Fiscal system of India

A country’s fiscal system is referred to a complete structure of revenues and expenditures of the government and the framework within which government agencies collect as well as disburse said funds. A country’s fiscal system is governed by the economic policy which is accepted by the governing body. The government adjusts the spending levels and tax rates through the fiscal policy mechanism in order to influence and monitor the nation’s economy. Another major instrument through which a nation’s economy is influenced is the monetary policy, which is governed by the central bank in order to control the nation’s money supply. These both policies are strong instruments which are used in different combinations to direct the country to its economic goals.

Objectives of India’s Fiscal Policy

Before diving into the numerous objectives of the Fiscal Policy stated by India’s government, it is important to mention, that India has positioned two above-all aims for its fiscal system: to improve the growth of its economy and to ensure the social justice to the people. India has stated 9 objectives through which it strives for these two aims:

Effective mobilisation of financial resources – this is done through direct and indirect taxation, public and private savings. The main source of resource mobilisation in India is taxation.

Reduction of inequality of income and wealth – government is using fiscal policy to promote the social justice and reduce the income inequality among different groups of the society. For example, the direct taxes are charged more from the wealthy people. Also, the indirect taxes are popular among semi-luxury and luxury items that are generally consumed only by wealthy people. The Indian government also invests a significant portion of its tax revenue into the Poverty Alleviation Programmes.

Control of inflation and price stability – managed via such instruments as a reduction of the fiscal deficit, an introduction of tax savings schemes and productive use of financial resources.

Employment generation – Indian government motivates the increase of employment through numerous fiscal measures, such as investment in infrastructure, lower taxes on small-scale industrial (SSI) units as well as through numerous rural employment programmes.

Balanced regional development – numerous projects are carried out by the Indian government with the help of public expenditure to mitigate the imbalances between regions of the country.

Reducing the balance of payment deficit – government gives export incentives as well as controls import in order to keep the balance of payment close to a specified level.

Increase national income – this is done by increasing and decreasing tax rates.

Development of infrastructure – improved infrastructure leads to more foreign investments and overall economic growth of the country.

Foreign exchange earnings – another way how to increase the foreign investments in the country through such instruments as an exemption in customs duty and concession in excise duty if producing in the domestic market.

Taxes in India

In India, central and state governments have the authority to levy taxes, which is derived from the Constitution of India. All taxes need to be backed by the accompanying law which needs to be passed by the Parliament of the State Legislature. Taxes in India are generally divided into three categories: direct, indirect and other taxes and the main difference is in the way these taxes are implemented. Direct taxes are paid directly by the individual or an entity and cannot be transferred to someone else; indirect taxes are generally added to the price of some product or service, such as VAT, service tax and sales tax. The third group of taxes is levied on the amount paid in taxes.

Income Tax

Income Tax is a direct tax paid by both – individuals and legal entities. Indian fiscal system foresees various income tax rates depending on your age and level of income and can, therefore, range from zero to 30%. In India, individuals are divided into three groups: general taxpayers, senior citizens (aged from 60 to 80) and very senior citizens (aged above 80).

Corporate Income Tax

Corporate income tax is paid by companies from the revenue they earn. Also, CIT rate depends on the amount of earned income as well as whether it is a domestic or foreign company. For example, domestic companies need to pay 30% CIT, while foreign companies need to pay 40% CIT. Surcharge and Education Cess are payable by both – domestic and foreign companies. Other taxes levied to companies are Minimum Alternative Tax at 18.5% rate, Fringe Benefits Tax and Dividend Distribution Tax currently at 15% rate.

Goods and Services Tax

As of July 1, 2017 a new tax called Goods and Services Tax was introduced, which comprises and replaces 15 other indirect taxes: Service Tax, VAT, Central Excise Duty, Countervailing Duty, Luxury Tax, Entertainment Tax, Lottery Tax, Sales Tax, Custom Duty, State Surcharge, Swacch Bharat