DIFFERENCE BETWEEN INDIAN AND UNITED

state tXATION system

INTRODUCTION:
A tax is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state
or the functional equivalent of a state to fund various public expenditures. Taxation Structure of any
country is the set of rules and laws set up by that particular country for the collection of taxes from the
public. The Fundamental objective of collecting Tax is to raise government revenue for development and
welfare programs in the country. The Secondary objectives is to maintain economic equalities by
imposing tax to the income earners and improving the economic condition of the general people, to
encourage the production and distribution of the products of basic needs and discourage the production
and harmful ones, to discourage import trade and protect the national industries (Bhim Chimoriya).
Growth and Development of a Country is largely dependent on the Taxation Structure it adopts.High
taxation rates and complex tax systems curb growth. Complex Taxation System also results in evasion of
taxes and thus increase the parallel economy. Complex Tax Systems are also responsible for hampering
the ease of doing business. Whereas countries with simplified taxation systems has resulted in facilitating
ease of doing business as well as growth and development of that particular country. India being one of
the largest democracies has a very complex taxation structure featured with a large number of taxes,
excessive and complex tax literature (rules and laws), inefficient administration. According to the white
paper published by Indian government on black money in 2012, govt cannot deny the presence of parallel
economy in the country. The amount of this parallel economy is nearly equal to the GDP. This huge
existence of parallel economy certainly denotes certain faults in the taxation structure of India. In This
Study we are Comparing Indian Tax Structure with the other developing and developed countries Tax
Structure in order to analyzeIndian tax structures strengths and weaknesses.

Overview of Taxation Structures:- Following is the summary of tax Structures of selected countries 1)
India :- India has a three tier tax structure where taxes are levied by Central Government, State
Government and Local Authorities like Municipal Corporations. In India, the authority to levy a tax is
received from the constitution. In constitution there is clear demarcation of respective taxes to be
collected by centre and the states. Article 265 of the Indian Constitution states that “No Tax Should be
levied without the authority of Law”. Hence abiding to the constitution, every tax in India is backed by its
respective accompanying law passed by either parliament or state legislative councils. In India , the taxes
are classified as Direct Taxes and Indirect Taxes. 2) USA:- The United States of America is has its
autonomous state and local governments. It is a federal republic country. Taxes in USA are levied by both
autonomous state and the local governments. The taxes include, taxes on income, property, sales, capital
gains, dividends, estates, gifts and imports. The Taxation System followed in USA is Progressive Tax
System. Taxes are incurred on incomes of the individual. The reliance on direct taxes is more than the
indirect taxes 3) UK:- In the United Kingdom, Taxes is levied at two levels i.e central government and the
local government. Income tax, VAT, Corporate tax, Fuel duty etc. are levied by central governments.
Business rates, Council Tax, street parking charges etc are collected by local governments. In addition
local governments also receive grants from funds of central government. Taxation in United Kingdom is
simple and easy to understand with high administrative efficiency. 4) South Africa:- Similiarly like united
kingdom, taxation in South Africa is also levied at two levels i.e central government and local government.
South African revenue services (SARS) acts on behalf of state government for the collection of taxes.
Income tax, Corporate Tax, Vat and fuel duty are collected by central government whereas local
government collect municipal rates and funds from central government. 5) Mexico:- In Mexico Taxes like
Income Tax, Corporate Tax, Alternative minimum tax are charged. Income Tax in mexico is progressive i.e
from 1.92 % to 30 %. Corporate Tax rates are 30 %. Alternative minimum tax is 17.5 %. Capital gains are
added to regular incomes and regular income tax is charged over them. 6) China:- China being an
communist country following the principles of socialism depend largely on the taxes for its revenue
sources. Tax is the important element of the macro economic policy of china and has a high impact on
socio-economic conditions in china. From the reforms in 1994, china has a well structured taxation
system. There are currently 26 Types of taxes in china which according to their nature can be divided into
the following 8 categories: Turnover Taxes, Income Taxes, Resource Taxes, Taxes for Special Purpose,
Property taxes, Behavioral Taxes, Agricultural taxes and Custom duties.

