"A STUDY ON TAXATION IS A TOOL FOR ECONOMIC DEVELOPMENT"

SUBMITTED

VIJAYANAGARA SRI KRISHNADEVARAYA UNIVERSITY, BALLARI

In partial fulfillment of the requirements for the award of the degree of

Bachelor of Commerce

Under the guidance of

PROJECT GUIDE

Sri.VINAY V MOOTHA, M.com

Guest Faculty

Department of Commerce

SHRI GAVISIDDESHWAR ARTS SCIENCE AND COMMERCE COLLEGE KOPPAL Gavimath

Campus, Gavimath Road, Koppal-583231

DECLARATIONS
I, the undersigned, hereby declare that the project report entitle “A STUDY ON
TAXTION IS A TOOL FOR ECONOMIC DEVELOPMENT” written and submitted
by me to Vijaynagara Sri Krishnadevaraya University, Bellary in partial fulfillment of
requirements for the Award of Degree of Bachelor of Arts/Commerce/Science under the
guidance of “Sri. VINAY V MOOTHA, GUEST FACULTY” is my original Work and
the conclusions drawn therein are based on the data and information collected by me.

PLACE: - Koppal Signature of the student

DA)

CERTIFICATE

This is to certify that the project report entitled “A STUDY ON TAXATION IS A

TOOL FOR ECONOMIC DEVELOPMENT which is being submitted herewith for the
Award of the Degree of Bachelor of Commerce of Vijayanagara Sri Krishnadevaraya
University, Bellary and is the result of the original research work completed by “ Kum.
KANYAKUMARI RATHOD” (Reg. No:-C1729545), guidance and to the best of my
Knowledge and belief the work Embodied in this Project Report has not formed earlier
the basis for the award of any Degree or Similar title of this or any other University or
examining body.

(Mr. SHARANAPPA JALIHAL) (Sri. VINAY V MOOTHA)

H.O.D. OF COMMERCE GUEST FACULTY COMMERCE

S.G.COLLEGE KOPPAL. S.G. COLLEGE KOPPAL.

(Mr.JAGADISH.S.PATIL)

PRINCIPAL,

S.G. COLLEGE KOPPAL.

ACKNOWLEDGEMENTS
First and of the highest level, with deep regards, overwhelming sense of pride and
genuine obligation, I seize this jubilant occasion to express my sincere, heartfelt and
reverential gratitude to my venerable supervisor “ Mr. VINAY V MOOTHA, GUEST
FACULTY OF COMMERCE DEPARTMENT” for his expert advice on designing and
executing of this research problem in the best possible way. He educated me on different
aspects of the subject, reflected on me the importance of work, discipline and
encouraged to reach much above natural abilities. I am extremely fortunate to have been
trained and initiated into this commerce world under his able guidance.
 I would like to offer my sincere thanks to “Dr. J.S.PATIL”Principal, Sri
Gavisiddeshwar Arts, Science and Commerce College, Koppal for their support and for
providing research facilities.

Conducting research in a multidisciplinary, such as this is not an easy task. It has

required support of so many people. Sentiments of my heart when moulded into words
can seldom convey what I truly wish to express to each of them. I begin with a humble
expression of my profound gratitude to my beloved teachers of Department of
Commerce, Sri Gavisiddeshwar Arts, Science and Commerce College, Koppal.
Mr.Sharanappa Jalihal, Dr.Karibasaveshwara.B, Kum. Sridevi. H.M, Mr. Vinay Mootha
and Mr. Ajjappa Hurakadali, for their kindness and blessings which they bestowed upon
me leads me through a long and thorny journey to a dip into the ocean of knowledge.

I am very much indebted to “MR.SHARANAPPA JALIHAL SIR, H.O.D. OF

COMMERCE&ASSISTANT PROFFESSOR OF SRI GAVISIDDESHWAR DEGREE COLLEGE
KOPPAL” for providing me necessary information in time and co-operation at every step
of the work. I am thankful to all the Public people, Government Employee, Public Sector
Employee&Business man , their willing cooperation in the collection of the data for the
study.

I am very happily gratitude to “Mr. Mahesh Biradar”, Librarian, SG College for their
kind help in providing the library facilities for my research work.

I am very grateful to all the non-teaching staff members Mr. Arunkumar Patil, Mr.
Manappa K, Mr. Ashok Gogi, Mr. Pradeep Ballolli, Mr. Kumaraswamy and Sri
Veeresha,Sri Gavisiddeshwar Arts, Science and Commerce College, Koppal for their help
during my research work.

I am very much indebted to all my lovely friends and all other classmates of the
Department of Commerce for their co-operation in this work.

I must pay my obeisance and respect to my father “Mr.HANUMANAYAK RATHOD”

whose protective hands over my bowed head proved sustaining and enlivening. I can
never forget the care and friendly environment provided of my loving brothers and sister
all the time to help attitude, which made me feel that how special and how valuable I am
for them. I express my thanks to my beloved Family for their support and
encouragement
 I am very much indebted to all my friends
Rajeshwari & Komal all other friends for their co-operation in this work.

Lastly I thankful to all those who helped me directly or indirectly to complete this
work

( KANYAKUMARI RATHOD )

SRI GAVISIDDESHWAR ARTS, SCIENCE AND COMMERCE COLLEGE

KOPPAL -583231

2019-20

1. INTRODUCTION TO TAXATION
TAX
A tax [from the Latin taxo] is a compulsory financial charge or some other type of levy
imposed upon a taxpayer [an individual or legal entity] by a governmental organization in
order to fund various public expenditures. A failure to pay, along with evasion of or
resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and
may sbe paid in money or as its labor equivalent. The first known taxation took place in
Ancient Egypt around 3000-2800BC.

Most countries have a tax system in place to pay for public, common or agreed
national needs and government functions. Some levy a flat percentage rate of
taxation on personal annual income, but most scale taxes based on annual income
accounts. Most countries charge a tax on an individual’s income as well as a
corporate income. Countries or subunits often also impose wealth taxes, inheritance
taxes, estate taxes, gift taxes, property taxes sales taxes payroll taxes or tariffs.

In economic terms, taxation transfers wealth from households or businesses to the

government. This has effects which can both increase and reduce economic growth
and economic growth and economic welfare. Consequently, taxation is a highly
debated topic.

HISTORY

The first known system of taxation was in Ancient Egypt around 3000-2800 BC in
the First Dynasty of Egypt of the old kingdom of Egypt of the old kingdom of Egypt.
The earliest and most widespread form of taxation was the corvee and tithe the. The
corvee was forced labor provided to the state by peasants too poor to pay other
forms of taxation (labour in ancient Egyptian is a synonym for taxes). Records from
the time document that the Pharaoh would conduct a biennial tour of the kingdom,
collecting tithes from the people. Other records granary resists on limestone flakes
and papyrus. Early taxation is also described in the Bible. In Genesis (chapter 47,
verse 24- the New International version), it states but “But when the crop comes in,
give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields
and as food for yourselves and your households and your children”. Joseph was
telling the people of Egypt how to divide their crop, providing a portion to the Pharaoh.
 TAXATION AS TOOL FOR ECONOMIC DEVELOPMENT ;
Taxation is an imposition of compulsory levy on individuals or entities by government.
Taxes are levied in almost every country of the world, primarily to raise revenue for
government expenditures, although they serve other purposes as well. In modern
economies taxes are the most important source of governmental revenue. Taxes are
differ from other sources of paid in exchange for some specific thing, such as a
particular public property, or the revenue in that they are compulsory levies and are
unrequited -i.e., they are generally not issuance of public debt. While taxes are
presumably collected for the welfare of taxpayers as a whole, the individual taxpayer’s
liability is independent of any specific benefit received. There are, however, important
exceptions; payroll taxes, for example, are commonly levied on labor income in order
finance retirement benefits, medical payments, and other social security, programs-all of
which are likely to benefit the taxpayer. Because of the likely link between taxes paid and
benefits received, payroll taxes are sometimes called “contributions” [as in the United
States]. Nevertheless, the payments are commonly compulsory, and the link to benefits
is sometime quite weak.

Another example of tax that is linked to benefits received, if only loosely, is the use of
taxes on motor fuels to finance the construction and maintenance of roads and
highways, whose services can be enjoyed only by consuming taxed motor fuels.

PURPOSE OF TAXATION
During the 19th century the prevalent idea was that taxes should serve mainly to finance
the government. In earlier times, and again today, governments have utilized taxation for
other than merely fiscal purposes. One useful way to view the purpose of taxation,
attributable to American economist Richard A. Musgrave, is to distinguish between
objectives of resource allocation income redistribution, and economic stability.
[Economic growth or development and international competitiveness are sometimes
listed as separate goals, but they can generally be subsumed under the other three.] In
the absence of a strong reason for interference, such as the need to reduce pollution, the
first objective, resource allocation, is furthered if tax policy does not interfere with the
market - determined allocations .The second objective, income redistribution is meant to
lessen inequalities in the distribution of income and wealth. The objective of
stabilization implemented through tax policy, monetary policy, and debt management is
that of maintaining high employment and price stability

There are likely to be conflicts among these three objectives. For example, resource
allocation might require changes in the level or composition [or both] of taxes, but those
changes might bear heavily on low-income families- thus upsetting redistributive goals.
As another example, taxes that are highly redistributive may conflict with the efficient
allocation of resources required to achieve the goal of economic neutrality.

CLASSES OF TAXES
Direct and indirect taxes
In the literature of public finance, taxes have been classified in various ways according to
who pays for them, who bears the ultimate burden of them, the extent to which the
burden can be shifted, and various other criteria. Taxes are most commonly classified as
either direct or indirect, an example of the former type of being the income tax and of the
latter the sales tax. There is much disagreement among economists as to the criteria for
distinguishing between direct and indirect taxes, and it is unclear into which category
certain taxes, such as corporate income tax or property tax, should fall. It is usually said
that a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas
an indirect tax can be.

Direct taxes
Direct taxes are primarily taxes on natural persons [e.g., individuals], and they are
typically based on the taxpayers ability to pay as measured by income, consumption, or
net wealth. What follows is a description of the main types of direct taxes.

