TAXATION

Taxation

Taxation comes in the domain of public finance, the most rapidly developing branch of economic theory. However, traditional economic theories are of little help in dealing with day to day tax problems of a country. In public-finance treaties, many of the theories and concepts are concerned with evaluating the economic effects of taxes by contrasting the characteristics of different types of taxes.

Taxes are evaluated on a continuous basis so as to be in tune with the economic system of a country and for dealing with the problems therein. 

The tax system of a country reflects the social, economic and political aims of the Government. As a nation's economic goals expand, as its policy objectives change, and as its industry grows, diversifies or fails to expand, tax policy has to alter.

In the various developmental activities of a government the emphasis is always on growth, modernisation, self-reliance, social justice and generation of productive employment. Taxes play an important role in achieving these objectives. Thus, taxation, which started as an exercise to mobilising revenue for the Government, has become an important tool for achieving various objectives.

Macro-economic policies of the governments alter the unrestricted working of the free-market system in an effort to effect either the allocation of resources among users or the distribution of income among people.

Government has to play its part in all round development of the economy. It has to perform its traditional functions (defence, maintenance of law and order) and in addition undertake welfare and development activities such as municipal work, health, education, sanitation, rural development, water supply etc. It has to mobilise funds for its own administration, too. These jobs require huge public finance.

The power to tax is an important element in such policies and is used not only to achieve re-distribution of incomes but also for attaining various other social and economic goals.

The basic objective of taxation is to raise money needed to finance government expenditure.

But taxes have other effects too.

As a factor affecting the pricing of goods, they determine what to produce and in what measure.

By taxing the affluent sections of society more, they change the distribution of incomes and wealth.

There is a bewildering array of taxes in any economy, especially in developing countries.

Taxes, in addition to financing government expenditure, serve several functions. They help in resource allocation, encourage or discourage certain kinds of economic and social behavior  redistribute income and wealth, stimulate and stabilize economic growth and even help in solving certain specific economic problems such as pollution, shortage of accommodation, and so on, through the mechanism of tax incentives.

Thus, taxation has developed into an instrument that promotes economic growth, stability and efficiency and has become a major device through which governments implement their political thinking and secure the participation of the masses in its policies and progress. A well-administered tax system is a good weapon against many odds. In such a tax system, it is the government, and not the taxpayers, which decides the economic sectors to be assisted and which not to.

Taxes are the chief source of public finance and government mobilizes revenue for public spending. Taxes have been broadly categorized into direct and indirect taxes. “Direct taxes” include those taxes which are paid by the person on whom these are levied like income tax, wealth tax etc. On the other hand, “indirect taxes” are collected by and levied on one person, but paid by another e.g. sales tax, excise duty, custom duty etc.

Income tax is the most important of all direct taxes and with the application of progressive rate schedule, provision of exemption limit and incorporation of a number of incentive provisions. It can be used not only to satisfy all the canons of a sound tax system but may also go a long way in realizing variety of socio-economic objectives set out by the economic system. It also helps in bringing distributional justice through higher rate of tax on the rich class of the society. It may also act as a tool for controlling inflation. Due to all these factors, income tax has assumed great importance in the structure of direct taxation. Therefore, all politically advanced democracies impose some form of personal taxation, generally based on income.

It has to be appreciated that nothing is so discouraging to a taxpayer's morale than seeing that tax evaders getting scot-free. Therefore, tax policies and law have to be framed and administered in such a manner that makes compliances un-burdensome & easy and punishes tax evaders and tax delinquents.

Disclaimer

In this note, we have attempted to summarise some of the significant aspects to be kept in mind by readers to ensure compliance of Income tax laws and regulations. Readers should ensure to verify specific provisions as applicable to each case before taking any business decisions. It would be pertinent to note that some changes are being made to the Income tax laws and rules and regulations on a continuous basis by way of notifications, clarifications etc issued by the department based on their practical experience in implementing the legislation.

It may be noted that nothing contained in this note should be regarded as our opinion.  Professional advice should be sought for applicability of legal provisions based on specific facts. Though reasonable efforts have been taken to avoid errors or omissions in this note we are not responsible for any liability arising to readers directly or indirectly due to any mis-statements or error contained in this note. It must be noted that the views expressed in the note are based on our understanding of the law and regulations as published by the Government authorities and we may or may not agree or subscribe to such views/ interpretations.