Relevance: Prelims/Mains: G.S paper III: Indian economy
The ‘Task Force for drafting a New Direct Tax Legislation’ submitted its report and a draft of the new proposed version of the Income-tax law to Finance Minister Nirmala Sitharaman.
About:
- The Task Force was constituted in November 2017.
- Akhilesh Ranjan, Member (Legislation), CBDT was the convenor of the task force.
- The Direct Tax Code will replace the Income Tax Act, which was enacted in 1961.
Key recommendations are:
- In the four slabs of personal income tax currently, the panel has suggested a rejig in rates between 5 % to 20 %. As of now, for taxpayers below 60 years of age, there’s nil tax on income up to Rs 2.5 lakh, 5 % tax rate for income between Rs 2.5-5 lakh, 20 % tax rate for income between Rs 5-10 lakh and 30 % for income above Rs 10 lakh.
- Some tweaks have also been suggested for dividend distribution tax and minimum alternate tax.
- It has also made suggestions on reducing compliance burden by simplification of procedures, and litigation management.
Taxation in India
The India Constitution is quasi-federal in nature, and the country has three tier government structure.
To avoid any disputes between the centre and state the Constitution envisage following provisions regarding taxation:
- Division of powers to levy taxes between centre and state is clearly defined.
- There are certain taxes which are levied by the centre, but their proceeds are distributed between both centre and the state. Example- Union Excise Duty.
- There are certain taxes which are levied by the centre, but their proceeds are transferred to the states. Example-Estate duty on property other than agriculture income.
- There are certain taxes which are levied by the central government, but the responsibility to collect them is vested with the states. Example- Stamp Duty other than included in the Union List.
- There are certain taxes which are levied by the states, and their proceeds are also kept by states. Example: Erstwhile VAT
Classification of Taxes
What is a Tax?
Taxes are generally an involuntary fee levied on individuals and corporations by the government in order to finance government activities. Taxes are essentially of quid pro quo in nature. It means a favour or advantage granted in return for something.
Direct Tax versus Indirect Tax
| Basis | Direct Tax | Indirect Tax |
| Meaning | The tax that is levied by the government directly on the individuals or corporations are called Direct Taxes. | The tax that is levied by the government on one entity (Manufacturer of goods), but is passed on to the final consumer by the manufacturer. |
| Incidence | The incidence and impact of the direct tax fall on the same person. | The incidence and impact of the tax fall on different persons. |
| Examples | Income Tax, Corporation Tax and Wealth Tax. | VAT, Service tax, GST, Excise duty, entertainment tax and Customs Duty. |
| Nature | They are progressive in nature. | They are regressive in nature. |
| Objective | Both Social and Economical. Social objective of direct tax is the distribution of income. A person earning more should contribute more in the provision of public service by paying more tax. This provision is also known as progressive taxation. | Only Economical. When an indirect tax is levied on a product, both rich and poor must pay at the same rate. A person earning 10 lakh a month pays the same tax on the Wheat purchase as the person earning 3000 Re a month. This principle is called regressive taxation. |
| Impact | Not at all Inflationary. | Is inflationary. |