UNIT-4

Objectives of Taxation in India

The main Objectives of Taxation in India is to finance the government’s expenditure
on public goods and services, such as education, health, infrastructure, and defense.
Taxation provides the government with the necessary resources to undertake
development programs, which, in turn, promote economic growth:
• Economic Development: Economic Development is one of the most important
objectives of taxes. The expansion of capital formation is the main determinant of
the economic progress of any country.
Capital formation is considered a fundamental pillar of economic progress.
However, lack of capital is common in less developed countries. To address capital
shortages, governments in these countries are deploying resources to accelerate
capital formation. The government uses tax revenue to increase public and private
investment through various expenditures. With proper tax planning, the ratio of
savings to national income can be increased, which will further help the economy
to develop.
• Non-Tax Objective: Non-Tax Revenue is the recurring income of the government
from sources other than taxes. They are extremely important because they help
the government and improve public finances. Reducing income and wealth
inequality is another non-revenue goal of taxes. This can be achieved by taxing the
rich at a higher rate than the poor or by introducing a progressive taxation system.
• Price Stability: Taxes can be used to maintain price stability, which is the short-
term goal of taxation. Taxes are considered a good way to keep inflation under
control. Increased direct tax rates can be used to curb private spending, further
reducing excess demand. Naturally, the commodity market is therefore under less
pressure. As for indirect taxes on products, they worsen inflationary trends.
• Balance of Payments (BOP) problems are reduced: Rising current account
deficits are sometimes a sign of impending balance of payments problems. Capital
inflows, other net currency inflows, or a reduction in foreign exchange reserves
are needed to finance current account deficits. Tariffs and other taxes are also used
to regulate imports of certain commodities to reduce the severity of balance of
payments problems and encourage domestic production of import alternatives.
• Full Employment: Because the level of employment is determined by effective
demand, a government seeking to achieve full employment must lower its tax rate.
As a result, disposable income will increase, and in turn, demand for products and
services will also increase. Increased demand will drive investment, leading to
increased incomes and employment through a multiplier effect. The greater the
barriers to work, the higher the tax wedge.
• Redistributing Income: A taxation is a tool that can be used to redistribute
income by levying higher taxes on the rich and lower taxes on the poor. This helps
to reduce income inequality and promote social justice.
• Controlling Inflation: By increasing taxes, the government can reduce the
amount of money in circulation, which can help to control inflation. Additionally,
certain taxes such as excise duty and customs duty can be used to regulate the
prices of goods.
• Encouraging Investment: The government can provide tax incentives to
encourage investment in specific sectors or regions, which can help to promote
economic growth.

Sources of Government Revenue:

:The following points highlight the nine main sources of government revenue. The
sources are: 1. Tax 2. Rates 3. Fees 4. Licence Fee 5. Surplus of the public sector units 6.
Fine and penalties 7. Gifts and grants 8. Printing of paper money 9. Borrowings.
Source # 1. Tax:
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.

Tax has three important features:

(i) It is a compulsory contribution, to the state from the citizen. Anyone refusing to pay
tax is punished under law. Nobody can object to taxation on the ground that he is not
getting the benefit of certain state services,

ADVERTISEMENTS:

(ii) It is the personal obligation of the individual to pay taxes under all circumstances,

(iii) There is no direct relationship between benefit and tax payment.

Source # 2. Rates:
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.
Source # 3. Fees:
Fee is a payment to defray the cost of each recurring service undertaken by the
government, primarily in the public interest.

Source # 4. Licence fee:

ADVERTISEMENTS:

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

Source # 5. Surplus of the public sector units:

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.

Source # 6. Fine and penalties:

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.

Source # 7. Gifts and grants:

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.

Source # 8. Printing of paper money:

ADVERTISEMENTS:

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.

Source # 9. Borrowings:
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.
What are the sources of revenue to the government?
There are two primary sources of this – tax and non-tax revenue. Tax revenue includes direct
and indirect taxes, while fees, penalties, donations, grants, and more come under non-tax
sources. Public revenue helps the government achieve the economic and social goals it has
set.

Difference Between Direct and Indirect Taxes

In India, every individual earning an income, has to pay tax according to his/her income slab. There
are two types of taxes which are charged in India: Direct tax and Indirect tax.

What is Direct Tax?

Direct taxes are non-transferable taxes paid by the taxpayer to the government. These taxes are
administered and governed by the Central Board of Direct Taxes (CBDT). Corporate tax and capital
gain tax are examples of direct tax.

What is Indirect Tax?

Indirect taxes are transferable taxes where the liability to pay can be shifted to others. These taxes
are administered and governed by the Central Board of Indirect Taxes and Customs (CBIC). Service
tax and sales tax are examples of indirect tax.