TAXATION SYSTEM IN US :
The United State of America has separate federal, state, and local governments with taxes imposed at each
of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports,
estates and gifts, as well as various fees. In 2010, taxes collected by federal, state, and municipal
governments amounted to 24.8% of GDP. In the OECD, only Chile and mexico are taxed less as a share of
their GDP.
However, taxes fall much more heavily on labor income than on capital income. Divergent taxes and
subsidies for different forms of income and spending can also constitute a form of indirect taxation of
some activities over others. For example, individual spending on higher education can be said to be
"taxed" at a high rate, compared to other forms of personal expenditure which are formally recognized as
investments.
Taxes are imposed on net income of individuals and corporations by the federal, most state, and some
local governments. Citizens and residents are taxed on worldwide income and allowed a credit for foreign
taxes. Income subject to tax is determined under tax accounting rules, not financial accounting principles,
and includes almost all income from whatever source. Most business expenses reduce taxable income,
though limits apply to a few expenses. Individuals are permitted to reduce taxable income by personal
allowances and certain non-business expenses, including home mortgage interest, state and local taxes,
charitable contributions, and medical and certain other expenses incurred above certain percentages of
income. State rules for determining taxable income often differ from federal rules. Federal marginal tax
rates vary from 10% to 39.6% of taxable income. State and local tax rates vary widely by jurisdiction,
from 0% to 13.30% of income, and many are graduated. State taxes are generally treated as a deductible
expense for federal tax computation, although the 2017 tax law imposed a $10,000 limit on the state and
local tax ("SALT") deduction, which raised the effective tax rate on medium and high earners in high tax
states. Prior to the SALT deduction limit, the average deduction exceeded $10,000 in most of the Midwest,
and exceeded $11,000 in most of the Northeastern United States, as well as California and Oregon. The
states impacted the most by the limit were thetri-state area (NY, NJ, and CT) and California; the average
SALT deduction in those states was greater than $17,000 in 2014.
The United States is one of two countries in the world that taxes its non-residents citizens on worldwide
income, in the same manner and rates as residents. The U.S. Supreme Court upheld the constitutionality
of imposition of such a tax in the case of Cook v. Tait.
Payroll taxes are imposed by the federal and all state governments. These include Social Security and
Medicare taxes imposed on both employers and employees, at a combined rate of 15.3% (13.3% for 2011
and 2012). Social Security tax applies only to the first $106,800 of wages in 2009 through 2011. However,
benefits are only accrued on the first $106,800 of wages. Employers must withhold income taxes on
wages. An unemployment tax and certain other levies apply to employers. Payroll taxes have dramatically
increased as a share of federal revenue since the 1950s, while corporate income taxes have fallen as a
share of revenue. (Corporate profits have not fallen as a share of GDP).
Property Taxes are imposed by most local governments and many special purpose authorities based on
the fair market value of property. School and other authorities are often separately governed, and impose
separate taxes. Property tax is generally imposed only on realty, though some jurisdictions tax some
forms of business property. Property tax rules and rates vary widely with annual median rates ranging
from 0.2% to 1.9% of a property's value depending on the state.
Sales taxes are imposed by most states and some localities on the price at retail sale of many goods and
some services. Sales tax rates vary widely among jurisdictions, from 0% to 16%, and may vary within a
jurisdiction based on the particular goods or services taxed. Sales tax is collected by the seller at the time
of sale, or remitted as use tax by buyers of taxable items who did not pay sales tax.
The United States imposes tariffs or customs duties on the import of many types of goods from many
jurisdictions. These tariffs or duties must be paid before the goods can be legally imported. Rates of duty
vary from 0% to more than 20%, based on the particular goods and country of origin.
Esate and gift taxes are imposed by the federal and some state governments on the transfer of property
inheritance, by will, or by lifetime donation. Similar to federal income taxes, federal estate and gift taxes
are imposed on worldwide property of citizens and residents and allow a credit for foreign taxes.
TAXATION SYSTEM IN INDIA :

Tax structure in India is a three tier federal structure. The central government, state governments, and
local municipal bodies make up this structure. Article 256 of the constitution states that “No tax shall be
levied or collected except by the authority of law”. Hence, each and every tax that is collected needs to
backed by an accompanying law.

Interestingly, the tax system in India traces its origin to the prehistoric texts such as Arthashastra and
Manusmriti. As proposed by these manuscripts, the taxes paid by farmers and artisans in that era would
be in the form of agricultural produce, silver or gold. Based on these texts, the foundation of the modern
tax system in India was conceptualised by the Sir James Wilson during the British rule in India in the year,
1860. However, post-independence the newly-established Indian Government then soldered the system
to propel the economic development of the country. After this period, the Indian tax structure has been
subject to a host of changes.

