Class: II B.B.

A (International Business) Subject: SBEC: Business Taxation

BUSINESS TAXATION
UNIT - I
INTRODUCTION
Tax is defined as a financial obligation, it is a fee levied by the government of the respective country
on income, goods, and activity. The main reason for imposing taxes is that they are the main source of
revenue to the government. Taxes are broadly classified as a direct tax and indirect tax, wherein the former is
charged directly on the income or wealth of the person, while the latter is imposed on the price of goods and
services.

DEFINITION OF TAX:
In every country major part of the revenue is raised through taxation. According to Prof.
Taylor Taxes are compulsory payments to governments without expectations of direct return or benefit to
the tax payer.

MEANING OF TAXATION
Taxation is the inherent power of the state, acting through the legislature, to impose and collect
revenues to support the government and its recognized objects. Simply stated, taxation is the power of the
State to collect revenues for public purpose.

PURPOSE OF TAXATION
Primary Purpose - is to provide funds or property with which the government discharges its
appropriate functions for the protection and general welfare of the its citizens.

NON - REVENUE OBJECTIVES

Aside from purely financing government operational expenditures, taxation is also utilized as a tool to carry
out the national objective of social and economic development.
1. To strengthen anemic enterprises by granting them tax exemptions or other conditions or incentives
for growth;
2. To protect local industries against foreign competition by increasing local import taxes;
3. As a bargaining tool in trade negotiations with other countries;
4. To counter the effects of inflation or depression;
5. To reduce inequalities in the distribution of wealth;
6. To promote science and invention, finance educational activities or maintain and improve the
efficiency of local police forces;
7. To implement police power and promote general welfare.

MEANING OF TAXES
Taxes are enforced proportional contributions from persons and property levied by the lawmaking
body of the state by virtue of its sovereignty for the support of the government and all public needs.
Tax in a general sense, is any contribution imposed by the government upon individuals for the use
and service of the state, whether under the name of toll, tribute, impost, duty, custom, excise, subsidy, aid,
supply or other name. Tax, in its essential characteristics , is not a debt.

ESSENTIAL CHARACTERISTICS OF TAX

1. It is an enforced contribution
2. It is generally payable in money.
3. It is proportionate in character, usually based on the ability to pay
4. It is levied on persons and property within the jurisdiction of the state
5. It is levied pursuant to legislative authority, the power to tax can only be exercised by the law making body
or congress
6. It is levied for public purpose
7. It is commonly required to be paid a regular intervals.

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Class: II B.B.A (International Business) Subject: SBEC: Business Taxation
OBJECTIVES OF TAXATION:
The primary purpose of taxation is to raise revenue to meet huge public expenditure. Most
governmental activities must be financed by taxation. But it is not the only goal. In other words, taxation
policy has some non-revenue objectives.
Truly speaking, in the modern world, taxation is used as an instrument of economic policy. It affects
the total volume of production, consumption, investment, choice of industrial location and techniques,
balance of payments, distribution of income, etc.

Here we will discuss the objectives of taxation in modern public finance:

1. Economic Development
2. Full Employment
3. Price Stability
4. Control of Cyclical Fluctuations
5. Reduction of BOP Difficulties
6. Non-Revenue Objective

Objective # 1. Economic Development:

One of the important objectives of taxation is economic development. Economic development of any
country is largely conditioned by the growth of capital formation. It is said that capital formation is the
kingpin of economic development. But LDCs usually suffer from the shortage of capital.
To overcome the scarcity of capital, governments of these countries mobilize resources so that a rapid
capital accumulation takes place. To step up both public and private investment, government taps tax
revenues. Through proper tax planning, the ratio of savings to national income can be raised.
By raising the existing rate of taxes or by imposing new taxes, the process of capital formation can be made
smooth. One of the important elements of economic development is the raising of savings- income ratio
which can be effectively raised through taxation policy.
However, proper care has to be taken, regarding investment. If financial resources or investments are
channelized in the unproductive sectors of the economy the economic development may be jeopardized, even
if savings and investment rates are increased. Thus, the tax policy has to be employed in such a way that
investment occurs in the productive sectors of the economy, including the infrastructural sectors.

Objective # 2. Full Employment:

Second objective is the full employment. Since the level of employment depends on effective demand,
a country desirous of achieving the goal of full employment must cut down the rate of taxes. Consequently,
disposable income will rise and, hence, demand for goods and services will rise. Increased demand will
stimulate investment leading to a rise in income and employment through the multiplier mechanism.