Comparison of Direct and Indirect Taxes

Both the direct and indirect taxes are significant to the government. They provide a sizable portion of
government revenue. Indirect and direct taxes, however, have different effects on society. To learn
more, keep reading:

Parameter Direct tax Indirect tax

Tax This tax is This tax on

Imposition directly the taxpayers for
 taxpayer’s the goods and
income. services availed or
purchased.

This tax is
This tax is
indirectly paid to
Payment directly paid to
the government
course the
through an
government.
intermediary.

These taxes are

These taxes are
paid by
Paying Entity paid by end-
individuals and
consumers.
businesses.

The rate of tax

is decided by Tax rates are the
Rate of
the government same for
Payment
based on profit everyone.
and income.

This type of tax

Transferability This type of tax is
is non-
of tax transferable.
transferrable.

This is a
This is a regressive
progressive type
type of tax, which
of tax. This tax
means the tax
rate increases
Nature of Tax rate is not
with an
affected by the
individual’s
individual's
profit and
income.
income.
 Income tax,
Sales tax, service
wealth tax,
Types of tax tax, value added
corporate tax,
tax, etc.
etc.

Collecting this
Tax collection is
Tax Collection type of tax is
relatively easier.
difficult.

Types of Direct and Indirect Taxes in India

Major Types of Direct taxes are as follows:

• Wealth tax: The tax levied on an individual’s assets based on their value in a financial year is
known as wealth tax. This tax is levied on HUFs, individuals, or companies.
• Corporation tax: This type of tax is levied on companies and businesses based on their
income in a financial year. The taxation rate depends on whether the enterprise is in India or
abroad.
• Income tax: This tax is levied on individuals on their annual income in a financial year.
• Capital Gains tax: The tax levied on profit earned from property sale are considered under
this category of taxes.

Major Types of Indirect taxes are as follows:

• Service tax: This type of tax is paid to the government by all the service providers.
• Sales tax: This type of tax is levied by the government on movable goods.
• Value added tax: This is levied on products which are added at each stage from
manufacturing till distribution.
• Excise Duty: The tax collected from manufacturers by the government is called as excise
duty tax.

Benefits of Direct and Indirect Taxes

The key benefits of direct taxes are as follows:

• Helps in establishing economic and social balance: The direct taxes are charged according
to tax slabs. Individuals earning lower income have to pay less tax and the individuals
earning higher income have to pay more tax. Thus, this category of tax helps in establishing
social and economic balance.
• Helps in reducing the rate of inflation: The tax rates are increased by the government when
the economy faces inflation. This eventually results in pulling down demand for goods and
services, thus, reducing the rate of inflation.

The key benefits of indirect taxes are as follows:

 • Contribution is equal: Every individual pays some amount of indirect tax to the state
government. Even the lower income groups who are exempted from direct tax payment, are
charged indirect tax on the goods and services they avail themselves.
• Unavoidable tax: These taxes are charged on the goods and services consumed. That is
why these taxes are unavoidable.

Disadvantages of Direct and Indirect Taxes

The disadvantages of direct taxes are as follows:

• Can be avoided: The Government of India has framed stricter rules and policies in order to
curb tax evasion. However, fraudulent practices are still prevailing and many individuals are
paying lower taxes than they should.
• Investment restraints: A lot of individuals avoid making investment to escape from the
imposition of direct taxes like capital gains tax and securities transaction tax.
• Viewed as burden: Direct taxes are often viewed as a burden as they require to be paid in
single lump-sum amount annually.

The disadvantages of indirect taxes are as follows:

• Unawareness: This type of tax is added to the product price and individuals are mostly
unaware of the amount they are paying.
• Regressive:This type of tax is considered regressive in nature. Though they ensure that
everyone pays taxes irrespective of their income, they are not equal. Individuals from all
income groups have to pay indirect taxes at the same rate.
• Increases the price of goods and services: Indirect tax is charged on all the goods and
services availed or consumed in society. Thus, this type of tax increases the end price of
goods and services.

Both direct and indirect taxes are important for the country as they are intricately linked with the
overall economy. As such, collection of these taxes is important for the government as well as the
well-being of the country. Both direct taxes and indirect taxes are collected by the central and
respective state governments according to the type of tax levied.

1.
What is Direct Tax?
Direct taxes are non-transferable taxes paid by the taxpayer to the government. These taxes are
administered and governed by the Central Board of Direct Taxes (CBDT). Corporate tax and capital
gain tax are examples of direct tax.

What is Indirect Tax?

