a high
level of non-performing loans, and this could impede the pace of the near-term recovery. Nevertheless,
India's economic outlook continues to be supported by a range of favourable structural factors, including
a growing working-age population and prospects for continued urbanisation, which should support the
outlook for some Australian exports, including education and coking coal. The outlook for other resource
exports such as iron ore and thermal coal, which have in the past been key exports to some fast-growing
east Asian economies, is not as encouraging given the stronger prospects for self-sufficiency in these
commodities. As a result, India is likely to remain an important trading partner for Australia, but growth
in exports of the kind experienced with China in the past few decades seems unlikely.

Zane Fair weather is from Economic Analysis Department and Maxwell Sutton is from International
Department. The authors extend their sincere thanks to Lea Jurkovic, who provided substantive analysis
in the earlier stages of this work.

For further details, see RBA (2020).

Between March and November, the Indian Government announced its fiscal response to the crisis in
3 phases. In March, India introduced a support package to bolster the healthcare system and provide free
food grains and cash transfers to India's most vulnerable citizens, many of whom faced a sudden loss of
income with a limited safety net during the initial lockdown. In May, small and medium enterprises were
offered government-guaranteed loans and equity injections to support their cash flows amid steep falls in
revenue during lockdowns. Once most of the country had moved out of lockdown by October, the
government also announced further stimulus measures including consumption vouchers and increased
infrastructure spending targets to support the recovery.

76
For further detail on India's long-run growth fundamentals, see Ma and Roberts (2018).

In the past 2 decades, India's labour force participation rate has declined significantly and is particularly
low for women relative to other Asian countries. As a result, the rapid growth in India's working-age
population has not led to equally rapid growth in the size of the labour force. Part of this can be explained
by higher enrolment of young women in education, which can reduce labour force participation in the
short run but increase it in the longer run if the labour market is able to provide sufficient opportunities for
educated women (Das et al 2015; Verick 2014).

The RBI has established 2 schemes to provide foreign investors with additional access to its government
bond market, which have so far generated moderate investment flows. The Indian Government has also
recently pushed for its bonds to be included in international bond indices, which some market analysts
estimate could generate portfolio inflows to India of around INR 1½ trillion (Sircar 2020). However,
meeting the inclusion criteria would require removing some capital controls and maintaining or improving
India's sovereign credit rating.

Prior to the crisis, significant stocks of non-performing assets (NPAs) had weighed on public sector banks'
ability to efficiently allocate credit, contributing to slower economic growth (RBA 2020). Indian banks'
NPA ratios improved at the start of 2020; however, this largely reflects substantial capital injections from
the Indian Government and the loan repayment moratorium, which has allowed banks to delay recognition
of non-performing loans until the moratorium ends (RBI 2020a; Moody's Investors Service 2020).

Like many countries, including Australia, India requires banks to hold a minimum amount of funds
(known as capital) relative to their loans to absorb losses if banks' borrowers default on their loans.

Some market analysts expect that the Indian Government may need to provide PSBs with further capital
injections, equivalent to 0.25–0.9 per cent of GDP, before the PSBs can meaningfully contribute to credit
growth (Moody's Investors Service 2020; Fitch Ratings 2020).

An exception is the decline in education exports between 2009 and 2012, following widespread media
coverage of incidents of violence against Indians, including students, living in Australia. Other factors
may have included a tightening in visa rules and the global financial crisis.

For further details on how travel restrictions associated with the COVID-19 pandemic affected Australia's
education exports, see (Grozinger and Parsons 2020).

77
The NEP proposes allowing satellite campuses of top foreign universities in India for the first time. Given
Australia has 7 universities in the top 100, this change could be positive for linkages between India and
Australia and increase the visibility of Australian universities. However, the direct impact on education
exports will be much smaller from Indian students at Australian satellite campuses as fees may be
regulated at lower levels and Australia will not be exporting ‗living expenses‘, which are a significant
component of total education exports.

India's urbanisation is likely to be less steel intensive than China's, as height restrictions in Indian cities
favour less steel intensive low-rise urban sprawl over high-rise buildings.

In 2018/19 India produced 40 million tonnes (Mt) of coking coal, around 5 Mt of which is suitable for
steelmaking after being washed. Over the same period, India imported 51 Mt of coking coal, including
37 Mt from Australia.

India produced 205 Mt of iron ore in 2018, making it the world's third-largest producer behind Australia
and Brazil. With small import and export volumes relative to production, it is also mostly self-sufficient.

78
 CHAPTER 5

5.1 CONCLUSION 1:

 Taxation is one of the most important instruments of fiscal policy.