Objective # 3. Price Stability:

Thirdly, taxation can be used to ensure price stabilitya short run objective of taxation. Taxes are
regarded as an effective means of controlling inflation. By raising the rate of direct taxes, private spending
can be controlled. Naturally, the pressure on the commodity market is reduced.
But indirect taxes imposed on commodities fuel inflationary tendencies. High commodity prices, on
the one hand, discourage consumption and, on the other hand, encourage saving. Opposite effect will occur
when taxes are lowered down during deflation.

Objective # 4. Control of Cyclical Fluctuations:

Fourthly, control of cyclical fluctuationsperiods of boom and depressionis considered to be
another objective of taxation. During depression, taxes are lowered down while during boom taxes are
increased so that cyclical fluctuations are tamed.

Objective # 5. Reduction of BOP Difficulties:

Fifthly, taxes like custom duties are also used to control imports of certain goods with the objective of
reducing the intensity of balance of payments difficulties and encouraging domestic production of import
substitutes.
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Class: II B.B.A (International Business) Subject: SBEC: Business Taxation
Objective # 6. Non-Revenue Objective:
Finally, another extra-revenue or non-revenue objective of taxation is the reduction of inequalities in
income and wealth. This can be done by taxing the rich at higher rate than the poor or by introducing a system
of progressive taxation.

CANONS /PRINCIPLES OF TAXATION :

Adam smith, the father of modem political economy, has laid down four principles or cannons of
taxation in his famous book "Wealth of Nations". These principles are still considered to be the starting point
of sound public finance. Adam Smith's celebrated cannons of taxation are:
(1) Cannon of equality or ability, (2) Cannon of certainty, (3) Cannon of convenience, and (4)
Cannon of economy.

(1) Canon of equality or ability:

Canon of equality, or ability is considered j to be a very important canon of taxation. By equality we
do not mean that people should pay equal amount by way of taxes to the government. By equality is meant
equality of sacrifice, that is people should pay taxes in proportion to their incomes. This principle points to
progressive taxation. It states that the rate or percentage of taxation should increase with the increase in
income and decrease with the decrease in income. In the words of Adam Smith:
"The subject of every state ought to contribute towards the support of the government as early as
possible in proportion to their respective abilities that is in proportion to the revenue which they respectively
enjoy under the protection of the State".

(2) Canon of certainty:

The Canon of certainty implies that there should be certainty with regard to the amount which
taxpayer is called upon to pay during the financial year. If the taxpayer is definite and certain about the
amount of the tax and its time of payment, he can adjust his income to his expenditure.
The state also benefits from this principle, because it will be able to know roughly in advance the
total amount which it is going to obtain and the time when it will be at its disposal. If there is an element of
arbitrariness in a tax, it will then encourage misuse of power and corruption Adam smith in this connection
remarks:
"The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of
payment, the manner of payment, the quantity to be paid all ought to be clear and plain to the contributor and
to every other person".

(3) Canon of convenience:

By this canon, Adam smith means that the tax should be levied at the time and the manner which is
most convenient for the contributor to pay it. For instance, if the tax on agricultural land is collected in
installments after the crop is harvested, it will be very convenient for the agriculturists to pay it. Similarly,
property tax, house tax, income tax, etc., etc., should be realized at a time when the taxpayer is expected to
receive income. The manner of payment of tax should also be .convenient. If the tax is payable by cheques,
the contributor will be saved from much inconvenience. In the Words of Adam Smith:
"Every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the
contributor to pay it".

(4) Canon of Economy:

The canon of economy implies that the expenses of collection of taxes should not be excessive. They
should be kept as little as possible, consistent with administration efficiency. If the government appoints
highly salaried, staff and absorbs major portion of the yield, the tax will be considered uneconomical. Tax
will also to regarded as uneconomical if it checks the growth of capital or causes it to emigrate to other
countries, In the words of Adam Smith:
"Every tax is to be so contrived as both to take out and keep out of the pockets of the people as little as
possible over and above what it brings into the public treasury of the state".