Types Of Taxes in India:

The tax system in India allows for two types of taxes—Direct and Indirect Tax.

The tax system in India for long was a complex one considering the length and breadth of India. Post
GST implementation, which is one of the biggest tax reforms in India, the process has become smoother. It
serves as an all-inclusive indirect tax which has helped in eradicating the cascading effect of tax as a
whole. It is simpler in nature and has led to upgraded the productivity of logistics.

Direct Tax:

Direct Tax is levied directly on individuals and corporate entities. This tax cannot be transferred or borne
by anybody else. Examples of direct tax include income tax, wealth tax, gift tax, capital gains tax.

Income tax is the most popular tax within this section. Levied on individuals on the income earned with
different tax slabs for income levels. The term ‘individuals’ includes individuals, Hindu Undivided Family
(HUF), Company, firm, Co-operative Societies, Trusts.

Indirect Tax:

Indirect taxes are taxes which are indirectly levied on the public through goods and services. The sellers
of the goods and services collect the tax which is then collected by the government bodies.

 Value Added Tax (VAT)– A sales tax levied on goods sold in the state. The rate depends on the
government.
 Octroi Tax– Levied on goods which move from one state to another. The rates depend on the
state governments.
 Service Tax– Government levies the tax on service providers.
 Customs Duty– It is a tax levied on anything which is imported into India from a foreign nation.

Tax Collection Bodies:

The three bodies which collect the taxes in India have clearly defined the rules on what type of taxes
they are permitted to collect.

 The Central Government:income tax, custom duties, central excise duty.

 The State Governments:tax on agricultural income, professional tax, value- added tax, state
excise duty, stamp duty.
 Local Bodies: property tax, water tax, other taxes on drainage and small services.

GST:

In India, the three government bodies collected direct and indirect taxes until 1 July 2017 when the
Goods and Services Act (GST) was implemented. GST incorporates many of the indirect taxes levied by
states and the central government.

Some of the taxes GST replaced include:

 Sales Tax
 Central Excise Duty
 Entertainment Tax
 Octroi
 Service Tax
 Purchase Tax

It is a multi-stage destination-based tax. Multi-stage because it is levied on each stage of the supply chain
right from purchase of raw material to the sale of the finished product to the end consumer whenever
there is value addition and each transfer of ownership.

Destination-based because the final purchase is the place whose government can collect GST. If a fridge is
manufactured in Delhi but sold in Mumbai, the Maharashtra government collects GST.

A major benefit is the simplification of taxation in India for government bodies.

GST has three components:

 CGST-Stands for Central Goods and Services Act. The central government collects this tax on an
intrastate supply of goods or services.
(Within Maharashtra)
 SGST:Stands for State Goods and Services Tax. The state government collects this tax on an
intrastate supply of goods or services.
(Within Maharashtra)
 IGST:Stands for Integrated Goods and Services Tax. The central government collects this for
inter-state sale of goods or services.

Objectives of Taxation:
The primary purpose of taxation is to raise revenue to meet huge public expenditure. Most governmental
activities must be financed by taxation. But it is not the only goal. In other words, taxation policy has some
non-revenue objectives.

Truly speaking, in the modern world, taxation is used as an instrument of economic policy. It affects the
total volume of production, consumption, investment, choice of industrial location and techniques,
balance of payments, distribution of income, etc.
Here we will discuss the objectives of taxation in modern public finance:

1. Economic Development

2. Full Employment

3. Price Stability

4. Control of Cyclical Fluctuations

5. Reduction of BOP Difficulties

6. Non-Revenue Objective

Objective # 1. Economic Development:

One of the important objectives of taxation is economic development. Economic development of any
country is largely conditioned by the growth of capital formation. It is said that capital formation is the
kingpin of economic development. But LDCs usually suffer from the shortage of capital.

To overcome the scarcity of capital, governments of these countries mobilize resources so that a rapid
capital accumulation takes place. To step up both public and private investment, government taps tax
revenues. Through proper tax planning, the ratio of savings to national income can be raised.

By raising the existing rate of taxes or by imposing new taxes, the process of capital formation can be
made smooth. One of the important elements of economic development is the raising of savings- income
ratio which can be effectively raised through taxation policy.

However, proper care has to be taken, regarding investment. If financial resources or investments are
channelized in the unproductive sectors of the economy the economic development may be jeopardized,
even if savings and investment rates are increased. Thus, the tax policy has to be employed in such a way
that investment occurs in the productive sectors of the economy, including the infrastructural sectors.