Indirect taxes are transferable taxes where the liability to pay can be shifted to others. These taxes
are administered and governed by the Central Board of Indirect Taxes and Customs (CBIC). Service
tax and sales tax are examples of indirect tax.

Comparison of Direct and Indirect Taxes

Both the direct and indirect taxes are significant to the government. They provide a sizable portion of
government revenue. Indirect and direct taxes, however, have different effects on society. To learn
more, keep reading:

Parameter Direct tax Indirect tax

This tax on
This tax is
taxpayers for
Tax directly the
the goods and
Imposition taxpayer’s
services availed or
income.
purchased.

This tax is
This tax is
indirectly paid to
Payment directly paid to
the government
course the
through an
government.
intermediary.
 These taxes are
These taxes are
paid by
Paying Entity paid by end-
individuals and
consumers.
businesses.

The rate of tax

is decided by Tax rates are the
Rate of
the government same for
Payment
based on profit everyone.
and income.

This type of tax

Transferability This type of tax is
is non-
of tax transferable.
transferrable.

This is a
This is a regressive
progressive type
type of tax, which
of tax. This tax
means the tax
rate increases
Nature of Tax rate is not
with an
affected by the
individual’s
individual's
profit and
income.
income.

Income tax,
Sales tax, service
wealth tax,
Types of tax tax, value added
corporate tax,
tax, etc.
etc.

Collecting this
Tax collection is
Tax Collection type of tax is
relatively easier.
difficult.

Types of Direct and Indirect Taxes in India

Major Types of Direct taxes are as follows:
 • Wealth tax: The tax levied on an individual’s assets based on their value in a financial year is
known as wealth tax. This tax is levied on HUFs, individuals, or companies.
• Corporation tax: This type of tax is levied on companies and businesses based on their
income in a financial year. The taxation rate depends on whether the enterprise is in India or
abroad.
• Income tax: This tax is levied on individuals on their annual income in a financial year.
• Capital Gains tax: The tax levied on profit earned from property sale are considered under
this category of taxes.

Major Types of Indirect taxes are as follows:

• Service tax: This type of tax is paid to the government by all the service providers.
• Sales tax: This type of tax is levied by the government on movable goods.
• Value added tax: This is levied on products which are added at each stage from
manufacturing till distribution.
• Excise Duty: The tax collected from manufacturers by the government is called as excise
duty tax.

Benefits of Direct and Indirect Taxes

The key benefits of direct taxes are as follows:

• Helps in establishing economic and social balance: The direct taxes are charged according
to tax slabs. Individuals earning lower income have to pay less tax and the individuals
earning higher income have to pay more tax. Thus, this category of tax helps in establishing
social and economic balance.
• Helps in reducing the rate of inflation: The tax rates are increased by the government when
the economy faces inflation. This eventually results in pulling down demand for goods and
services, thus, reducing the rate of inflation.

The key benefits of indirect taxes are as follows:

• Contribution is equal: Every individual pays some amount of indirect tax to the state
government. Even the lower income groups who are exempted from direct tax payment, are
charged indirect tax on the goods and services they avail themselves.
• Unavoidable tax: These taxes are charged on the goods and services consumed. That is
why these taxes are unavoidable.
Disadvantages of Direct and Indirect Taxes
The disadvantages of direct taxes are as follows:

• Can be avoided: The Government of India has framed stricter rules and policies in order to
curb tax evasion. However, fraudulent practices are still prevailing and many individuals are
paying lower taxes than they should.
• Investment restraints: A lot of individuals avoid making investment to escape from the
imposition of direct taxes like capital gains tax and securities transaction tax.
• Viewed as burden: Direct taxes are often viewed as a burden as they require to be paid in
single lump-sum amount annually.

The disadvantages of indirect taxes are as follows:

• Unawareness: This type of tax is added to the product price and individuals are mostly
unaware of the amount they are paying.
• Regressive:This type of tax is considered regressive in nature. Though they ensure that
everyone pays taxes irrespective of their income, they are not equal. Individuals from all
income groups have to pay indirect taxes at the same rate.
• Increases the price of goods and services: Indirect tax is charged on all the goods and
services availed or consumed in society. Thus, this type of tax increases the end price of
goods and services.

Both direct and indirect taxes are important for the country as they are intricately linked with the
overall economy. As such, collection of these taxes is important for the government as well as the
well-being of the country. Both direct taxes and indirect taxes are collected by the central and
respective state governments according to the type of tax levied.

What Is an Indirect Tax?

