Introduction to Taxation
Introduction
A tax may be defined as a "pecuniary burden laid upon individuals or
property owners to support the Government, a payment exacted by
legislative authority. A tax "is not a voluntary payment or donation, but
an enforced contribution, exacted pursuant to legislative authority.
A direct tax is a kind of charge, which is imposed directly on the
taxpayer and paid directly to the Government by the persons (juristic or
natural) on whom it is imposed. A direct tax is one that cannot be
shifted by the taxpayer to someone else. A significant direct tax
imposed in India is income tax.
Introduction
If the taxpayer is just a conduit and at every stage the tax-incidence is
passed on till it finally reaches the consumer, who really bears the brunt
of it, such tax is indirect tax.
An indirect tax is one that can be shifted by the taxpayer to someone
else.
Its incidence is borne by the consumers who ultimately consume the
product or the service, while the immediate liability to pay the tax may
fall upon another person such as a manufacturer or provider of service
or seller of goods.
Features of Indirect taxes
An important source of revenue: Indirect taxes are a major source of
tax revenues for Governments worldwide and continue to grow as more
countries move to consumption oriented tax regimes. In India, indirect
taxes contribute more than 50% of the total tax revenues of Central and
State Governments.
Tax on commodities and services: It is levied on commodities at the
time of manufacture or purchase or sale or import/export thereof.
Hence, it is also known as commodity taxation. It is also levied on
provision of services.
Features of Indirect taxes
No perception of direct pinch: Since, value of indirect taxes is
generally inbuilt in the price of the commodity, most of the time the tax
payer pays the same without actually knowing that he is paying tax to
the Government. Thus, tax payer does not perceive a direct pinch while
paying indirect taxes.
Inflationary: Tax imposed on commodities and services causes an all-
round price spiral. In other words, indirect taxation directly affects the
prices of commodities and services and leads to inflationary trend.
Features of Indirect taxes
Wider tax base: Unlike direct taxes, the indirect taxes have a wide tax base.
Majority of the products or services are subject to indirect taxes with low
thresholds.
Promotes social welfare: High taxes are imposed on the consumption of
harmful products (also known as ‘sin goods’) such as alcoholic products,
tobacco products etc. This not only checks their consumption but also
enables the State to collect substantial revenue.
Regressive in nature: Generally, the indirect taxes are regressive in nature.
The rich and the poor have to pay the same rate of indirect taxes on certain
commodities of mass consumption. This may further increase the income
disparities between the rich and the poor.
Components of GST
Value Added Continuous chain Burden borne by No cascading
Tax(VAT) of tax credit the consumer effect
