Understanding the methods of taxation and its relation to a profitable business

An essential part of being a responsible and productive citizen of your country is paying your taxes on time. Tax is essentially your contribution to the country's growth and development and are deducted from an individual's income or added to the cost of certain transactions, services, and goods. In India every tax levied is supported by a law passed by the Parliament or the State legislature. As a result, we pay taxes in various forms that differ depending on how they are implemented and paid to the authorities. It is generally considered as government's most important and largest source of revenue and when collected the government uses that for a variety of projects aimed at the nation's development.

Understanding the Methods involved in India’s Tax Structure

The Indian tax system is well-organized, with a three-tiered federal structure.It is made up of the federal government, state governments, and local municipal governments. When it comes to taxes, there are two types in India: direct taxes and indirect taxes. Income tax, gift tax, capital gain tax, and so on are examples of direct taxes, whereas indirect taxes include value-added tax, service tax, Good and Service tax, customs duty, and so on. The Central Government of India levies taxes such as customs duty, central excise duty, income tax, and service tax while the state governments levy income taxes on agricultural income, state excise duty, professional tax, land revenue, and stamp duty and the local governments are permitted to collect octroi, property tax, and other taxes on various services such as water and drainage supply. Lets now Understand in brief why we pay taxes to the government !

Purposes of Taxation

During the 19th century, the prevalent belief was that taxes should be used primarily to fund the government. They have used taxation for more than just fiscal purposes in the past and continue to do so today, distinguishing between the goals of resource allocation, income redistribution, and economic stability. Economic growth or development, as well as international competitiveness, are sometimes listed as separate goals, but they are usually subsumed under the other three. In the absence of a compelling reason for intervention, such as the need to reduce pollution, the first goal, resource allocation, is advanced if tax policy does not interfere with market-determined allocations. The second goal, income redistribution, seeks to reduce disparities in the distribution of income and wealth. The goal of stabilisation implemented through tax policy, government spending policy, monetary policy, and debt management is to keep employment high and prices stable because public expenditures tend to grow at least as fast as the national product, taxes, as the main vehicle of government finance, should produce revenues that grow correspondingly. However, today's entrepreneurs and innovators undeniably contribute to economic growth by growing their businesses from a small scale to a large scale. But the question still remains: how is taxing business beneficial to the country's growth?

Is Taxing Business Good for Growth?

Profits and gains from business are one of the income tax categories that comes under the Income Tax Act. The Income Tax Act divides taxable income into five categories or heads of income for the purpose of determining a taxpayer's tax liability. After salaries and house property income, business profits are the third type of income under the Act. This is used to categorise or aggregate income generated by the taxpayer through business or professional activities. When filing an income tax return, the taxpayer must declare the amount of business profits and gains if the assessee has any such income. As a result, it is clear that businesses benefit from a country's infrastructure, and there are reasonable, practical, and political reasons why they should pay tax. However, tax is more than just a cost to be minimised; it is a burden that reduces investment and economic output.In addition, businesses pay far more than just corporate or business tax. As a result, governments must consider both the design of a tax system that encourages investment and the total tax burden borne by businesses.

Corporate Taxation & how can we fix it ?

When it comes to taxing businesses, there are two camps: some argue that because corporation tax is widely regarded as the most economically distorting tax, it should be kept to a minimum, if not eliminated entirely. Others, particularly international corporations, see them as not paying their "fair share" and as an easy target, and as is often the case, the truth lies somewhere in the middle. There is disagreement over who bears the cost of corporation tax: shareholders, employees, or customers. According to some estimates, up to 70% is passed on to employees, while others claim it is only 20% or even nil. However, the government now wants new domestic businesses to set up manufacturing units in India as soon as possible, so the concessional tax rate of 15% has been extended by a year until March 2024. According to the report, direct and indirect tax collections are increasing and are buoyant, and India's tax-to-GDP ratio could be the "Biggest ever" in the current fiscal year.

Final Notes

There is no single blueprint for the ideal tax system. Each one must take into account the specific conditions of the country for which it is intended. And it should be developed through consultation with all stakeholders. Concerning businesses, there must be an acknowledgement that on the one hand, business requires a stable, thriving society to which it should contribute; and, on the other hand, business pays far more than corporation tax, and the system must be designed to incentivize investment and growth.