Individual income taxes are commonly levied on total personal net income of the
taxpayer [which may be an individual, a couple, or a family] in excess of some stipulated
minimum. They are also commonly adjusted to take into account the circumstances
influencing the ability to pay, such as family status, number and age of children, and
financial burdens resulting from illness. The taxes are often levied at graduated rates,
meaning that the rates rise as income rises. Personal exceptions for the taxpayer and
family can create a range of income that is subject to a tax rate of zero.

Taxes on net worth are levied on the total net worth of a person- that is, the value of his
asset minus his liabilities. As with the income tax, the personal circumstances of the
taxpayer can be taken into consideration.

Personal or direct taxes on consumption [also known as expenditure taxes or spending

taxes] are essentially levied on all income that is not channeled into savings. In contrast
to indirect taxes on spending such as the sales tax, a direct consumption tax can be
adjusted to an individual’s ability to pay by allowing for marital status, age, number of
dependants, and so on. Although long attractive to theorists, this form of tax has been
used in only two countries, India and Sri Lanka; both instances were brief and
unsuccessful. Near the end of the 20th century, the ‘flat tax’- this achieves economic
effects similar to those of the direct consumption tax by exempting most income from
capital-came to be viewed favorably by the tax experts. No country has adopted a tax
with the base of the flat tax, although many have income taxes with only one rate.

Taxes at death take two forms; the inheritance tax, where the taxable object is the
bequest received by the person inheriting, and the estate tax, where the object is the total
estate left by the decreased. Inheritance taxes sometimes take into account the personal
circumstances of the taxpayer’s relationship to the donor and his met worth before
receiving the bequest. However, are generally graduated according to the size of the
estate, and in some countries they provide tax-exempt transfers to the spouse and make
an allowance for the number of heirs involved. In order to prevent the death duties from
being circumvented through an exchange of property prior to death, tax systems may
include a tax on gifts above a certain threshold made between living persons .Taxes on
transfers do not ordinarily yield much revenue, if only because large tax payments can be
avoided through estate planning.
INDIRECT TAXES
Indirect taxes are levied on the production or consumption of goods and services or on
transactions, including imports and exports. Examples include general and selective sales
taxes, value- added taxes [VAT], taxes on any aspect of manufacturing or
production, taxes on legal transactions, and customs or import duties.

General sales taxes are levies that they are applied to a substantial portion of consumer
expenditures. The same tax rate can be applied to all taxed items, or different items
[such as food or clothing] can be subject to different rates.

Single- stage taxes can be collected at the retail level, as the U.S. states do, or they can
be collected at a pre- retail [i.e., manufacturing or wholesale] level, as occurs in some
developing countries. Multistage taxes are applied at each stage in the production -
distribution process. The Vat, which increased in popularity during the second half of the
20th century, is commonly collected by allowing the taxpayer to deduct a credit for tax
paid on purchases from liability on sales. The Vat has largely replaced the turnover tax -
a tax on each stage of the production and distribution chain, with no relief for tax paid at
previous stages. The cumulative effect of the turnover tax, commonly known as tax
cascading, distorts economic decisions.

Although they are generally applied to a wide range of products, sales taxes sometimes
exempt necessities to reduce the tax burden of low-income households. By comparison,
excises are levied only on particular commodities or services. While some countries
impose excises and customs duties on almost everything- from necessities such as
bread, meat, and salt, to nonessentials such as cigarettes, wine, liquor, coffee, and tea, to
luxuries such as jewels and furs- taxes on a limited group of products- alc0holic
beverages, tobacco products, and motor fuel- yield in bulk of excise revenues for most
countries. In earlier centuries, taxes on consumer durables were applied to luxury
commodities such as pianos, saddle horses, carriages, and billiard tables. Today a main
luxury tax object is the automobile, largely because registration requirements facilitate
administration of the tax. Some countries tax gambling and state- run lotteries have
effects similar to excises, with the governments “take” being, in effect, a tax on gambling.
Some countries impose taxes on raw materials, intermediate goods [e.g., mineral oil,
alcohol], and machinery.

Some excises and customs duties are specific-i.e., they are levied on the basis of number,
weight, length, volume, or other specific characteristics of the good or service being
taxed. Other excises, like sales taxes, are ad valorem- levied on the value of the goods as
measured by the price. Taxes on legal transactions are levied on the issue of shares, on
the sale [or transfer] of houses and land, and on stock exchange transactions. For
administrative reasons, they frequently take the form of stamp duties; that is, the legal or
commercial document is stamped to denote payment of the tax. Many tax analysts
regard stamp taxes as nuisance taxes; they are most often found in less- developed
countries and frequently bog down the transactions to which they are applied
 1. ECONOMIC EFFECTS
ECONOMIC EFFECTS

In economic terms, taxation transfers wealth from households or businesses to the

government of a nation. Adam Smith writes inThe Wealth of Nations that

"…the economic incomes of private people are of three main types: rent, profit and
wages. Ordinary taxpayers will ultimately pay their taxes from at least one of these
revenue sources. The government may intend that a particular tax should fall
exclusively on rent, profit, or wages - and that another tax should fall on all three
private income sources jointly. However, many taxes will inevitably fall on
resources and persons very different from those intended … Good taxes meet four
major criteria. They are (1) proportionate to incomes or abilities to pay (2) certain
rather than arbitrary (3) payable at times and in ways convenient to the taxpayers
and (4) cheap to administer and collect."[45]

The side-effects of taxation (such as economic distortions) and theories about how
best to tax are an important subject in microeconomics. Taxation is almost never a
simple transfer of wealth. Economic theories of taxation approach the question of
how to maximize economic welfare through taxation.

A 2019 study looking at the impact of tax cuts for different income groups; it was tax
cuts for low-income groups that had the greatest positive impact on employment
growth.[46] Tax cuts for the wealthiest top 10% had a small impact. [46]
 INCIDENCE

Law establishes from whom a tax is collected. In many countries, taxes are imposed on
business (such as corporate taxes or portions of payroll taxes). However, who ultimately
pays the tax (the tax "burden") is determined by the marketplace as taxes
become embedded into production costs. Economic theory suggests that the economic
effect of tax does not necessarily fall at the point where it is legally levied. For instance, a
tax on employment paid by employers will impact on the employee, at least in the long
run. The greatest share of the tax burden tends to fall on the most inelastic factor
involved—the part of the transaction which is affected least by a change in price. So, for
instance, a tax on wages in a town will (at least in the long run) affect property-owners in
that area.

Depending on how quantities supplied and demanded vary with price (the "elasticity’s" of
supply and demand), a tax can be absorbed by the seller (in the form of lower pre-tax
prices), or by the buyer (in the form of higher post-tax prices). If the elasticity of supply is
low, more of the tax will be paid by the supplier. If the elasticity of demand is low, more
will be paid by the customer; and, contrariwise for the cases where those elasticity’s are
high. If the seller is a competitive firm, the tax burden is distributed over the factors of
production depending on the elasticity’s thereof; this includes workers (in the form of
lower wages), capital investors (in the form of loss to shareholders), landowners (in the
form of lower rents), entrepreneurs (in the form of lower wages of superintendence) and
customers (in the form of higher prices).

To show this relationship, suppose that the market price of a product is $1.00, and that a
$0.50 tax is imposed on the product that, by law, is to be collected from the seller. If the
product has an elastic demand, a greater portion of the tax will be absorbed by the seller.
This is because goods with elastic demand cause a large decline in quantity demanded for
a small increase in price. Therefore, in order to stabilize sales, the seller absorbs
more of the additional tax burden. For example, the seller might drop the price of the
product to $0.70 so that, after adding in the tax, the buyer pays a total of $1.20, or $0.20
more than he did before the $0.50 tax was imposed. In this example, the buyer has paid
$0.20 of the $0.50 tax (in the form of a post-tax price) and the seller has paid the
remaining $0.30 (in the form of a lower pre-tax price). [47
Increased economic welfare [edit]
Government spending [edit]
The purpose of taxation is to provide for government spending without inflation. The
provision of public goods such as roads and other infrastructure, schools, a social safety
net, health care, national defense, law enforcement, and a courts system increases the
economic welfare of society if the benefit outweighs the costs involved.

Pigovian [edit]
The existence of a tax canincrease economic efficiency in some cases. If there is
a negative externality associated with a good, meaning that it has negative effects not
felt by the consumer, then a free market will trade too much of that good. By taxing the
good, the government can increase overall welfare as well as raising revenue. This type
of tax is called a Pigovian tax, after economist Arthur Pigou.

Possible Pigovian taxes include those on polluting fuels (like petrol), taxes on goods
which incur public healthcare costs (such as alcohol or tobacco), and charges for
existing 'free' public goods (like congestion charging) are another possibility.

Reduced inequality [edit]

Progressive taxation may reduce economic inequality. This effect occurs even when the
tax revenue isn't redistributed
Reduced economic welfare [edit]
mandating unproductive labor (compliance costs) or by creating distortions to Most
taxes (see below) have side effects that reduce economic welfare, either by economic
incentives (deadweight loss and perverse incentives).[citationneeded]

Cost of compliance [edit]

Although governments must spend money on tax collection activities, some of the costs,
particularly for keeping records and filling out forms, are borne by businesses and by
private individuals. These are collectively called costs of compliance. More complex tax
systems tend to have higher compliance costs. This fact can be used as the basis for
practical or moral arguments in favor of tax simplification (such as the FairTax or One Tax,
and some flat tax proposals).

Deadweight costs [edit]

Diagram illustrating deadweight costs of taxes

In the absence of negative externalities, the introduction of taxes into a market

reduces economic efficiency by causing deadweight loss. In a competitive market
the price of a particular economic good adjusts to ensure that all trades which benefit
both the buyer and the seller of a good occur. The introduction of a tax causes the price
received by the seller to be less than the cost to the buyer by the amount of the tax. This
causes fewer transactions to occur, which reduces economic welfare; the individuals or
businesses involved are less well off than before the tax. The tax burden and the amount
of deadweight cost are dependent on the elasticity of supply and demand for the good
taxed.

