IILS India



MODULE II: INDIAN ECONOMYPUBLIC FINANCE AND FICSAL POLICY4. TAXATIONAfter reading this unit you should be able to understand:What are the different types of tax according to the tax burden?What are Progressive taxation, Proportional taxation, and Regressive taxation?INTRODUCTIONTaxes are levied by the government on basis of three major classes of tax rates. In order to understand them it is essential to know how these types of tax rates differ from each other on the basis of tax base. The base is the item to be taxed. It is the income being taxed in the basis of income tax, the value of property in the case of property tax and the value of goods and services sold in the case of a sales tax. Therefore, taxes may be divided into 3types based on the burden of taxation. They are:PROPORTIONAL TAXPROGRESSIVE TAXREGRESSIVE TAX“TAX BASE AND TAX PERCENTAGE”PROPORTIONAL TAXAdam Smith stressed the principle of equality in tax levy. But how can this equality be achieved? According to Smith, equality is secured by taxing everyone at an equal rate. This is known as Proportional Taxation.Rate of tax does not change with change in income.All tax payers pay on equal proportion of income in the form of taxesIf the person’s income is 20k and rate of tax is 20%, he will have to pay 2000 as tax.If income is 2lac, tax rate is 20% he will have to pay 20k.It is the one whose percentage remains same as the tax base increases.According to the classical economists, the levy of tax at a uniform rate on all persons secures equality of sacrifice.This kind of tax affects the less wealthy people more heavily than it does the rich ones.Proportional tax or flat tax is the tax rate that stays the same for everyone, regardless of their income levelLet us discuss this type of tax with the help of a diagram:I t is very simple to understand with no difficulty.It can be easily administered because there are no complicated tax slabs.There is no necessity to define proportional tax because it the simple rule of three.It does not affect the pattern of distribution in the country because every person pays the same tax rate.BUT, despite all these, this system is inequitable because it adversely affects the low income groups and favors the high income groups. This is because with the increase in income of a person, the MU of income diminishes for him. As such the MU for low income groups is high and low for the high income groups. So when both income groups is are taxed at the same rate persons belonging to the low income groups make a greater sacrifice than those in the high income groups.The gap widens hence does not reduce the disparityHence no country follows this kind of system.PROGRESSIVE TAX (During the 18th and 19th centuries the proportional tax system was in vogue. It was only in the early 20th century that the progressive tax system was started in Great Britian for the first time and later on it spread to other countries of Europe. At present progressive tax systems is prevalent in every country of the world)A proportional tax is fairer than equality of payment because it takes away a larger sum in tax from the rich than from the poor.Tax base and tax rate increasesAs the income of the person increases the tax rate also increases gradually and vice versa.A higher income people will pay higher tax than a person with a lower income.If a man with an income of Rs.1000 a year pays income tax at a rate of 10 per cent, then a person whose income is Rs.10, 000 a year ought to pay tax at a higher rate.?Again if a man with an income of Rs.10, 000 a year pays 10% of his income as tax, a man with an income of Rs.20, 000 a year will have to pay 15%, 20% or more.?This very fact has led to general acceptance of the principle of progression, whereby taxation takes a larger proportion of people’s incomes, the higher their incomes are.A progressive tax is one which charges different rates from different incomes. Under this system, the higher the income the higher is the rate of taxation. This means that the amount of tax to be paid increases more than proportionately with income.Progressive taxes are equitable because they make the rich people who have greater ability) to pay more. The rates of a progressive tax can be so fixed as to secure equality of sacrifice between the rich and the poor. TAX BASE IN RSTAX RATE %AMOUNT OF TAX IN RS100010100200015300300025750All modern mixed economies have adopted progressive taxation. Apart from securing equality of sacrifice, it reduces disparity in income and wealth among the various classes of the people. In India, all personal taxes such as the income tax, wealth tax and gift tax are progressive in nature.ABILITY TO PAYELASTICECONOMICALINCOME EQUALITYSOCIAL JUSTICEEQUITABLEBUT, tax evasion, discourages capital formation, arbitrary, unjustified.Despite the above mentioned weakness of progressive taxation this system is in practice in every country of the world because it confirms the canons of taxation. It is socially and economically desirable because it removes inequalities of income and wealth distribution.REFERENCES:ML JHINGAN: MICROECONOMICSDR SR MYNENI: PRINICPLES OF ECONOMICS ................
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