Some other Canons/Principles of Taxation Rather Than Adam Smith:

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Class: II B.B.A (International Business) Subject: SBEC: Business Taxation
Some writers on Public Finance have formulated four other important canons/principles of taxation. They, in
brief, are as follows:
(1) Canon of productivity:
The canon of productivity indicates that a tax when levied should produce sufficient revenue to the
government. If a few taxes imposed yield a sufficient fund for the state, then they should be preferred over a
large number of small taxes which produce less revenue and are expensive in collection.
(2) Canon of elasticity:
Canon of elasticity states that the tax system should be fairly elastic so that if at any time the
government is in need of more funds, it should increase its financial resources without incurring any
additional cost of collection. Income tax, railway fares, postal rates, etc., are very good examples of elastic
tax. The government by raising these rates a little, can easily meet its rising demand for revenue.
(3) Canon of simplicity:
Canon of simplicity implies that the tax system should be fairly simple, plain and intelligible to the tax
payer. If it is complicated and difficult to understand, then it wilt lead to oppression and corruption.
(4) Canon of diversity:
Canon of diversity says that the system of taxation should include a large number of taxes whish are
economical. The government should collect revenue from its citizens by levying direct and indirect taxes.
Variety in taxation in desirable from the point of view of equity, yield and stability.
(5)Canon of Co-Ordination:
In a federal system of government, taxes are imposed by the central, state and local governments.
Hence there must be a well stitched co-ordination between the taxes imposed by different taxing authorities.
(6) Canon of Expediency:
This canon insists that taxes should not be covered in controversy. Taxpayers should have no doubt
about its desirability.
The canons of taxation have a sound philosophy behind them and exhibit an insight into the practical
experience of tax administration and its effects. Since the days of Adam Smith many other principles have
been added.

TAX SYSTEM IN INDIA

India offers a well-structured tax system for its population. Taxes are the largest source of income for
the government. This money is deployed for various purposes and projects for the development of the nation.
Taxes are determined by the Central and State Governments along with local authorities like municipal
corporations. The government cannot impose any tax unless it is passed as a law.
Here are the salient features of the taxation system in India:

1. Role of the Central and State Government

The entire system is clearly demarcated with specific roles for the central and state government. The
Central Government of India levies taxes such as customs duty, income tax, service tax, and central excise
duty.
The taxation system in India empowers the state governments to levy income tax on agricultural income,
professional tax, value added tax (VAT), state excise duty, land revenue and stamp duty. The local bodies are
allowed to collect octroi, property tax, and other taxes on various services like drainage and water supply.

2. Types of taxes
Taxes are classified under two categories namely direct and indirect taxes. The largest difference
between these taxes is their implementation. Direct taxes are paid by the assessee while indirect taxes are
levied on goods and services.

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Class: II B.B.A (International Business) Subject: SBEC: Business Taxation

A) Direct taxes
Direct taxes are levied on individuals and corporate entities and cannot be transferred to others. These
include income tax, wealth tax, and gift tax.
Income tax
As per the Income Tax (IT) Act, 1961 every assessee whose total income exceeds the maximum
exempt limit is liable to pay this tax. The tax structure and rates are annually prescribed by the Union Budget.
This tax is imposed during each assessment year, which commences on 1st April and ends on 31st March.
The total income is calculated from various heads such as business and profession, house property, salaries,
capital gains, and other sources. The assesses are classified as individuals, Hindu Undivided Family (HUF),
association of persons (AOP), body of individuals (BOI), company, firm, local authority, and artificial
judiciary not falling in any other category.

B) Indirect taxes
Indirect taxes are not directly paid by the assessee to the government authorities. These are levied on
goods and services and collected by intermediaries (those who sell goods or offer services). Here are the most
common indirect taxes in India:
Value Added Tax (VAT)
This is levied by the state government and was not imposed by all states when first implemented.
Presently, all states levy such tax. It is imposed on goods sold in the state and the rate is decided by the
state governments.
Customs duty
Imported goods brought into the country are charged with customs duty which is levied by the Central
Government.
Octroi
Goods that move from one state to another are liable to octroi duty. This tax is levied by the respective
state governments.
Excise duty
All goods produced domestically are charged with excise duty. Also known as Central Value Added Tax
(CENVAT), this is paid by the manufacturers.
Service Tax
All services provided domestically are charged with service tax. The tax is paid by all service providers
unless specifically exempted.

C) Goods and Service Tax (GST)

As a significant step towards the reform of indirect taxation in India, the Central Government has
introduced the Goods and Service Tax (GST). GST is a comprehensive indirect tax on manufacture, sale and
consumption of goods and services throughout India and will subsume many indirect taxes levied by the
Central and State Governments. GST will be implemented through Central GST (CGST), Integrated GST
(IGST) and State GST (SGST).

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Class: II B.B.A (International Business) Subject: SBEC: Business Taxation
Four laws (IGST, CGST, UTGST & GST (Compensation to the States), Act) have received President
assent. All the States & UT expected to pass State GST Act, by end of May 2017. GST law is expected to
take effect from July 1, 2017.

