by A country’s tax system refers to a complete structure of government revenue and expenditure and the framework within which government agencies collect and spend those funds. A country’s tax system is determined by economic policies accepted by the governing body. The government adjusts spending levels and tax rates through the fiscal policy mechanism to influence and monitor the country’s economy. Another important tool through which a nation’s economy is influenced is monetary policy, which is steered by the central bank to control the nation’s money supply. These two policies are powerful tools that are used in different combinations to guide the country toward its economic goals.
Goals of Indian Fiscal Policy
Before we delve into the numerous objectives of the Government of India’s fiscal policy, it is important to mention that India has two primary objectives for its fiscal system: to improve the growth of its economy and to ensure social justice for its people. India has set 9 goals with which it aims to achieve these two goals:
Effective mobilization of financial resources – this is done through direct and indirect taxation, public and private savings. The main source of resource mobilization in India is taxation.
Reducing Income and Wealth Inequality – The government uses tax policy to promote social justice and reduce income inequality between different groups in society. For example, direct taxes are levied more heavily on the rich. Indirect taxes are also popular with pleasure and luxury items, which are generally only consumed by wealthy people. The Indian government also invests a significant portion of its tax revenue in poverty alleviation programs.
Control of inflation and price stability – controlled by instruments such as reducing the budget deficit, introducing tax savings programs and the productive use of financial resources.
Job Creation – The Indian government is motivating the increase in employment through a variety of fiscal measures such as: B. investments in infrastructure, lower taxes on small industrial (SSI) units as well as through numerous rural employment programs.
Balanced regional development – Numerous projects are being implemented by the Indian government with the help of public funds to reduce imbalances between the country’s regions.
Reducing the balance of payments deficit – the government provides export incentives and controls imports to keep the balance of payments close to a certain level.
Increase national income – this is done by raising and lowering tax rates.
Infrastructure Development – Improved infrastructure leads to more foreign investment and overall economic growth of the country.
Foreign exchange earnings – another way to increase foreign investment in the country through such tools as duty exemption and excise tax reduction when producing in the domestic market.
Taxes in India
In India, the central and state governments have the power to levy taxes, which derives from the Indian Constitution. All taxes must be covered by the accompanying law, which must be passed by the parliament of the state legislature. Taxes in India are generally classified into three categories: direct, indirect and other taxes, and the main difference is how these taxes are implemented. Direct taxes are paid directly by the individual or entity and are not transferable to others; indirect taxes are generally added to the price of some products or services, such as B. Value Added Tax, Service Tax and Sales Tax. The third group of taxes is levied on the amount of tax paid.
Income Tax
Income Tax is a direct tax paid by both – individuals and legal entities. Indian fiscal system foresees various income tax rates depending on your age and level of income and can, therefore, range from zero to 30%. In India, individuals are divided into three groups: general taxpayers, senior citizens (aged from 60 to 80) and very senior citizens (aged above 80).
Corporate Income Tax
Corporate income tax is paid by companies from the revenue they earn. Also, CIT rate depends on the amount of earned income as well as whether it is a domestic or foreign company. For example, domestic companies need to pay 30% CIT, while foreign companies need to pay 40% CIT. Surcharge and Education Cess are payable by both – domestic and foreign companies. Other taxes levied to companies are Minimum Alternative Tax at 18.5% rate, Fringe Benefits Tax and Dividend Distribution Tax currently at 15% rate.
Goods and Services Tax
As of July 1, 2017 a new tax called Goods and Services Tax was introduced, which comprises and replaces 15 other indirect taxes: Service Tax, VAT, Central Excise Duty, Countervailing Duty, Luxury Tax, Entertainment Tax, Lottery Tax, Sales Tax, Custom Duty, State Surcharge, Swacch Bharat Cess, Antidumping Duty, Infrastructure Cess, Krishi Kalyan Cess and Education Cess. The introduction of Goods and Services Tax has significantly eased and simplified indirect tax measure of Indian fiscal system. Currently, all goods and services are taxed from zero to 28% depending on the category.