It is a tax levied upon goods or services by the Indian government on the end consumer.
Typically, the market price of the goods or services includes this tax. Indirect taxes in India are
not well defined by any Act. However, our government brings out notifications and circulars to
impose indirect taxes on tangible and intangible products.
What Are the Types of Indirect Taxes?
There are various types of indirect taxes in India. Though all these taxes came under one group
after the introduction of GST, the pre-existing types are as follows -
1. Service Tax
A consumer pays service tax to purchase a service from any entity. The Indian government
collects service tax on certain transactions that a service provider performs to sell a service.
2. Value Added Tax
State governments collect this tax on a good or service at each point of purchase where a value
has been added. This tax is applicable from the point of a raw material purchase to the sale of a
finished product.
3. Custom Duty
The Union government collects this indirect tax on an import of a product in India. Timely, it is
applicable on products exported from India.
4. Excise Duty
Our government collects excise duty from the manufacturers of goods manufactured in an Indian
company. The manufacturers collect it from their buyers through the price of the goods.
5. Sales Tax
Central government imposes this tax on an Inter-state sale and the State government on an Intra-
state sale of a good.
6. Entertainment Tax
State government charges this tax on the purchase of any entertainment-related goods and
services. This can be purchasing goods like video games or services like movies, theatres, sports,
amusement parks
7. Securities-Transaction-Tax
Securities-Transaction-Tax or STT is levied during purchase of securities via Stock Exchanges
of India. These are inclusive of F&O transactions, mutual funds, shares etc.
8. Stamp Duty
This type of indirect tax is levied by the State Governments upon immovable property transfer of
respective states. Furthermore, the State Government levies tax on legal documents. The rate of
stamp duty varies from one state to another.
What Are the Features of Indirect Tax?
Below are some salient features of indirect tax -
• Initially, its nature was regressive. This is because it formerly imposed a significant burden on a
taxpayer's income, whether high or low. However, it turned progressive after the introduction of
the Goods and Services Tax.
• The liability of tax payment can be transferable. This means retailers, service providers or
manufacturers pay the tax first. Then they accrue it from their customer.
• The taxpayer is always the end consumer, and the taxable product is a finished good and
service.
• Indirect tax encourages an individual to save and invest and boost growth.
• It is impossible to escape this tax as it comes under the market price of a product.
Advantages of Indirect Taxes
Below are some benefits of this tax -
1. Easy to Fetch
It is relatively easier to collect than direct tax. Retailers or service providers add this tax to a
product's market price and collect it only upon purchase. Therefore, the initial taxpayer (retailer
or service provider) need not worry about recollecting it from their customers.
2. Convenient and Time-Saving
One of the merits of indirect tax is that it is transferable from one person to another. Since the
taxpayer is the end buyer, retailers or service providers can collect it directly at their stores. This
makes the collection of this tax time-saving and convenient.
3. Mitigation of Stress of Tax Payment
The taxpayers do not need to pay this tax directly from their salary. Our government implements
it through the market value of a product and collects it at a point of purchase. Hence, it does not
feel like a burden to the taxpayers.
4. Fair Distribution of Tax
This tax is inversely related to the necessity of any commodity. Therefore, items that serve our
essentials and basic needs have a lower tax. Conversely, luxurious and valuable commodities
will hold higher taxes.
5. Inevitable to Escape
It is not easy to escape indirect tax as it comes included in a good and service price tag.
Therefore, you pay this tax automatically whenever you make a purchase.
6. Equal Collection from All
An income of less than ₹2.5 lakhs annually does not fall under any income tax slab. People
having this earning do not need to pay direct tax. However, they pay our government indirect tax
and contribute to the development of our country.
Disadvantages of Indirect Taxes
Along with the bright sides, this tax comes with some drawbacks. Below are some
1. Regressive Nature
This tax remains regressive to some extent even after the introduction of the Goods and Services
Tax. The tax on a commodity or service is the same for all, disregarding the poor or rich. This
makes commodities expensive for a poor person and affects his net operating income.
2. Cumulative Nature
Charging this tax sometimes works cumulatively. Intermediaries tend to charge high tax at every
point of transactions, from raw material to the finished product. This increases the price of a
commodity.
3. Unfavourable for Industries
One of the demerits of indirect tax is it is not favourable for rising industries. As discussed in the
previous pointer, intermediaries charge high on the raw material. This leads to a cost of
production that discourages industries from expanding.
What Are Some Examples of Indirect Taxes?
Some examples of indirect tax are service tax, sales tax, central sales tax, state excise duty,
countervailing duty, octroi and entry tax, purchase tax.
Hopefully, the above discourse on indirect taxes' types, features, and pros and cons has helped
you gain a clear idea. Keep the above pointers in mind when dealing with payment of any of
these tax types.