Most taxes—including income tax and sales tax—can have significant deadweight costs.
The only way to avoid deadweight costs in an economy that is generally competitive is to
refrain from taxes that change economic incentives. Such taxes include the land value
tax,[48] where the tax is on a good in completely inelastic supply, a lump sum tax such as
a poll tax (head tax) which is paid by all adults regardless of their choices. Arguably
a windfall profits tax which is entirely unanticipated can also fall into this category.

Deadweight loss does not account for the effect taxes have in leveling the business
playing field. Businesses that have more money are better suited to fend off competition.
It is common that an industry with a small amount of very large corporations has a very
high barrier of entry for new entrants coming into the marketplace. This is due to the fact
that the larger the corporation, the better its position to negotiate with suppliers. Also,
larger companies may be able to operate at low or even negative profits for extended
periods of time, thus pushing out competition. More progressive taxation of profits,
however, would reduce such barriers for new entrants, thereby increasing competition
and ultimately benefiting consumers.

Perverse incentives [edit]

Complexity of the tax code in developed economies offer perverse tax incentives. The
more details of tax policy there are, the more opportunities for legal tax avoidance and
illegal tax evasion. These not only result in lost revenue, but involve additional costs: for
instance, payments made for tax advice are essentially deadweight costs because they
add no wealth to the economy. Perverse incentives also occur because of non-taxable
'hidden' transactions; for instance, a sale from one company to another might be liable
for sales tax, but if the same goods were shipped from one branch of a corporation to
another, no tax would be payable.

To address these issues, economists often suggest simple and transparent tax
structures which avoid providing loopholes. Sales tax, for instance, can be replaced with
a value added tax which disregards intermediate transactions.

In developing countries [edit]

Following Nicolas Kaldor's research, public finance in developing countries is strongly

tied to state capacity and financial development. As state capacity develops, states not
only increase the level of taxation but also the pattern of taxation. With the increase of
larger tax bases and the diminish of the importance of trading tax, while income tax
gains more importance.[50] According to Tilly's argument, state capacity evolves as
response to the emergence of war. War is an incentive for states to raise tax and
strengthen states capacity. Historically, many taxation breakthroughs took place during the
wartime. The introduction of income tax in Britain was due to the Napoleonic War in 1798.
US first introduce income tax during Civil War.[51] Taxation is constrained by the
fiscal and legal capacities of a country. [52] Fiscal and legal capacities also complement
each other. A well-designed tax system can minimize efficiency loss and boost economic
growth. With better compliance and better support to financial institutions and individual
property, the government will be able to collect more tax. Although wealthier countries
have higher tax revenue, economic growth does not always translate to higher tax
revenue. For example, in India, increases in exemptions leads to the stagnation of
income tax revenue at around 0.5% of GDP since 1986.[53

Researchers for EPS PEAKS [54] stated that the core purpose of taxation is revenue
mobilization, providing resources for National Budgets, and forming an important part of
macroeconomic management. They said economic theory has focused on the need to
'optimize' the system through balancing efficiency and equity, understanding the impacts
on production, and consumption as well as distribution, redistribution, and welfare.

They state that taxes and tax reliefs have also been used as a tool for behavioral change,
to influence investment decisions, labour supply, consumption patterns, and positive and
negative economic spill-over’s (externalities), and ultimately, the promotion of economic
growth and development. The tax system and its administration also play an important
role in state-building and governance, as a principal form of 'social contract' between the
state and citizens who can, as taxpayers, exert accountability on the state as a
consequence.

The researchers wrote that domestic revenue forms an important part of a developing
country's public financing as it is more stable and predictable than Overseas
Development Assistance and necessary for a country to be self-sufficient. They found
that domestic revenue flows are, on average, already much larger than ODA, with aid
worth less than 10% of collected taxes in Africa as a whole.

However, in a quarter of African countries Overseas Development Assistance does

exceed tax collection,[55] with these more likely to be non-resource-rich countries. This
suggests countries making most progress replacing aid with tax revenue tend to be
those benefiting disproportionately from rising prices of energy and commodities.

The author[54] found tax revenue as a percentage of GDP varying greatly around a global
average of 19%.[56] This data also indicates countries with higher GDP tend to have higher
tax to GDP ratios, demonstrating that higher income is associated with more than
proportionately higher tax revenue. On average, high-income countries have tax revenue
as a percentage of GDP of around 22%, compared to 18% in middle-income countries
and 14% in low-income countries.

In high-income countries, the highest tax-to-GDP ratio is in Denmark at 47% and the
lowest is in Kuwait at 0.8%, reflecting low taxes from strong oil revenues. Long-term
average performance of tax revenue as a share of GDP in low-income countries has been
largely stagnant, although most have shown some improvement in more recent years. On
average, resource-rich countries have made the most progress, rising from 10% in the
mid-1990s to around 17% in 2008. Non resource rich countries made some progress,
with average tax revenues increasing from 10% to 15% over the same period. [57]

Many low-income countries have a tax-to-GDP ratio of less than 15% which could be due
to low tax potential, such as a limited taxable economic activity, or low tax effort due to
policy choice, non-compliance, or administrative constraints.

Some low-income countries have relatively high tax-to- GDP ratios due to resource tax
revenues (e.g. Angola) or relatively efficient tax administration (e.g. Kenya, Brazil)
whereas some middle-income countries have lower tax-to-GDP ratios (e.g. Malaysia)
which reflect a more tax-friendly policy choice.

While overall tax revenues have remained broadly constant, the global trend shows trade
taxes have been declining as a proportion of total revenues(IMF, 2011), with the share of
revenue shifting away from border trade taxes towards domestically levied sales
taxes on goods and services. Low-income countries tend to have a higher dependence on
trade taxes, and a smaller proportion of income and consumption taxes, when
compared to high income countries.[58]

One indicator of the taxpaying experience was captured in the 'Doing Business' survey,
[59]
which compares the total tax rate, time spent complying with tax procedures and the
number of payments required through the year, across 176 countries. The 'easiest'
countries in which to pay taxes are located in the Middle East with the UAE ranking first,
followed by Qatar and Saudi Arabia, most likely reflecting low tax regimes in those
countries. Countries in Sub-Saharan Africa are among the 'hardest' to pay with
the Central African Republic, Republic of Congo, Guinea and Chad in the bottom 5,
reflecting higher total tax rates and a greater Administrative burden to comply
The Income Tax Department (also referred to as IT Department or ITD) is a government
agency undertaking direct tax collection of the Government of India. It functions under
the Department of Revenue of the Ministry of Finance.[5] Income Tax Department is
headed by the apex body Central Board of Direct Taxes (CBDT). Main responsibility of IT
Department is to enforce various direct tax laws, most important among these being
the Income-tax Act, 1961, to collect revenue for Government of India. It also enforces
other economic laws like the Benami Transactions (Prohibition) Act, 1988[6] and
the Black Money Act, 2015[7].

The Income Tax Act, 1961 has wide scope and empowers ITD to levy tax on income
of individuals, firms, companies, local authorities , societies, or other artificial juridical
persons[8]. Therefore Income Tax Department influences businesses, professionals,
NGOs, income earning citizens, and local authorities among others. The Act empowers
Income Tax Department to tax international businesses and professionals and
therefore ITD deals in all matters of Double Taxation Avoidance Agreements and
various other aspects of international taxation such as Transfer pricing . Combating tax
evasion and tax avoidance practices is key duty of ITD to ensure constitutionally
guided political economy. One measure to combat aggressive tax avoidance is General
Anti Avoidance Rules (GAAR). Ancient Times [edit]

Taxation has been one of the key functions of the sovereign state since ancient times. In
Manusmriti, the Manu stated that king has the sovereign power to levy and collect tax
according to sastras.[10]

लोक च करा द हणो शा न ः यात । — Manu, Sloka 128, Manusmriti [10]

(It is in
consonance with sastras to collect taxes from citizen.)

In Bodhayana Dharma sutras, it is mentioned that the king got 1/6th part of income from
his subjects which was legally termed as tax. In lieu of this tax, the king has a duty to
protect his subjects.[10]

According to Kautilya's Arthashastra - an ancient treatise on the study of economics, the

art of governance and foreign policy - artha has a much wider significance than wealth.
According to him, the power of the government depended upon the strength of its
treasury. He states: "From the treasury comes the power of the government, and the
earth, whose ornament is the treasury, is acquired by means of the treasury and army."
In Raghuvamsh, Kalidas, eulogizing King Dalip, said, "it was only for the good of his
subjects that he collected taxes from them just as the sun draws moisture from the earth
to give it back a thousand time." [11]

Modern Times [edit]

The 19th century saw the establishment of British Rule in India. Following the Mutiny of
1857, the British Government faced an acute financial crisis. To fill up the treasury, the
first Income-tax Act was introduced in February, 1860 by James Wilson, who became
British-India's first Finance Minister.[11] The Act received the assent of the Governor
General on July 24, 1860, and came into effect immediately. It was divided into 21 parts
consisting of no less than 259 sections. Income was classified under four schedules: I)
income from landed property; ii) income from professions and trade; iii) income from
securities, annuities and dividends; and IV) income from salaries and pensions.
Agricultural income was subject to tax.[11]

Subsequently many laws were brought to streamline income tax laws. For example,
Super-Rich Tax was introduced in 1918 and new Income-tax Act was passed in 1918. But
most important among all these were the Income-tax Act of 1922. This Act of 1922
marked an important change from the Act of 1918 by shifting the administration of the
income tax from the hands of Provincial Government to the Central government. Another
remarkable feature of this Act was that the rales were to be enunciated by the annual
finance Acts instead of in the basic enactment.[12] Again, new Income-tax Act came in
1939.

