• Article 256 of the Constitution of India says that no tax shall be levied or collected except by the authority of law. In India the Parliament is the only authority to enact the law in the country. 
  • Direct Tax: In this tax, the impact and incidences is on the same person and shifting of tax burden is not possible. It means that the one who pays the direct tax also bears the burden of the tax. Examples of direct taxes are personal tax, corporate tax, income tax, etc.
  • Indirect Tax: Indirect taxes are those taxes which are paid by someone who shifts the burden of the tax on some other person. Therefore, tax impact and tax incidence is on two different people. Examples are: excise tax, sales tax, service tax .etc,
  • Ad Valorem Tax: It is a kind of indirect tax in which the goods or commodities are taxed as per its value. VAT is an example of Ad Valorem tax.
  • Specific Tax: It is the tax that is imposed on the basis of special attributes of the commodity. For example, the length, the breadth, the weight is used in the international trade or in case of import-exports.
  • Minimum Alternative Tax (MAT): It is the minimum tax which a company has to pay even if it does not have any income or has zero income. It came into force to curb the problem of tax version by the companies showing zero income hence paying no taxes with effect from April 2000. MAT was imposed at a flat rate of7.5% on book profit as computed under the companies act without allowing for any directions or adjustment. Union Budget 2006-07 has increased the rate of MAT to 10% of book profit.

Value Added TAX (VAT)

  • VAT is the tax levied on the value added at various stages of the output of commodity.
  • The value added is measured as the difference between the gross value of output and that of the intermediate goods purchased for the purpose of final disposal.
  • For the computation of VAT, the tax credit method is used under which a firm is allowed to deduct the VAT paid by it on its purchase from other units from the VAT which the firm has to pay. This sale invoice has to be shown.
  • The decision ro introduce VAT arrived at during the conference of chief ministers of state or union territories he in 1999 and afterwards in 2000 and 2001.
  • An empowered committee of state finance ministers was constituted in July 2000 to monitor the progress of introduction of VAT.
  • VAT came into effect on April 1. 2005, except in the BJP ruled states and Uttar Pradesh. All in all, twenty-five states or union territories implemented VAT in 2005-06.
  • Chhattisgarh, Madhya Pradesh, Jharkhand, and Rajasthan implemented VAT with effect from April 1,2006.
  • As per the preconditions, if any loss is suffered by any state due to implementation of VAT, it will be compensated by the centre in the following manner:
    (i) 100% compensation in first year
    (ii) 75% compensation in second year
    (iii) 50% compensation in third year
  • In 2005-06, maximum loss was suffered by Kerala followed by Andhra Pradesh and Bihar. Only eight states out of twenty-five states that implemented VAT in 2005-06 suffered losses due to it.
  • As on 2 June 2014, VAT has been implemented in all states and union territories in India

Service Tax

  • It was introduced for the first time in 1984-85 budget at a 5% union service tax on three specific services namely telephone, general insurance and stock brokerage. At present nearly 100 services are under its ambit. The union budget 2015-16 has increased service tax rate to 14% plus surcharge applicable thereon.
  • Service tax is in the union list of the seventh schedule of the Constitution expenditure of the government. The budget consists of two parts viz: 
    i. Revenue Budget
    ii. Capital Budget
  • Expenditure of the centre: The central government amkes expenditures broadly under two heads:
    i.    Plan expenditure
    ii.    Non-plan expenditure
    The outlay for agriculture, rural development, irrigation and flood control, energy, industry and minerals, transport, science and technology, environment and economic services, etc., come under plan expenditure.
    The major non-plan expenditures are interest payment, defence, subsidies and general services.
    Expenditure of the state: Maintenance of law and order, education, health, service, irrigation, agricultural development, etc. Comprise the revenue expenditure for major heads of states.
  • Public debt of the government of India of two kinds: Internal and External.
    Internal debt: It comprises of loans raised from the open market, compensation bonds, prize bonds, treasury bills issued to the RBI commercial banks. etc. 
    External debt: It consists of loans taken from the World Bank, IMF, ADB, and individual countries like the USA, Japan and others. 
  • Deficit financing is a fiscal tool in the hands of the government to bridge the gap between revenue receipt and revenue expenditure. Major indicators of deficits are: 

    (1) Revenue Deficit 
    = Revenue Expenditure - Total Receipts 
    Or = Non-plan expenditure - Plan expenditure (net tax revenue - non-tax revenue) 

    (2) Budget Deficit 
    = Total expenditure -Total Receipts 
    Or = (Revenue Receipts - Capital Receipts) (non-plan expenditure + plan expenditure) 

    (3) Fiscal Deficit 
    = Revenue Receipt (net tax revenue t non-tax revenue) + Capital Receipts (only recoveries of loans and other receipts) - Total Expenditure (plan and non-plan) 

    (4) Primary Deficit 
    = Revenue Deficit - Interest Payments 

    (5) Monetized Deficit 
    = increment in net RBI credit to the central government