Objective # 2. Full Employment:

Second objective is the full employment. Since the level of employment depends on effective demand, a
country desirous of achieving the goal of full employment must cut down the rate of taxes. Consequently,
disposable income will rise and, hence, demand for goods and services will rise. Increased demand will
stimulate investment leading to a rise in income and employment through the multiplier mechanism.

Objective # 3. Price Stability:

Thirdly, taxation can be used to ensure price stability—a short run objective of taxation. Taxes are
regarded as an effective means of controlling inflation. By raising the rate of direct taxes, private spending
can be controlled. Naturally, the pressure on the commodity market is reduced.

But indirect taxes imposed on commodities fuel inflationary tendencies. High commodity prices, on the
one hand, discourage consumption and, on the other hand, encourage saving. Opposite effect will occur
when taxes are lowered down during deflation.

Objective # 4. Control of Cyclical Fluctuations:

Fourthly, control of cyclical fluctuations—periods of boom and depression—is considered to be another
objective of taxation. During depression, taxes are lowered down while during boom taxes are increased
so that cyclical fluctuations are tamed.

Objective # 5. Reduction of BOP Difficulties:

Fifthly, taxes like custom duties are also used to control imports of certain goods with the objective of
reducing the intensity of balance of payments difficulties and encouraging domestic production of import
substitutes.

Objective # 6. Non-Revenue Objective:

Finally, another extra-revenue or non-revenue objective of taxation is the reduction of inequalities in
income and wealth. This can be done by taxing the rich at higher rate than the poor or by introducing a
system of progressive taxation.

Research Methodology:-

The Sample for this study have been taken as India, 2 developed countries ( US and UK), 2 developing
countries ( South Africa and Mexico) . Additionally china is also considered due to its geographic and
demographic similiaraities to India. All the Countries which are selected are practicing democracies (
except china ) and it is seen that due to their overall economic conditions, there taxation structure is
comparable.The Taxation Stucture were compared with the help of some of the key indicators.
Comparative Charts are drawn for all this selected countries to help easily understand the performance of
all the selected countries with respect to the key indicators.

India :- India has a three tier tax structure where taxes are levied by Central Government, State
Government and Local Authorities like Municipal Corporations. In India, the authority to levy a tax is
received from the constitution. In constitution there is clear demarcation of respective taxes to be
collected by centre and the states. Article 265 of the Indian Constitution states that “No Tax Should be
levied without the authority of Law”. Hence abiding to the constitution, every tax in India is backed by its
respective accompanying law passed by either parliament or state legislative councils. In India , the taxes
are classified as Direct Taxes and Indirect Taxes.
USA:- The United States of America is has its autonomous state and local governments. It is a federal
republic country. Taxes in USA are levied by both autonomous state and the local governments. The taxes
include, taxes on income, property, sales, capital gains, dividends, estates, gifts and imports. The Taxation
System followed in USA is Progressive Tax System. Taxes are incurred on incomes of the individual. The
reliance on direct taxes is more than the indirect taxes.

LIMITATIONS:
There has been an interesting shift in the Left’s relationship with the Laffer Curve, economist Arthur
Laffer’s brilliant calculation of the optimum tax level. Liberals spent a long time treating the Laffer Curve
as heresy, and pretending it did not exist, despite mountains of hard data to the contrary. Instead, they
clung to the absurd “static model” of taxation, which holds that tax rates do not influence the behavior of
taxpayers in any meaningful way. Thus, a 5 percent tax hike brings in 5 percent more revenue.

In reality, high taxes depress economic growth, and induce behavior designed to avoid paying the
tax. The effects of avoidance grow more pronounced at higher income levels, as wealthy individuals and
large corporations have more options for evading taxation. Laffer devised a method for determining the
point at which taxes produce the optimum sustained revenue, and since that level is considerably lower
than liberal dogma calls for, much controversy ensued.

Lately there has been a move among certain economists on the Left to make their peace with the Laffer
Curve, and argue that its peak would support higher tax rates than we are paying now. Chief among these
economists are Peter Diamond and Emmanuel Saez, who wrote in the wall street journal a few weeks ago
that top marginal rates could be shoved into the 50 to 70 percent range before the ice-covered down
slope of Arthur Laffer’s hill was reached.
This effort is accompanied by a growing nostalgia for the 1950s, which liberals used to chide
conservatives for idealizing at the cultural level. Now it’s become fashionable for the Left to idealize
Fifties economics, which supposedly featured high taxes combined with explosive growth.