Contemporary Times [edit]

See also: The Income-tax Act, 1961

The 1922 Act was amended not less than twenty nine times between 1939 and 1956. A
tax on capital gains was imposed for the first time in 1946, although the concept of
‘capital gains’ has been amended many times by later amendments. [12] In 1956, Mr.
Nicholas Kaldor’s to investigate the Indian Tax System in the light of the revenue
requirement of the second five-year plan (1956-1961) . He submitted an exhaustive
report for a coordinated tax system and therefore, the result was the enactment of
several taxation Acts, viz., the wealth-tax Act 1957, the Expenditure-tax Act, 1957 and the
Gift-tax Act, 1958.[12]

The Direct Taxes Administration Enquiry Committee, under the Chairmanship of Shri
Mahavir Tyagi, submitted its Report on Nov 30, 1959 and the recommendations made
therein took shape of the Income Tax Act, 1961. The 1961 Act came in to force with
effect from 1st April, 1962 by replacing the Indian Income Tax Act, 1922 which had
remained in operation for 40 years. The present law of income tax is governed by the
Income Tax Act, 1961, which has 298 sections and 4 schedules and is applicable to
whole of India including the state of Jammu and Kashmir. [12]

2. REVENUE SOURCES
Administration in ITD [edit]

Administration in Income Tax Department (ITD) is run through statutory body, the Central
Board of Direct Taxes (CBDT), at apex level and 18 territories based regional
headquarters at field offices level. Besides these are 10 specialized directorates within
Income Tax Department (ITD), most extensive and famous among these being
Directorate of Investigation.

CBDT [edit]
The Central Board of Direct Taxes (CBDT) is a part of Department of Revenue in the
Ministry of Finance. The CBDT provides inputs for policy and planning of direct taxes in
India, and is also responsible for administration of direct tax laws through the IT
Department. The CBDT is a statutory authority functioning under the Central Board of
Revenue Act, 1963. The officials of the Board in theirex officio capacity also function as a
division of the Ministry dealing with matters relating to levy and collection of direct taxes.
The CBDT is headed by Chairman and also comprises six members, all of whom areex
officio Special Secretary to the Government of India.

The Chairman and members of the CBDT are selected from the Indian Revenue
Service (IRS), whose members constitute the top management of the IT Department. The
Chairman and every member of CBDT are responsible for exercising supervisory control
over specialized functional categories at field offices of IT Department. Various
functions and responsibilities of the CBDT are distributed amongst Chairman and six
members, with only fundamental issues reserved for collective decision by the CBDT.
The areas for collective decision by the CBDT include policy regarding discharge of
statutory functions of the CBDT and of the Union Government under the various direct
tax laws. [13]
Regional Headquarters [edit]
With territorial jurisdiction and 1 region for International Taxation. As required for
efficient and effective at present Income Tax Department (ITD) field offices are divided
into 18 regions administration, these regions have some administrative autonomy to
carry out duties assigned by CBDT.

List of ITD Regions[14][15]

Serial Region (headed Sub-Regions (headed by CCsIT) Headquarter

No. by PrCCIT) City

CCsIT, Ahmedabad-1, 2, TDS, Surratt,

1 Gujarat Vadodara, Rajkot, DGIT (Inv.), Ahmadabad
Ahmadabad

2 Karnataka & Goa CCsIT, Bengaluru-1 & 2, TDS, Panjabi, Bangalore

DGIT (Inv.), Bangalore

3 Madhya Pradesh CCsIT, Raipur, Indore, DGIT (Inv.), Bhopal

& Chhattisgarh Bhopal

4 Odessa None Bhubaneswar

5 North West CCsIT Amritsar, Ludhiana, Shimla, Chandigarh

Region Panchkula, DGIT (Inv.), Chandigarh
 Tamil Nadu & CCsIT, Chennai-1 to 4, TDS,
6 Coimbatore, Madurai, Trichy, DGIT Chennai
Pondicherry
(Inv.), Chennai

CCsIT Delhi-1 to 9, TDS, Central,

7 Delhi Exemptions, DsGIT (Inv.), Delhi, (Risk Delhi
Assessment), (I&CI)

8 North East CCIT, Shillong Guwahati

Region

Andhra Pradesh CCsIT, Hyderabad, Vijayawada,

9 Vishakhapatnam, DGIT (Inv.), Hyderabad
& Telangana
Hyderabad

10 Rajasthan CCsIT, Jodhpur, Udaipur DGIT (Inv.), Jaipur

Jaipur

11 UP (West) & CCsIT, Ghaziabad, Dehradun Kanpur

Uttarakhand

12 Kerala CCsIT, Thiruvananthpuram, DGIT Kochi

(Inv.), Kochi

13 West Bengal & CCsIT, Kolkata-1 to 6, TDS, DGIT Kolkata

Sikkim (Inv.), Kolkata

14 UP (East) CCsIT, Allahabad, Bareilly, DGIT Lucknow

(Inv.), Lucknow

15 Mumbai CCsIT, Mumbai-1 to 11, TDS, Central- Mumbai

1, 2, DGIT (Inv.), Mumbai,
16 Nagpur None Nagpur

17 Bihar & CCIT, Ranchi, DGIT (Inv.), Patna Patna

Jharkhand

18 Pune CCsIT, Pune, Thane, Nasik, DGIT Pune

(Inv.), Pune

19 International CCsIT (International Taxation), Delhi

Taxation Bangalore, Mumbai

Directorates [edit]
Directorates are meant to take responsibility of specialized functions. There are 10
specialized directorates within Income Tax Department (ITD), most extensive and
famous among these being Directorate of Investigation.

List of ITD Directorates [16][17]

Serial Directorate Head of Directorate Headquarter City

No.

18 Director Generals of At respective

1 Investigation regional
Income Tax (DGsIT)
headquarters

2 Systems Principal Director New Delhi

General of Income Tax

3 Legal & Research Principal Director New Delhi

General of Income Tax

4 Training Principal Director NADT, Nagpur

 General of Income Tax

5 Intelligence & Criminal Director General of New Delhi

Investigation (I&CI) Income Tax

Principal Director
6 Vigilance General of Income New Delhi
Tax/CVO

7 Administration & Tax Principal Director New Delhi

Payer Services (TPS) General of Income Tax

8 Logistics Principal Director New Delhi

General of Income Tax

9 Human Resource Principal Director New Delhi

Development (HRD) General of Income Tax

10 Risk Assessment Director General of New Delhi

Income Tax

Good Governance by ITD [edit]

Income Tax Department of Government of India is a leader in good governance. Since
large portion of population interacts with department on yearly basis hence good
governance by ITD has improved citizen satisfaction with government functioning. [18]
A
very well known model of good governance, Sevottam, is being implemented by Income
Tax Department.

Sevottam [edit]

Income Tax Department (ITD) is leader in implementing Sevottam, [19] which is

certification of excellent quality of public service delivery in India. The term Sevottam
comes from the Hindi words "Seva" and "Uttam" and means excellence in service delivery.
It involves the identification of the services delivered to the citizens, quality of service, its
objective, improvement of quality, by using innovative methods for developing business
process and more informative with the help of information technology. The citizen-
centric approach includes the following three components [20]:

 Citizen Charter and Service Standards: Citizen's Charter [21] is being published by ITD
from time to time to lay down standards of service delivery to taxpayers.

 Public Grievances: Income Tax Department has used technology for easy registration
and faster disposal of grievances. Various initiatives taken by ITD
are: eNivaran[22] lets taxpayers to directly lodge grievance with their concerned ITD
officer; Aaykar Seva Kendra (ASK) acts at integrated grievance through email to ITD
officers on detection of errors in tax filings by taxpayers; and other portals
like CPGRAMS.

Service Delivery Enablers: This includes customer feedback, employee motivation

and infrastructure. Income Tax Department (ITD) functions largely through computer
systems and networks; and feedback of taxpayers is taken regularly through Pre-
Budget Consultation[24] and regular industry-ministry/department interactions, Outreach
Programmers[25] etc. Employee motivation is subjective but good public perception of
ITD ensure high employee.

Aaykar Seva Kendra (ASK) [edit]

Aaykar Seva Kendra (ASK) is an integrated model that provides single window system for
registration of all applications including those for redressal of grievances as well as
receipt of paper return.[26] The assesses can approach ASK and pose all kinds of queries.
ASK is available at almost all Income Tax Department offices across the country.

Tax Return Preparer Scheme (TRPS) [edit]

Launched in 2006 by the Income Tax Department, Tax Return Preparer Scheme (TRPS)
assists small and marginal taxpayers in preparing and filing their tax returns by creating a
company of ‘Tax Return Preparers’ (TRPs). Tax Return Preparers (TRPs) are experts in
income tax law and in filing of Income Tax Return (ITR). They can charge a maximum fee
of Rs. 250, or sometimes nothing.[18]

Simplified Income Tax Return (ITR) Filing [edit]

Over the years Income Tax Return (ITR) filing has been made more simple, convenient,
and smart through use of technology. This includes following [18]:

 E Filing: e Filing of returns ensured that all returns can be submitted in submitted in
digital form at dedicated efiling website (https://incometaxindiaefiling.gov.in ) without
any need of submitting paper returns to Income Tax Department offices. This not only
reduced grievances of taxpayers on account of errors in data entry but also
made filing of return of income any-time, any-where, convenient exercise.

 SAHAJ and SUGAM[27]: ITR-1 (SAHAJ) is simplified version of earlier lengthy and
complex ITR-1, which is applicable to salaried employees; similarly ITR-4 (SUGAM) is
simplified version of ITR-4, which is applicable to small businesses and professionals.

 Verification: Use of Aadhar Card or Bank Account is made to ensure ratification of

ITR by taxpayers. It is user-friendly and removed of the hassle of sending the hard
copy of the ITR-V form to Bangalore. Taxpayers have also reported that the process
of e-verification shortens the time taken for processing of the return and issue of
refund.[18]

 Pre-filled ITR: As part of efforts to popularize the electronic mode of filing Income
Tax Returns (ITRs), the CBDT is planning to provide “pre-filled” return forms to filers
who will have an automatic upload of data on income and other vitals of a taxpayer. [18]

Law Enforcement Powers of ITD

Taxation law is not only very complex as it requires specialized knowledge and expertise
to implement, but also it necessitates various kinds of deterrent actions to ensure
compliance by taxpayers.

 Assessment: Assessment is done to ensure correct estimation of total taxable

income of an assessed (i.e. taxpayer) and it determines amount of tax to be payable
by (or to be refunded to) assessed.

 Fines and Penalty: These are financial punishments for non-compliance with any
specific provision of the Income-tax Act.
 Surveys: ITD can survey any business premises for physical verification of records
and other valuables.