However, the effect of taxation on economic growth was and still is debated.

 Neither the theoretical literature nor the empirical literature provides the bottom line of the
relationship between taxation and economic growth.

 this section reviewed this relationship and found that the literature can be divided into three main
groups:
(1) the positive impact of taxation on economic growth.
(2) the negative impact of government spending on economic growth.
(3) the nonlinear impact of taxation on economic growth.

 this review finds that most of the studies support the negative effect of taxation on economic growth.

 However, it seems that the results of the literature on government spending on economic growth is
subject to a set of various factors, including the selection of the sample of countries, the level of
development of countries, the time frames, the control variables included, the methodology used,
among other factors.

 therefore, none of the views on the relationship between taxation and economic growth can be wholly
relied upon. plus, the most advanced methodologies should be employed in future research.

5.2 CONCLUSION 2:

 Both changes in the level of revenues and changes in the structure of the tax system can influence
economic activity, but not all tax changes have equivalent, or even positive, effects on long-term
growth.
79
 The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as
gospel.

 However, theory, evidence, and simulation studies tell a different and more complicated story.

 Tax cuts offer the potential to raise economic growth by improving incentives to work, save, and
invest.

 But they also create income effects that reduce the need to engage in productive economic activity,
and they may subsidize old capital, which provides windfall gains to asset holders that undermine
incentives for new activity.

 In addition, tax cuts as a stand-alone policy (that is, not accompanied by spending cuts) will typically
raise the federal budget deficit. The increase in the deficit will reduce national saving—and with it,
the capital stock owned by Americans and future national income—and raise interest rates, which will
negatively affect investment.

 The net effect of the tax cuts on growth is thus theoretically uncertain and depends on both the
structure of the tax cut itself and the timing and structure of its financing.

 Several empirical studies have attempted to quantify the various effects noted above in different ways
and used different models, yet mostly come to the same conclusion: Long- persisting tax cuts financed
by higher deficits are likely to reduce, not increase, national income in the long term.

 By contrast, cuts in income tax rates that are financed by spending cuts can have positive impacts on
growth, according to the simulation models.

 In modern United States history, however, major tax cuts (in 1964, 1981, and 2001/2003) have been
accompanied by increases in federal outlays rather than cutbacks.
 The effects of income tax reform—revenue- and distribution ally-neutral base-broadening, rate-
reducing changes—build off of the effects of tax cuts, but are more complex. The effects of
reductions in rates are the same as above.

Broadening the base in a revenue neutral manner will eliminate the effect of rate cuts on budget
deficits. It will also reduce the impact of the rate cuts on effective marginal tax rates and thus reduce
the impact on labour supply, saving, investment, etc.

However, broadening the base will have one other effect as well; by reducing the extent to which the
tax code subsidizes alternative sources and uses of income, base broadening will reallocate resources
toward their highest value economic use and hence will raise the overall size of the economy and
result in a more efficient allocation of resources.

These effects can be big in theory and in simulations, especially for extreme policy reforms such as
eliminating all personal deductions and exemptions and moving to a flat-rate tax. But there is little
empirical analysis of broad-based income tax reform in the United States, in part because there has
only been one major tax reform in the last fifty years.

Still, there is a sound theoretical presumption—and substantial simulation results— indicating that a
base-broadening, rate-reducing tax reform can improve long-term performance.

The key, however, is not that it boosts labor supply, saving or investment—since it raises the same
amount of revenue from the same people as before—but rather that it leads to be a better allocation of
resources across sectors of the economy by closing off targeted subsidies.

 An admittedly less than fully scientific source of evidence is simply asking economists what they
think.

In a survey of 134 public finance and labour economists, the estimated median effect of the Tax
Reform Act of 1986 on the long term size of the economy was one per cent (Fuchs et al. 1998).

Note that TRA 86 did not reduce public saving, so the growth effect was entirely due to changes in
marginal tax rates and the tax base.
The median response also suggested that the 1993 tax increases had no effect on economic growth.

The 1993 act raised tax rates on the highest income households, but also reduced the deficit and
thereby increased national saving.

One strong finding from all of the analysis is that not all tax changes will have the same impact on
growth. Reforms that improve incentives, reduce existing subsidies, avoid windfall gains, and avoid
deficit financing will have more auspicious effects on the long-term size of the economy, but in some
cases may also create trade-offs between equity and efficiency.

These findings illustrate both the potential benefits and the potential perils of income tax reform on
long-term economic growth.

82
 CHAPTER 6

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 Tiryakian, Edward a: occupational satisfaction and aspiration in an underdeveloped country: the

philliupines , ibid.

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