It is simply amazing that any educated person could make this argument without mentioning a very
significant event that occurred during the Forties. It was in all the papers – a messy little dispute about
the borders of Germany, and the unruly behavior of Japanese tourists in Hawaii, which led to the complete
devastation of America’s economic competitors. A repeat of those conditions does not appear to be in the
cards.
Also, America is currently fighting to avoid tumbling into the abyss of a double-dip recession, or outright
depression, not riding upon the crest of an economic boom. Our problem is an excess of government
spending and regulation, not an insufficiently large diversion of resources from the productive private
sector to our moribund bureaucracy.

The other major factor to consider is the sheer complexity of the modern tax code, which is not easily
compared to the tax system of earlier eras. Sensitive to increasing public unhappiness with rules no one
understands – not even the IRS! – and only certain people are expected to obey, the Left has begun
warming to the concept of tax simplification. They interpret this to mean shutting down tax deductions…
or “loopholes,” as liberals prefer to identify deductions they dislike.
This mindset also explains the tendency of statists, notably including President Obama, to refer to
deductions as “tax expenditures.” In other words, the government is “spending money” on certain people
when it allows them to take tax deductions. This reasoning will absolutely never be applied to the Earned
Income Tax Credit, which really is a welfare payment disguised as a “tax break,” frequently granted to
people who do not actually pay any taxes.
And, of course, the liberal version of “tax simplification” will never involve assessing the same rate on all
taxpayers, or giving up many of the micro-targeted subsidies and penalties used by the government to
control economic behavior. In fact, the Left’s thoughts on tax policy move increasingly toward making the
tax burden invisible to voters, particularly in the lower and middle income ranges. Instead, taxes will be
shifted to evil corporations and the rich people who owe them.
Naturally, those hidden taxes will trickle back down the Laffer Curve and hit the public through elevated
prices, but Big Government will leave no fingerprints at the scene of that crime. That’s a major advantage
for the Left, which can turn public anger at the oppressive weight of government against what remains of
the private sector – a deadly political judo move that will leave a confused populace unable to figure out
how things got so bad, and delightfully receptive to appeals from statists who promise they can make life
better, if only they are irrevocably granted greater power.

This effort is aided by a greater focus on federal revenue needs, which completely eclipse state and local
taxes in the minds of many people. The collapsed housing market, which might not recover for a
generation, further obscures local tax burdens from the public mind, since so many of those taxes are
assessed against property. Renters pay them, but never see or think about them.
So, what is the ideal tax burden? The Tax Foundatation repoted that last week that “U.S. citizens will pay
more than $4 trillion in total federal, state, and local taxes,” which is “$152 billion, or 3.8 percent, more
than they will spend on housing, food, and clothing combined.” (Emphasis mine.)
Furthermore, a steadily increasing portion of household expenses are now covered by government
benefits – which means the government takes piles of cash from the private sector, skims its gigantic
overhead off the top, and returns pennies on the dollar in value to our economy. Of course, they’re
pennies on someone else’s dollar.
It will take 107 days for the average American to pay off his total tax burden in 2012. That’s obscene. It’s
a far greater levy than tyrants of old imposed upon their serfs. The idea that such a burden should be
increased upon anyone is absurd, and the amount of our tax burden hidden entirely from our view is an
outrage.
The Laffer Curve locates the point of optimum government revenue, but that is not the same thing as the
ideal tax burden. Our government has already grown far beyond the point at which an optimum revenue
stream can sustain it – hence the titanic national debt, and the complete foolishness of believing trillion-
dollar deficits can be closed with tax increases.
It would also be wise to remember how slippery the far side of the Laffer Curve tends to be. When tax
rates exceed the point of optimum revenue, politicians have a built-in tendency to demand
even higher tax rates to cover those revenue shortfall. The failure of tax increases to produce the
anticipated revenue is invariably portrayed as a crime, for which the offending citizens should be
punished. This leads to further, increasingly dramatic, failures… which become fuel for ever more
strident demands. History does not offer a single example of this death spiral that didn’t end with some
degree of violence.
Our national discussion should focus on trimming the government back to performing its essential duties,
and then presenting the public with an honest revenue plan to fund those duties. It should be a system
that conceals nothing, and deals entirely with financing the government in the simplest and least
burdensome manner possible… instead of using the tax code as a tool for “transforming” the public, in
accordance with the vision of their betters.