 Search and Seizure: ITD can search residential and business premises of any
taxpayer to check records and valuables to ensure that no evasion of tax is taking
place.

 Prosecution: Certain actions of taxpayers, for example willful evasion of tax, are
considered as criminal offence by the Income-tax Act and hence these offences
result in prosecution.

Demonetization Period [edit]

The Finance Ministry instructed all revenue intelligence agencies to join the crackdown
on forex traders, hawala operators and jewelers besides tracking movement of
demonetized currency notes.[28]

Income Tax departments raided various illegal tax-evasive businesses in Delhi, Mumbai,
Chandigarh, Ludhiana and other cities that traded with demonetized
currency.[29] The Enforcement Directorate issued several FEMA notices to forex large
sum of cash in and gold traders.[28] Defunct notes were seized in different parts of the
country.[30][31][32][33][34] In Chhattisgarh liquid cash worth of ₹4.4 million (US$62,000) was
seized.[35] In 2016, December the Income Tax department, received more than 4000
emails, on black money holders, in India, within 3 days, when Income Tax Department,
issued in public notice an email to report black money[36]

Huge amounts of cash in the form of new notes were seized all over the country after the
demonetization.[37][38]

In December 2016, over 4 crore in new ₹2000 notes were seized from four persons in
Bangalore,[39][40][41] ₹33 lakh in ₹2000 notes were recovered from Manish Sharma, an
expelled BJP leader in West Bengal,[42][43] and ₹1.5 crore was seized in Goa.[44] 900 notes of
the new ₹2000 denomination were seized from a BJP leader in Tamil Nadu. [45] Around
₹10 crore in new notes were seized in Chennai.[46]

As of 10 December, ₹242 crore in new notes had been seized.[47]

ROLE OF TAXATION IN ECONOMIC DEVELOPMENT
Tax policy plays two important roles in financing economic development. One is to
maintain an economy at a higher employment level so that the saving capacity of the
people is raised with an increase in income per head.

The second is to raise the marginal propensity to save of the community as far above the
average propensity to the maximum extent possible without discouraging work effort or
violating canons of equity. Savings can be generated in two ways: by increasing real
output or by a reduction in real consumption.

There is considerable disagreement among economists and policymakers about the

usefulness, or necessity of taxation in raising resources for financing economic

development in developing countries like India .

At the early stage of development, when the rate of rising is low, there is need for
compulsion in forcing people to consume less and save more. Only through taxation it is
possible to generate forced saving which is so essential for accelerating the rate of
capital formation which is the sine qua non of high rate of per capita income growth.

Tax policy to raise the MPS above APS is concerned with the design and implementation
of taxes to reduce private consumption. Tax revenue as a percentage of GNP is low in
most developing countries, averaging between 15—20%, compared to 25—30% in
developed countries. Moreover, direct taxes especially taxes on income, are a minor
source of tax revenue compared with indirect taxes.

The proportion of the population that pays income tax in developing countries is
correspondingly low, averaging about 10% compared to the vast majority of the working
population in developed countries which constitutes between 20 to 40% of the total
population. There would, therefore, appear to be a greater scope for using tax policy to
raise the level of aggregate saving relative to income. Two important points may be
noted in this context
NATURE OF TAX SYSTEM

First, the rudimentary nature of the tax system in developing countries is partly a
reflection of the stage of development itself. Thus, the scope for increasing tax revenue
as a proportion of income may in practice is limited.

Measuring the tax base:

Secondly, there are the difficulties of defining and measuring the tax base and of
assessing and collecting taxes in circumstances where the population is scattered
throughout the country, and primarily engaged in producing for subsistence and where
the illiteracy rate is also high.

There is also the fact that, as far as income tax is concerned, the income of the vast
majority of income-careers is so low that they fall outside the scope of the tax system.
Whereas 70% of national income is subject to income tax in developed countries, only
about 50% is subject to such taxation in developing countries.

In this context, A.P. Thirwall has argued that, “even if there was scope for raising
considerably more revenue by means of taxation, whether the total saving would be
raised depends on how tax payments are financed — whether out of consumption or
saving — and how income (output) is affected. It is often the case that taxes which would
make tax revenue highly elastic with respect to income are taxes which would be met
mainly out of saving or have the most discouraging effects on incentives.”

Progressive income tax and saving:

In this context, we may cite the examples of progressive income tax which will
discourage work effort if the substitution effect of the tax is stronger than the income
effect; and to the extent the high marginal rates of tax fall primarily on the high-income
groups (i.e., rich people) with low propensities to consume, saving may fall by nearly as
much as tax revenue rises.
To avoid such large reductions in private saving, an expenditure tax on high income
groups, which exempts saving from taxation, is a preferable alternative to a progressive
income tax, but the disincentive effects on work effort are not necessarily avoided.

This is so because if the expenditure tax encourages saving, the tax rate must be higher to
yield the same revenue as the income tax. If people work to consume and the prices of
consumption goods are raised, work effort will be curtailed if the substitution effect of the
change is stronger than the income effect.

The more successful the expenditure tax is in stimulating saving out of a given income,
the higher must be the rate of tax to keep the economy from the two taxes equal, and the
greater the discentive to work effort is likely to be.

In general, the most effective tax policy to raise the level of saving relative to income
would be to impose taxes on those with high MFC, viz., the poor, keeping in view the
obvious considerations of equity.

For achieving the best possible results, i.e., promoting growth without affecting the
incentives to work hard and save taxes should be imposed on all non-profit incomes and
luxury consumption. However, since most people in developing countries do not have
taxable income (due to complete absence of agricultural income tax, low per capita
income and widespread tax evasion and avoidance), the contribution of direct taxes is
low.

In India, for example, the contribution of direct taxes to total tax revenue was 18.5% in
1995-96. This means that 81.5% of tax revenue was derived from indirect taxes. So, in
order to raise adequate resources for development, the government is forced to extend
the coverage of indirect taxes on mass consumption goods

Furthermore, since agriculture is the backbone of the economy, and since huge amount
of investments usually made in agriculture and allied activities in developing countries,
agricultural taxation has to play an important role in resource mobilization for planned
economic development.
Agricultural tax:
The predominant importance of agriculture in developing countries makes agricultural
taxation a potentially significant source of tax revenue and a means of transferring
resources into productive investment .

There are various instruments for taxing agriculture, including taxes on land area, on land
value, on net income and on land transfer. If the object of the government is to raise
revenue, then agricultural marketing and export taxes are probably the most efficient and
the easiest to collect.

In theory, land taxes are probably the most desirable way to transfer resources from
agriculture. But, in practice, land taxes are not important as a source of tax revenue.

In a modern market-based economy like that of India, the balance between direct taxes
on income and indirect taxation on expenditure and trade is heavily weighted in the
direction of the latter, particularly in the form of import duties and sales taxes.

Business taxes:
Such taxes are easy to collect and administer but again business taxation may merely
replace one form of saving for another. The MPS out of profits is usually high. The main
justification for corporate taxation is to retain control of resources which might
otherwise leave the country if the business is foreign-owned or to substitute public for
private investment on the grounds that the public investment is more socially productive
than its private counterpart.

Difficulties:
However, taxation as a method of development finance creates certain problems. While
involuntary savings may increase through financed reduction in consumption, voluntary
savings may fall because individuals may try to protect their living standards by
maintaining their existing consumption levels. This is likely to reduce the flow of funds to
the private sector.

Moreover, taxation has a negative effect on incentives to work hard, save and take risk.
So, work effort, saving and investment in venture capital (i.e., new enterprise) will fall.
Moreover, taxation on agriculture may affect agricultural improvement. Instead of
adopting measures for raising agricultural productivity through investment, farmers may
prefer to consume more and save less.

Thus, it is absolutely essential to evolve an ideal tax system that is unlikely to have any
adverse effect on work effort, saving, investment and enterprise (risk-taking) and does
not violate the accepted notion of equity.
Conclusion:
In short, the system of tax policy in developing countries like India is likely to exert
considerable influence on saving and investment the two crucial determinants of
economic growth. So, the primary objective of tax policy in such countries should be to
transfer financial resources from the private to the public sector as much as possible
with minimum adverse effect.

There is wide agreement among economists that in countries like India there is an
untapped tax potential. In other words, there is considerable scope for broadening and
deepening the tax system by improving the tax structure and by strengthening the tax
collecting machinery.
EFFECT OF INCOME TAXES ON ECONOMIC DEVELOPMENT
One of the most commonly discussed issues in economics is how tax rates relate to
economic growth. Advocates of tax cuts claim that a reduction in the tax rate will lead to
increased economic growth and prosperity. Others claim that if we reduce taxes, almost
all of the benefits will go to the rich, as those are the ones who pay the most taxes. What
does economic theory suggest about the relationship between economic growth and
taxation?

Income Taxes and Extreme Cases

In studying economic policies, it is always useful to study extreme cases. Extreme cases
are situations such as "What if we had a 100% income tax rate?", or "What if we raised
the minimum wage to $50.00 an hour?” While wholly unrealistic, they do give very stark
examples of what direction key economic variables will move when we change a
government policy.

First, suppose that we lived in a society without taxation. We'll worry about how the
government finances its programs later on, but for now, we'll assume that they have
enough money to finance all the programs we have today. If there are no taxes, then the
government does not earn any income from taxation and citizens do not spend any time
worrying about how to evade taxes. If someone has a wage of $10.00 an hour, then they
get to keep that $10.00. If such a society where possible, we can see that people would
be quite productive as any income they earn, they keep.

Now consider the opposing case. Taxes are now set to be 100% of income. Any cent you
earn goes to the government. It may seem that the government would earn a lot of
money this way, but that's not likely to happen. If you don't get to keep anything out of
what you earn, why would you go to work? Most people would rather spend their time
doing something they enjoy. Simply, put, you wouldn't spend any time working for a
company if you didn't get anything out of it. Society as a whole wouldn't be very
productive if everybody spent a large portion of their time trying to evade taxes. The
government would earn very little income from taxation, as very few people would go to
work if they did not earn an income from it.
While these are extreme cases, they do illustrate the effect of taxes and they are useful
guides of what happens at other tax rates. A 99% tax rate is awfully like a 100% tax rate,
and if you ignore collection costs, having a 2% tax rate is not much different from having
no taxes at all.

