CMA Indirect Tax Notes – Taxation for Quick Reference
CMA Indirect Tax Notes-INTRODUCTION
CMA Indirect Tax Notes-India is a socialist, democratic and republic country. Constitution of India is supreme law of land. All other laws, including the Income Tax Act, are subordinate to the Constitution of India. The Constitution provides that ‘no tax shall be levied or collected except by Authority of Law’. The Constitution includes three lists in the Seventh Schedule providing authority to the Central Government and the State Governments to levy and collect taxes on subjects stated in the lists.
CMA Indirect Tax Notes-DIRECT TAXES AND INDIRECT TAXES Notes
Direct Taxes: They are imposed on a person’s income, wealth, expenditure, etc. Direct Taxes charge is on person concern and burden is borne by person on whom it is imposed.
Indirect Taxes: They are imposed on goods / services. The Immediate liability to pay is of the manufacturer / service provider / seller but its burden is transferred to the ultimate consumers of such goods / services. The burden is transferred not in form of taxes, but, as a part of the price of goods / services.
Example-Excise Duty, Customs Duty, Service Tax, Value-Added Tax (VAT), Central Sales Tax (CST).
CMA Indirect Tax Notes-FEATURES OF INDIRECT TAXES
Government need funds for various purposes like maintenance of law and order, defence, social / health services,
etc. Government obtains funds from various sources, out of which one main source is taxation. Justice Holmes of US Supreme Court, has, long ago, rightly said that tax is the price which we pay for a civilized Society.
CMA Indirect Tax Notes-Difference between Direct Taxes & Indirect Taxes
- Direct Taxes are those taxes where the incidence and impact falls on the same person.
- Direct Tax progressive in nature.
- Taxable Income of the Assessees.
- Levied and collected from the Assessee.
- Directly borne by the Assessee. Hence, cannot be shifted.
- After the income for a year is earned or valuation of assets is determined on the valuation date.
- Indirect Tax is a tax where incidence and impact fall on two different person.
- Indirect Taxes is regressive in nature.
- Purchase / Sale / Manufacture of goods and provision of services.
- Levied & collected from the consumer but paid/deposited to the Exchequer by the Assessee / Dealer.
- Tax burden is shifted or the subsequent / ultimate user.
- At the time of sale or purchases or rendering of services.
Advantages of Direct taxes
- Direct taxes are ‘progressive’, as they depend on paying capacity. Rich person is taxed more compared to poor person.
- Direct taxes do not affect prices of goods and service.
- Low income tax rates decrease tax revenues and tax evasion and hawala transactions.
- Direct taxes do not increase the cost of modern machinery and technology.
- Direct taxes are not inflationary.
Limitations of Direct taxes
- It Is psychologically very difficult for a person to pay some amount after it is received in his hands. Hence, there is psychological resistance [This is the reason why even Income Tax Act is widening the scope of “Tax Deduction at Source’’ (TDS) and TCS. Thus, a direct tax is converted to an indirect tax].
- Direct taxes are mainly on income of individuals, firms or corporate bodies, where millions of transactions are carried out in lakhs Of places and keeping an eye over all such transactions is virtually impossible.
- Tax evasion is comparatively more in direct taxes where it is on unorganized sector, since control is difficult.
- Collection cost of direct taxes as percentage of tax collected are higher in direct taxes compared to indirect taxes.
- Direct taxes can control wasteful expenditure only indirectly by taxing higher income group people. Government can judiciously use the direct taxes to support development in desirable areas, while discouraging in backward areas, infrastructure development etc.
CMA Indirect Tax Notes-Advantages of Indirect Taxes
- Since the price of commodity or service is already inclusive of indirect taxes, the customer i.e. the ultimate tax payer does not feel a direct pinch while paying indirect taxes and hence, resistance to indirect taxes is much less compared to resistance todirect taxes.
Manufacturer’s/Dealer’s Psychology favours indirect taxes– The manufacturer/ trader who collects the taxes in his Invoice and pays it to Government,has a psychological feeling that he is only collecting the taxes
and is not paying out of his own pocket (though feeling may not be always correct).
- Indirect taxes are easier to collect as indirect taxes are mainly on goods/commodities/services,for which record keeping, verification and control is relatively easy(at least in organized sector).Manufacturing activities are carried out mainly in organized sector, where records and controls are better.
- Tax evasion is comparatively less in indirect taxes in organized sector due to convenience of control.
- Collection costs of indirect taxes as percentage of tax collected are lower in indirect taxes compared to direct taxes.
- Government can levy higher taxes on luxury goods, which reduces the wasteful expenditure.
- Government can judiciously use the indirect taxes to support development in desirable areas, while
encouraging it in backward areas also,e.g. reducing taxes on goods manufactured in tiny or small scale units; lowering taxes in backward areas etc.
CMA Indirect Tax Notes-Limitations of Indirect taxes
- Indirect taxes do not depend on paying capacity.Since the indirect tax is uniform, the tax payable on
commodity is same, whether it is purchased by a poor man or a rich person. Hence, the indirect taxes are termed as ‘regressive’.(This argument is only partially correct; as it is possible to levy lower taxes on goods of daily consumption while levying higher taxes on luxury goods and the regressive effect can be reduced in many circumstances.)
- Tax on goods and services increases its prices, which may reduce demand as per law of demand of goods and services. Lesser demand means lower growth of industrialization.
- High customs/excise duty increases smuggling, hawala trade and mafia gangs, which is harmful in many ways.Similarly, high excise duty leads to evasion. On the other hand, low tax rate will affect the government exchequer.
- Higher customs duty and excise duty increases cost of modern machinery and technology
- Indirect taxes increase the prices of products And hence are often perceived as inflationary.