3. Revenue Authorities
CBDT
The Central Board of Direct Taxes (CBDT) is a part of the Department of Revenue under the Ministry
of Finance. This body provides inputs for policy and planning of direct taxes in India and is also responsible
for administration of direct tax laws through the Income Tax Department.
CBEC
The Central Board of Excise and Customs (CBEC) is also a part of the Department of Revenue under
the Ministry of Finance. It is the nodal national agency responsible for administering customs, central excise
duty and service tax in India.
CBIC
Under the GST regime, the CBEC has been renamed as the Central Board of Indirect Taxes &
Customs (CBIC) post legislative approval. The CBIC would supervise the work of all its field formations and
directorates and assist the government in policy making in relation to GST, continuing central excise levy and
customs functions.
The Indian taxation system in India has witnessed several modifications over the years. There has
been standardization of income tax rates with simpler governing laws enabling common people to understand
the same. This has resulted in ease of paying taxes, improved compliance, and enhanced enforcement of the
laws.

DIRECT & INDIRECT TAXES

Meaning
Direct and indirect taxes include all the different types of taxes levied by the government. Direct taxes
include the taxes that cannot be transferred or shifted to another person, for instance the income tax an
individual pays directly to the government. In this case, the burden of the tax falls flatly on the individual who
earns a taxable income and cannot shift the tax to others.
Indirect taxes, on the other hand, are taxes which can be shifted to another person. An example would
be the Value Added Tax (VAT) that is included in the bill of goods and services that you procure from others.
The initial tax is levied on the manufacturer or service provider, who then shifts this tax burden to the
consumers by charging higher prices for the commodity by including taxes in the final price.
Both direct and indirect taxes are critical components of governmental revenue and consequently the
economy. The variations in the indirect taxes may come down in the future once the Goods and Services Tax
bill is passed by the parliament, probably by next year.

TYPES:
Direct Tax Vs Indirect Tax:
Direct taxes are paid in entirety by a taxpayer directly to the government. It is also defined as the tax
where the liability as well as the burden to pay it resides on the same individual. Direct taxes are collected by
the central government as well as state governments according to the type of tax levied. Major types of direct
tax include:
Income Tax: Levied on and paid by the same person according to tax brackets as defined by the
income tax department.
Corporate Tax: Paid by companies and corporations on their profits.
Wealth Tax: Levied on the value of property that a person holds.
Estate Duty: Paid by an individual in case of inheritance.
Gift Tax: An individual receiving the taxable gift pays tax to the government.
Fringe Benefit Tax: Paid by an employer that provides fringe benefits to employees, and is collected
by the state government.
Indirect tax, as mentioned above, include those taxes where the liability to pay the tax lies on a
person who then shifts the tax burden to another individual.
Some types of indirect taxes are:
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Class: II B.B.A (International Business) Subject: SBEC: Business Taxation
Excise Duty: Payable by the manufacturer who shifts the tax burden to retailers and wholesalers.
Sales Tax: Paid by a shopkeeper or retailer, who then shifts the tax burden to customers by charging
sales tax on goods and services.
Custom Duty: Import duties levied on goods from outside the country, ultimately paid for by
consumers and retailers.
Entertainment Tax: Liability is on the cinema owners, who transfer the burden to cinemagoers.
Service Tax: Charged on services rendered to consumers, such as food bill in a restaurant.
Therefore, the prime difference between direct tax and indirect tax is the ability of the taxpayer to shift the
burden of tax to others. Direct taxes include tax varieties such as income tax, corporate tax, wealth tax, gift
tax, expenditure tax etc. Some examples of indirect taxes are sales tax, excise duty, VAT, service tax,
entertainment tax, custom duty etc. However, this is not an exhaustive list of taxes and more types of taxes
are levied by the government on specific cases.

Difference between direct and indirect taxes:

DIRECT TAXES INDIRECT TAXES

1. Direct taxes are paid entirely by a taxpayer 1. Indirect tax is ultimately paid for by the end-
directly to the government consumer of goods and services.

2. Burden of taxes cannot be shifted 2. Burden of taxes can be shifted

3. It can help reduce inflation 3. It enhances inflation

4. These cannot be evaded as are charged on goods

4. Tax evasion can be possible
and services

5. Higher administrative costs are involved 5. Lesser administrative cost involved

6. Direct tax is progressive 6. Indirect tax is regressive
Similarities
Payable to the government.
Penalty for the non-payment.
Interest on Delayed Payment.
Improper administration can lead to tax avoidance or tax evasion.