Go back to the person earning $10.00 an hour. Do you think he'll spend more time at
work or less if his take-home pay is $8.00 rather than $2.00? It's a pretty safe bet that at
$2.00 he's going to spend less time at work and much more time trying to earn a living
away from the prying eyes of the government.

Taxes and Other Ways of Financing Government

In the case where the government can finance spending outside of taxation, we see the
following:

 Productivity declines as the tax rate increases, as people choose to work less. The
higher the tax rate, the more time people spend evading taxes and the less time
they spend on the more productive activity. So the lower the tax rate, the higher
the value of all the goods and services produced.
 Government tax revenue does not necessarily increase as the tax rate increases.
The government will earn more tax income at 1% rate than at 0%, but they will not
earn more at 100% than they will at 10%, due to the disincentives high tax rates
cause. Thus there is a peak tax rate where government revenue is highest. The
relationship between income tax rates and government revenue can be graphed
on something called aLaffer Curve .

Of course, government programs are not self-financing. We'll examine the effect of
government spending in the next section.
Even an ardent supporter of unrestricted capitalism realizes that there are necessary
functions for the government to perform. The Capitalism Site lists three necessary things
a government must provide:

 An Army: To protect against foreign invaders.

 A Police Force: To protect against domestic criminals.
 ACourtSystem:Tosettlehonestdisputesthatariseandtopunishcriminals
 according to objectively predefined laws.

Government Spending and the Economy

Without the last two functions of government, it is easy to see that there would be little
economic activity. Without a police force, it would be difficult to protect anything that
you've earned. If people could just come by and take anything you owned, we'd see three
things happen:

1. People would spend a lot more time trying to steal what they need and a lot less
time trying to produce what they need, as stealing something is often easier than
producing it yourself. This leads to a reduction in economic growth.
2. People who have produced valuable goods would spend more time and money
trying to protect what they've earned. This is not a productive activity; society
would be much better off if citizens would spend more time producing productive
goods.

3. There would likely be a lot more murders, so the society would lose a lot of
productive people prematurely. This cost and the costs people incur in trying to
prevent their own murder greatly diminish economic activity .
4. A police force which protects the basic human rights of citizens is absolutely
necessary to ensure economic growth.
5. A court system also promotes economic growth. A large portion of economic
activity depends on the use of contracts. When you start a new job, normally you
have a contract specifying what your rights and responsibilities are and how much
you will be compensated for your labor. If there's no way to enforce a contract like
that, then there is no way to ensure that you will end up getting compensated for
your labor. Without that guarantee, many would decide it is not worth the risk to
work for someone else. Most contracts involve an element of "do X now, and get
paid Y later" or "get paid Y now, do X later". If these contracts are not enforceable,
 the party who is obligated to do something in the future might decide then that he
doesn't feel like it. Since both parties know this, they would decide not to enter into
such an agreement and the economy as a whole would suffer.

Having a working court system, military, and police force provides a large economic
benefit to a society. However it is expensive for a government to provide such services,
so they'll have to collect money from the citizens of the country to finance such
programs. The financing for those systems comes through taxation. So we see that a
society with some taxation that provides these services will have a much higher level of
economic growth than a society with no taxation but no police force or the court system.
So an increase in taxescan lead to larger economic growth if it is used to pay for one of
these services. I use the termcan because it is not necessarily the case that expanding
the police force or hiring more judges will lead to greater economic activity. An area
which already has many police officers and little crime will gain almost no benefit from
hiring another officer. Society would be better off not hiring her and instead of lowering
taxes. If your armed forces are already large enough to deter any potential invaders, then
any additional military spending drags down economic growth. Spending money on these
three areas isnot necessarily productive, but having at least a minimal amount of all
three will lead to an economy with higher economic growth than none at all.

In most Western democracies the majority of government spending goes towards social
programs. While there are literally thousands of government-funded social programs the
two largest are generally health care and education. These two do not fall into the
category of infrastructure. While it is true that schools and hospitals must be built, it is
possible for the private sector to profitably do so. Schools and healthcare facilities have
been built by non-government groups all over the world, even in countries that already
have extensive government programs in this area. Since it is possible to cheaply collect
funds from those who use the facility and to ensure those who do use the facilities
cannot easily evade paying for those services, these do not fall into the category of
"infrastructure".

Can these programs still provide a net economic benefit? Being in good health will
improve your productivity. A healthy workforce is a productive workforce, so spending on
health care is a boon to the economy. However, there is no reason the private sector
cannot adequately provide health care or why people will not invest in their own health.
It's tough to earn an income when you're too sick to go to work, so individuals will be
willing to pay for health insurance that will help them get better if they are ill. Since
people would be willing to buy health coverage and the private sector can provide it, there
is no market failure here.
To purchase such health insurance you must be able to afford it. We could get into a
situation where society would be better off if the poor got proper medical treatment, but
they do not because they cannot afford it. Then there would be a benefit to giving health
care coverage to the poor. But we can get the same benefit by simply giving the poor
cash and letting them spend it on whatever they want, including health care. However, it
could be that people, even when they have enough money, will buy an inadequate amount
of health care. Many conservatives argue that this is the basis of many social programs;
government officials do not believe that citizens buy enough of the "right" things, so
government programs are necessary to ensure people get what they need but won't buy.

The same situation occurs with educational expenditures. People with more education tend
to be on average more productive than people with less education. Society is better off by
having a highly educated population. Since people with higher productivity tend to get paid
more, if parents care about the future welfare of their children, they will have an incentive
to seek an education for their children. There are no technical reasons why
private sector companies cannot provide educational services, so those who can afford it
will get an adequate amount of education.

As before, there will be low-income families who cannot afford a proper education
although they (and society as a whole) are better off by having well-educated children. It
would seem that having programs which focus their energies on poorer families will have a
greater economic benefit than those which are universal in nature. There seems to be a
benefit to the economy (and society) by providing an education to a family with limited
opportunities. There is little point in providing an education or health insurance to a
wealthy family, as they will likely buy as much as they need.
On the whole, if you believe that those who can afford it will buy an efficient amount of
health care and education, social programs tend to be a deterrent to economic growth.
Programs which focus on agents who are unable to afford these items have a greater
benefit to the economy than those that are universal in nature.

We saw in the previous section that higher taxes can lead to higher economic
growthif those taxes are efficiently spent on three areas which protect the rights of
citizens. A military and a police force ensure that people do not have to spend a great
deal of time and money on personal security, allowing them to engage in more
productive activities. A court system allows individuals and organizations to enter into
contracts with one another which create opportunities for growth through collaboration
motivated by rational self-interest.

Roads and Highways Cannot Be Paid by Individuals

There are other government programs, which bring a net benefit to the economy when
fully paid for by taxes. There are certain goods that society finds desirable but individuals
or corporations cannot supply. Consider the problem of roads and highways. Having an
extensive system of roads on which people and goods can freely travel greatly adds to the
prosperity of a nation. If a private citizen wanted to build a road for profit, they would run
into two major difficulties:

The cost of collection. If the road was a useful one, people would gladly pay for
its benefits. In order to collect fees for the use of the road, a toll would have to be set up
at every exit and entry to the road; many interstate highways work this way. However, for
most local roads the amount of money obtained through these tolls would be dwarfed by
the extreme costs of setting up these tolls. Because of the collection problem, a lot of
useful infrastructures would not be built, although there is a net benefit to its existence.

Monitoring who uses the road. Suppose you were able to set up a system of
tolls at all the entrances and exits. It may still be possible for people to enter or leave the
road at points other than the official exit and entrance. If people can evade paying the toll,
they will.
Governments provide a solution to this problem by constructing the roads and recouping
the expenses through taxes such as the income tax and the gasoline tax. Other pieces of
infrastructure such as the sewage and water system work on the same principle. The
idea of government activity in these areas is not new; it goes at least as far back
as Adam Smith. In his 1776 masterpiece, "The Wealth of Nations" Smith wrote:

"The third and last duty of the sovereign or commonwealth is that of erecting and
maintaining those public institutions and those public works, which, though they may be in
the highest degree advantageous to a great society, are, however, of such a nature that the
profit could never repay the expense to any individual or small number of individuals, and
which it, therefore, cannot be expected that any individual or small number of
individuals should erect or maintain."

Higher taxes which lead to improvements in infrastructurecan lead to higher economic

growth. Once again, it depends on the usefulness of the infrastructure being created. A
six-lane highway between two small towns in upstate New York is not likely to be worth
the tax dollars spent on it. An improvement to the safety of the water supply in an
impoverished area might be worth its weight in gold if it leads to reduced illness and
suffering for the users of the system.

Higher Taxes Are Used to Finance Social Programs

A tax cut does not necessarily help or hurt an economy. Youmust consider what the
revenue from those taxes is being spent on before you can determine the effect the cut
will have on the economy. From this discussion, though, we see the following general
trends:

1. Cutting taxes and wasteful spending will help an economy because of the
disincentive effect caused by taxation. Cutting taxes and useful programs may or
may not benefit the economy.
2. A certain amount of government spending is required in the military, the police, and
the court system. A country which does not spend an adequate amount of money in
these areas will have a depressed economy. Too much spending in these areas is
wasteful.
3. A country also needs infrastructure to have a high level of economic activity. Much of
this infrastructure cannot be adequately provided by the private sector, so
governments must spend money in this area to ensure economic growth. However,
too much spending or spending on the wrong infrastructure can be wasteful and
slow economic growth.
4. If people are naturally inclined to spend their own money on education and healthcare,
then taxation used for social programs is likely to slow economic growth. Social
spending which targets low-income families is much better for the economy than
universal programs.
5. If people are not inclined to spend towards their own education and healthcare, then
there can be a benefit to supplying these goods, as society as a whole benefit from a
healthy and educated workforce.
6. The government ending all social programs is not a solution to these issues. There
can be many benefits to these programs which are not measured in economic growth.
A slowdown in economic growth is likely to occur as these programs are expanded,
however, so that should always be kept in mind. If the program has enough other
benefits, society as a whole may wish to have lower economic growth in return for
more social programs.
Treatment of Income from Different Sources

I. Income under the head Salaries

1.1 Salary is defined to include :
a) Wages

b) Annuity

c) Pension

d) Gratuity

e) Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages

f) Advance of Salary

g) Leave Encashment

h) Annual accretion to the balance of Recognized Provident Fund

i) Transferred balance in Recognized Provident Fund

j) Contribution by Central Government or any other employer to Employees Pension

Account as referred in Sec. 80CCD

1.2 Points to consider:

a) Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is
earlier.
b) Existence of relationship of employer and employee is must between the payer and
payee to tax the income under this head.

c) Income from salary taxable during the year shall consists of following:

i. Salary due from employer (including former employer) to taxpayer during the
previous year, whether paid or not;

ii. Salary paid by employer (including former employer) to taxpayer during the
previous year before it became due;

iii. Arrear of salary paid by the employer (including former employer) to taxpayer
during the previous year, if not charged to tax in any earlier year;

Exceptions - Remuneration, bonus or commission received by a partner from the firm is

not taxable under the head Salaries rather it would be taxable under the head business or
profession.

1.3 Place of accrual of salary :

a) Salary accrues where the services are rendered even if it is paid outside India;

b) Salary paid by the Foreign Government to his employee serving in India is taxable
under the head Salaries;

c) Leave salary paid abroad in respect of leave earned in India shall be deemed to
accrue or arise in India.

Exceptions - If a Citizen of India render services outside India, and receives salary from
Government of India, it would be taxable as salary deemed to have accrued in India.
4.GRAPHICAL PRESENTATION OF
ECONOMY OF INDIA
India has come a long way in modernizing its economy, reducing poverty and improving
living standards for a large segment of its population.

Its economy has been one of the largest contributors to global growth over the last
decade, accounting for about 10% of the world’s increase in economic activity since 2005,
while GDP per capita in PPP (purchasing power parity) terms is today three times as high
as in 2000.

Yet, this period also witnessed a rise in inequality, which has been mainly driven by
income gaps between India’s states, and a growing urban-rural divide. India continues to
have the largest number of poor in the world (approximately 300 million are in extreme
poverty), and nearly half of the poor are concentrated in five states.

Growth has slowed in recent years and several challenges remain unsolved. Bringing
more people into the process of generating growth and sharing the gains more
widely will make India more resilient for the future.
With one of the largest and youngest populations in the world, India needs to create
millions of good-quality jobs in the near future to ensure decent living conditions for the
vast majority of its citizens.

The country is often cited as an example of an economy that is modernizing by jumping

directly into services without passing through manufacturing. The weight of
manufacturing in India has been relatively stable over the past two decades, at much
lower levels than China and ASEAN countries. Business services - a high value added
sector - represent a larger share of economic activity in India than in Europe.

Will India be able to achieve shared prosperity without a growing manufacturing sector?
Agriculture accounts today for only 16% of total value added (down from 44% in 1965),
but still employs about half of the Indian population. Productivity in this sector did not
increase significantly in the past decades, limiting improvements in living standards in
rural areas
The competitiveness landscape

After five years of decline, India’s competitiveness improved notably this year as
measured by the Global Competitiveness Report 2015-2016, where the country improves
16 ranks to 55th of 140 economies.

This improvement can be largely attributed to two main factors.

Firstly, macroeconomic conditions improved significantly. Inflation eased to 6% in 2014,

down from near double-digit levels the previous year. The government budget deficit has
gradually dropped since its 2008 peak, although it still amounted to 7% of GDP in 2014,
one of the world’s highest.

Secondly, the country benefits from the momentum initiated by the election of Narendra
Modi, whose pro-business, pro-growth, and anti-corruption stance has improved the
business community’s sentiment toward the government. Infrastructure has also
improved, but remains a major growth bottleneck. The fact that the most notable
improvements are in the basic drivers of competitiveness bodes well for the future, but
other areas also deserve attention, including technological readiness
How inclusive is growth?

Despite India’s relatively strong record in terms of economic growth over the last decade,
its middle class remains small and getting a job is no guarantee of escaping poverty.

India must take further action to ensure that the growth process is broad-based in order to
reduce the share of the population living on less than $2 a day—many of whom are
employed in informal and low skilled jobs. Educational enrollment rates are relatively low
across all levels, and quality varies greatly, leading to notable differences in educational
performance among students from different socioeconomic backgrounds.

The gender gaps in labour force participation and wages are both high, showing that
India’s women are not benefiting equally from economic opportunities. India scores
well in terms of access to finance for business development and real economy
investment (investment channelled towards productive uses), yet new business creation
continues to be held back by administrative burdens. India also under-exploits the use of
fiscal transfers compared to peer countries.
Modernizing India’s public institutions
Modernizing public institutions has been high on the agenda of reforms in India in recent
years, and results are starting to show. In 2015, businesses perceived lower levels of
corruption among public officials and showed more trust in government’s decisions.
Improved public institutions are one of the main drivers of the increase in India’s
competitiveness. Yet, there is still a lot of ground to cover.
Private investment, especially from foreign firms, requires a favourable business
environment, which includes strong property rights protection and also fair and speedy
trials in the case of disputes. To this end, ensuring the independence of the judicial
system and increasing efficiency in settling disputes will be key. Business ethics should
also improve in line with that of public institutions. Reporting and accounting standards
are necessary to ensure transparency in the private sector, increase trust and facilitate
long-term financing and investment.

Talent, education and social mobility

Educational enrolment rates are relatively low across all levels: barely above the median
for its peer group on pre-primary and primary, and below the median for secondary,
vocational and tertiary levels.
Only 1.4% of secondary students are enrolled in technical and vocational programs,
limiting the talent pool for skilled labor. The average level of education is only 7.3 years
and a gender gap continues to persist, with boys benefiting from two more years of
schooling than girls. India ranks 31st out of 37 lower middle income countries in
providing equal educational opportunities for men and women, which translates into low
levels of female participation in the labor force.

The gap in educational attainment between children from the top and bottom quintiles in
India is 8.7 years, with those in the bottom quintile receiving only 2.8 years of education on
average and those in the top income quintile receiving 11.56 years. The disparities in
educational attainment by income are greater in India than in most other countries with
similar income levels, and can be important in transmitting inequality down the
generations. The gap is much smaller in Vietnam, Thailand, Indonesia and the Philippines
and larger only in Laos. Thailand stands out for having the best educational outcomes in
this peer group on average (nearly 5 more years than India).
Unequal access to finance

India scores relatively well in terms of access to finance for developing businesses and
investing in the economy. India’s entrepreneurs have better access to bank accounts,
credit, venture capital, and equity markets than their counterparts in most peer countries.
However, access to finance remains limited for low income individuals, especially
women. 400 million people remain unbanked in India and disconnected from the
financial system despite impressive gains in recent years. Most unbanked are poor and
female: only 27% of individuals in bottom quintiles and 37% of women have access to a
bank account. Finance can help poor households optimize severely constrained
resources across their lifetime.
Barriers to Entrepreneurship

Yet, only 7% used their savings account to start a business (the proportion is even
smaller for those in the bottom 40% of the income distribution). A last-placed ranking on
small business ownership is evidently not for want of good ideas, as India scores fourth
on a measure of patent applications. But budding entrepreneurs are held back by red
tape and an inefficient justice system, with relatively low rankings for indicators such as
the time and cost of starting a business, enforcing a contract and resolving insolvency.

Closing the infrastructure gap in India

Infrastructure development has not keep up with the increasing needs of the economy.
Since 2007, the country slipped 14 ranks to 81st worldwide in terms of overall quality of
infrastructure. In a recent report, the World Bank estimates that India might need up
to 1.7 trillion dollars to close its gap in infrastructure development. Such a huge
challenge cannot be borne by the government alone and will require more private
investments and public-private partnerships. Private infrastructure financing totalled only
2.4 % of GDP per year on average from 2009-2013.
A quarter of Indians still do not have access to electricity and almost a third of the urban
population live in slums. 65% of the population does not have access to improved
sanitation and access remains unevenly distributed. This is also the case for clean
drinking water.

Modernizing transport infrastructure will be particularly important to increasing India’s

competitiveness. The airline sector is one of the weaknesses of India’s transport system.
Operational airports are still out of reach for large parts of the country given that only half
of Indian roads are paved, contributing to one of the highest accident rates in the world.
On the flipside, the railway system performs relatively better than other modes of
transport, traversing the country for approximately 65,000 kilometers (the fourth largest
in the world). Nonetheless, investments are needed to improve the speed and efficiency
of the system, especially within urban areas.

India Connecting
Despite many clusters of excellence in the IT industry and a vibrant service sector, India
is not fully leveraging ICTs (information and communication technologies) for the
benefits of its entire population. Regulation of the ICT sector is among the most
competitive in the world and costs are low by international standards. Yet, the uptake of
ICTs in India remains very low. Fewer than one in five Indians access the Internet on a
regular basis, with only 1 percent of the population having fixed broadband (more
worryingly, this figure has not gone up significantly in recent years). Smartphones are the
privilege of the very few, with 5 mobile broadband subscriptions for every 100 population,
while less than two in five Indians are estimated to own even a basic cell phone.
India has been slipping behind other countries in developing Asia over the last decade.
Until 2007, internet usage was in line with the median performance of other economies in
the region. Since then, countries such as Thailand and the Philippines have experienced a
tremendous increase in the uptake of ICTs. Connecting India will mean investing in both
physical and human capital to bridge the gap with other emerging markets. ICT could help
fulfil India’s ambition to become a global manufacturing hub. Furthermore, ICT could do
wonders in improving productivity in agriculture and the services sector, while
boosting access to some basic services among the rural population.
India’s tax tystem and social safety net
Some countries effectively use redistribution to reduce inequality, but India is not among
them. Its Gini coefficient (a measure of income distribution) is the second highest
among lower middle income countries and is barely changed by fiscal transfers. Tax
revenues are extremely low and India’s tax code is regressive, meaning that the poor
bear a heavier burden than the rich, which is not offset by social spending. The country
spends only 2.5% of GDP on social protection compared with over 6% in many peer
countries.
India has a great deal of opportunity to enhance the generosity and progressivity of its
social protection system so that it can give its citizens the safety net needed to take
risks and participate fully in the economy and society.

Increasing its narrow tax base can also give India more fiscal space to make these much
needed social expenditures, particularly in health. India’s public health system remains
limited in coverage. Out-of-pocket expenses are high, limiting affordability. This
translates into poor (and unequal) health outcomes. Inequality adjusted life expectancy
is 25 years while in many peer countries like Thailand and Vietnam there is only around
10 years’ difference between high and low-income individuals.
The way ahead
To achieve both economic growth and social inclusion, India should focus on a number
of areas of reform, including:
 FINANCE AND TAXES
Finance is the backbone of any economy. In order to propel the economic development
of the country, finance and tax related matters are highly essential

MINISTRY OF FINANCE

Cabinet Minister
Smt. Nirmala Sitharaman

DEPARTMENT OF REVENUE-

About the Department

The Department of Revenue functions under the overall direction and control of the
Secretary (Revenue). It exercises control in respect of matters relating to all the Direct
and Indirect Union Taxes through two statutory Boards namely, the Central Bord of Direct
Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC). Each Board
is headed by a Chairman who is also ex-officio Special Secretary to the Government of
India. Matters relating to the levy and collection of all Direct Taxes are looked after by the
CBDT whereas those relating to levy and collection of Customs and Central Excise duties
 and other Indirect Taxes fall within the purview of the CBIC. The two Boards were
constituted under the Central Board of Revenue Act, 1963. At present, the CBDT has six
Members and the CBIC has six Members. The Members are also ex-officio Special
Secretaries to the Government of India.

. The Department of Revenue administers the following Acts:

 GST Act, 2017;

 CGST Act;

 CGST (Extension to Jammu And Kashmir) Act 2017;

 101st constitution amendment act 2016 ;

 IGST Act;

 IGST (Extension to Jammu And Kashmir) Act 2017;

 GST ( Compensation To The State ) Act;

 The Central Good And Services Tax Act 2017;

 The Good And Services Tax (Compensation To The State) Act 2017 ;

 Integrated good and service tax act 2017;

 Income Tax Act, 1961;

 Union territory good and service tax act 2017;

 Constitution (One Hundred and first amendment ;

 Wealth Tax Act, 1958;

 Expenditure Tax Act, 1987;

 Prohibition Of Benami Property Transaction Act 1988;

 Prevention of money-Laundering act 2002;

 Black money ( undisclosed foreign income And Assets) and imposition of Tax Act
 2015;

 Super Profits Act, 1963;

 Fugitive Economic offenders Act 2018;

 Securities Transaction Tax Commodities Transaction tax ;

 Companies (Profits) Sur-tax Act, 1964;

 Compulsory Deposit (Income Tax Payers) Scheme Act, 1974;

 Chapter VII of Finance (No.2) Act, 2004 (Relating to Levy of Securities Transactions
Tax)

 Chapter VII of Finance Act 2005 (Relating to Banking Cash Transaction Tax)

 Chapter V of Finance Act, 1994 (relating to Service Tax)

 Central Excise Act, 1944 and related matters;

 Customs Act, 1962 and related matters;

 Medicinal and Toilet Preparations (Excise Duties) Act, 1955;

 Central Sales Tax Act, 1956;

 Narcotic Drugs and Psychotropic Substances Act, 1985;

 Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act,

1988;

 Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976;

 Equalization levy with Rules;

 Indian Stamp Act, 1899 (to the extent falling within jurisdiction of the Union);

 Conservation of Foreign Exchange and Prevention of Smuggling Activities Act,

1974;
 Foreign Exchange Management Act, 1999; and

 Prevention of Money Laundering Act, 2002.

The administration of the Acts mentioned at Sl.Nos.3, 5, 6 and 7 is limited to the cases
pertaining to the period when these laws were in force. The Department looks after the
matters relating to the above-mentioned Acts through the following
attached/subordinate offices:

 Commissionerate/Directorates under Central Board of Excise and Customs;

 Commissionerate/Directorates under Central Board of Direct Taxes;

 Central Economic Intelligence Bureau;

 Directorate of Enforcement;

 Central Bureau of Narcotics;

 Chief Controller of Factories;

 Appellate Tribunal for Forfeited Property;

 Income Tax Settlement Commission;

 Customs and Central Excise Settlement Commission;

 Customs, Excise and Service Tax Appellate Tribunal;

 Authority for Advance Rulings for Income Tax;

 Authority for Advance Rulings for Customs and Central Excise;

 National Committee for Promotion of Social and Economic Welfare;

 Competent Authorities appointed under Smugglers and Foreign Exchange

Manipulators (Forfeiture of Property) Act, 1976 & Narcotic Drugs and Psychotropic
Substances Act, 1985;
 Financial Intelligence Unit, India (FIU-IND); and,

 Income Tax Ombudsman

2. Revenues Headquarters
Administration
The Headquarters of the Department of Revenue looks after matters relating to all
administration work pertaining to the Department, coordination between the two boards
(CBIC and CBDT), the administration of the Indian Stamp Act 1899 (to the extent falling
within the jurisdiction of the Union), the Central Sales Tax Act 1956, the Narcotic Drugs
and Psychotropic Substances Act 1985 (NDPSA), the Smugglers and Foreign Exchange
Manipulators (Forfeiture of Property) Act 1976 (SAFEM (FOP) A), the Foreign Exchange
Management Act 1999 (FEMA), Prevention of Money- Laundering Act, 2002 and the
Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974
(COFEPOSA), and matters relating to the following attached/ subordinate offices of the
Department:

 nforcement Directorate

 Central Economic Intelligence Bureau (CEIB)

 Competent Authorities appointed under SAFEM (FOP) A and NDPSA

 Chief Controller of Factories

 Central Bureau of Narcotics

 Customs, Excise and Service Tax Appellate Tribunal (CESTAT)

 Appellate Tribunal for Forfeited Property (ATFP)

 Customs and Central Excise Settlement Commission (CCESC)

 Income Tax Settlement Commission (ITSC)

 Authority for Advance Rulings (AAR) for Customs and Central Excise

 Authority for Advance Rulings (AAR) for Income Tax

 National Committee for Promotion of Social and Economic Welfare (NCPSEW)

 Financial Intelligence Unit, India (FIU-IND)

 Settlement Commission (Income Tax/Wealth Tax)

 Income Tax Ombudsman

3. The following items of works are also undertaken by the

Headquarters:
 Appointment of:

 Chairman and Members of CBIC and CBDT

 Chairman and Members of ATFP

 Chairman, Vice Presidents and Members of CESTAT

 Chairmen, Vice Chairmen and Members of CCESC and ITSC

 Chairmen and Members of AARs for Customs/ Central Excise and Income
Tax

 Director of Enforcement

 Director General of CEIB

 Competent Authorities (SAFEM (FOP) Act and NDPS Act)

 Director (FIU-IND)

 Income Tax Ombudsman

 Setting up of Commissions/Committees under the Department

 Foreign training and assignment of officers of the Department

 CHAPTER = 5
FINDINGS AND SUGGESTIONS

Tax policy plays two important role in financing economic development. One is to
maintain an economy at a higher employment level so that savings capacity of the
people is raised with an income per period.
The second is to raise the marginal propensity to save of the community as far
above the average propensity to the maximum extent possible without
discouraging work effort or violating canons of equity. Savings can br generated in
two ways: by increasing real output or by reduction in real consumption.
There is considerable disagreement among economies development in developing
countries like India.
SUGGESTIONS:

CHAPTER = 5

FINDINGS, SUGGESTIONS AND CONCLUSION

SUGGESTIONS

 Government of India is required to open more investment option in income

tax law to increase capital formation in the country.

 There is a high need to consolidate and simplify the tax laws.

 Income tax department should run tax payers awareness programme so

that a common person may understand the tax law and procedures.

 Provision for minimum taxes should also be incorporated for persons other
than company except for individuals like for societies, Firms, and LLPs etc.

 It should reduce tax rates on edibles so that inflation rate rate may be
brought down on food items.

 Government should enlarge the tax regime to capture effectively the middle
and lower business class.

 The area of wealth tax needs to be enlarged to cover more people in its
regime.

 The poor people should be tired to be freed from indirect tax regime while
income inequality gap.

 Today there is no separate tax provision for limited liability partnership firm.
It is treated like other partnership firm due to its peculiar feature and being
 an entity entirely different from partnership firm, separate provisions are
needed to tax this entity.

 Today there are two separate boards for direct tax and indirect tax. Central
board of direct tax looks after direct tax and Central board of Excise and
customs looks after indirect tax. There is lack of coordination between
these two departments and thus it is highly needed that these two
department are consolidated into one.

CONCLUSIONS

Endogenous growth theory provides models that can assess the effect of
taxation upon economic growth. This project has described the available
models and has discussed the result that have been obtained. Numerous
channels were identified through which taxation can affect growth. In
quantitative terms, a wide range of theoretical predictions arose for the size
of the tax effect. These range from insignificant to dramatically large. The
size of the growth rate effect depends just about equally on the structure of
the model and on parameter values with in a model. The growth-reducing
effect on taxation is increased in open economy models and reduced, and
possibly even reversed, if life-cycle behavior is considerd. The production
process of human capital is also critical, as are the elasticity’s in the utility
function and the rates of depreciation. A fair summary would say that the
theoretical models introduce a range of issue that must be considered, but
they do not provide any convincing or definitive answers.
The conclusions of the empirical evidence are not quite as diverse as those
of the theory. Although there are some disagreements, the picture that
emerges is that effect of taxation, if there is any at all, is relatively minor.
However the estimates are dogged by the difficulty of defining the
appropriate measure of the tax rate and the choice of appropriate
repressors’. These problems may prove to be significant but that is unlikely.
As far as policy is concerned, the conclusion is reassuring since it removes
the need to be overly concerned about growth effects when tax reforms are
being planned.

Given these findings, what principles should guide the design of taxes? The
empirical evidence can be interpreted as supporting the argument that the
level of taxes is not the significant (with the obvious and important caveat
that this claim does not extend to levels outside the range observed in the
data) but the structure of taxation is important. When growth is
endogenous, taxation can be influence the factors that determine the
growth rate.