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Macro Economics

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Published in: Economics
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Indian Economic Environment

Amarendra G / Kolkata

27 years of teaching experience

Qualification: 12th (Shree Jain Vidyalaya, Calcutta - 1987), B.Com (Goenka College of Commerce & Business Administration, Calcutta - 1990), M.Com (University of Calcutta - 1992), M.A (IGNOU (Economics) - 1994), MBA/PGDM (Sikkim Manipal University - 1996)

Teaches: CA - CPT, CMA Foundation, CS - Foundation, Accountancy, Business Studies, Economics

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  1. 5 4 3 2 1 Category 1 Category 2 Category 3 Category 4 Series 1 Series 2 Series 3 MACRO ECONOMICS Series 3 Series 2 Series 1 - AMARENDRA GOEL
  2. CHAPTER 5 INDIAN ECONOMY - A PROFILE UNIT 1- NATURE OF INDIAN ECONOMY
  3. 1.0 INDIA : AN UNDEVELOPED ECONOMY • Economic development is broader concept than economic growth. 1
  4. I.o.o FEATURES OF AN UNDERDEVELOPED ECONOMY INDIA'S CASE (a) Predominance of agriculture ' Population engaged in agriculture : At the time of Independence (b) High poverty • % of population below poverty line 2007-08 2004-05 2008-09 • The percentage of population below poverty line is gradually falling (NSSO survey),
  5. (c) High population growth and dependency rate Population growth rate More than 2% p.a. Dependency rate (% of people in non-working age group, i.e. below 15 and above 64 years) India Developed countries 40%
  6. (d) High income inequalities ' Over the period, the inequalities of income and wealth have increased. ' Gini Index/Coefficient - It is used to measure the inequality of income and wealth. - It measures the extent to which distribution of income/consumption among individuals/households within an economy deviates from a perfectly equal distribution. - It lies between 0 (perfect equality) and I(perfect inequality). Thus, the higher the Gini co-efficient, the more the inequalities in distribution of income and wealth, and vice versa. - GINI index for India: 2000-10 0.368 (Human Development Report— 2010) 2 3
  7. (e) High unemployment and underemployment - Unemployment rate in India 2007-08 8.1% of labour force based on CDS (NSSO: 64th round) - Actual extent of disguised unemployment is difficult to measure. It is more common in agricultural sector.
  8. (f) Low level of human well-being Human Development Index (HDI) - It is constructed by the United Nations Development Programme (UNDP)I - It is used to measure human well-being. - It is a composite index of three basic indicators of human development: 4 5 Indicators of human development Longevity Knowledge (or health) (or literacy) Basis of measurement Life expectancy at birth Education Standard of living (or employment) Real GDP per capita - India's relative global ranking on HDI - HDI for India . 2010 . 2010 119 among 169 countries 6 0.519
  9. (g) Low per capita income (h) Low capital formation - However, there have been improvements in rate of capital formation since 90s. Backward technology Low productivity of labour (k) Low ratio of industrial output to total output (l) Underutilisation of national resources (m) Traditional social life & orthodox outlook of people. 7-9
  10. 1.1 INDIA-A DEVELOPING ECONOMY India is a developing economy because of her initiative for planned economic development. (a) Rise in National income (b) Rise in Per Capita Income 10, 11
  11. (c) Significant changes in occupational distribution of population ' Occupational structure refers to the distribution of work force in different occupations: 12 Primary Sector Secondary sector Tertiary sector Agriculture & allied activities like animal husbandry, forestry, fishery, poultry farming, etc. All types of manufacturing activities including construction etc. Trade, transport, communication, banking, insurance, warehousing and such other services. 13 14
  12. • As an economy grows, there is a shift of labour force from primary sector to secondary and tertiary sectors. - There has been shift of work force from primary to other sectors, - Yet, the occupational structure of India's labour force since 1951 has remained more or less static. 15
  13. (d) Important changes in sectoral distribution of GDP - The share of primary sector has fallen & the shares of secondary & tertiary sectors have improved in GDP. (e) Growing capital/ industrial base of the economy (f) Improvements in social overhead capital Social overhead capital mainly include 1. 2. 3. 4. 5. transport, irrigation, e n e rgy, education, health & medical facilities. (g) Development in the banking and financial sector 16
  14. 1.2 INDIA - A MIXED ECONOMY 1. 2. 3. 4. 5. Co-existence of private and public ownership over means of production Important role of market mechanism Growth of monopoly houses Presence of a large public sector along with free enterprise Economic planning as a means of realizing overall national economic goals - Here planning is only indicative in nature and not compulsive. 17
  15. N/A
  16. CHAPTER 5 UNIT 2 - ROLE OF DIFFERENT SECTORS IN INDIA
  17. 2.0 AGRICULTURE
  18. 200.0 ROLE OF AGRICULTURE IN INDIA With the development of economy, the % of people employed in agriculture has come down. 1950-51 2007-08 2008-09 1 2 But in absolute terms, the number of people engaged in agricultural activities has increased. The share of agriculture in India's national income came down to 17% in 2009-10 (constant prices). 3-4
  19. The industrial sector depends on the agricultural sector for the following purposes: - food and other products for the consumption purposes of industrial sector - raw materials for the development of agro-based industries - market for the industrial products 5 At the time of Independence and a number of years thereafter cotton textiles, jute and tea accounted for more than 50% of our export earnings. Share of agriculture in total exports At the time of Independence 70% 2009-10 6
  20. Special schemes (like Special Agricultural Product Scheme) have been started to promote export of agro products. India, has become self-sufficient in the production of agro-products. At present, income tax revenues from the agriculture sector are negligible. 7m 7m 25m
  21. 2.001 GROWTH OF AGRICULTURE DURING PLANNING PERIOD Increase in production and productivity 1. The new agricultural strategy called the High Yielding Varieties Programmes (HYVP) was started in 1966. Green Revolution, i.e. significant improvement in the production and productivity of food-grains has become possible due to HYVP. HYVP stressed upon the use of 1) High-yielding varieties of seeds (the most crucial input) 2) Proper irrigation facilities, 3) Fertilizers, 4) Pesticides and insecticides. HYVP was restricted to five crops — wheat, rice, bajra, jawar and maize. The green revolution is also termed as wheat revolution. 7m 8 9 10
  22. 2) Diversification of agriculture The share of non-crop sector (fishery, forestry and animal husbandry) in agro- products has increased. In crop sector, the relative share in gross cropped area has changed: Food grains Decrease Commercial crops (sugar, cotton, oilseeds, etc.) Increase Superior cereals (rice and wheat) Increase 11 12
  23. 3) Modern agriculture Indian agriculture has become modern: How? - Increase in the use of high yielding varieties of seeds, fertilizers, pesticides, etc. - Noticeable positive change in the attitude of farmers towards new techniques of production - Farmers are increasingly resorting to intensive cultivation, multiple cropping, scientific water management 13
  24. 4) Improved agrarian system At the time of Independence, there were three types of land tenure systems: - the zamindari system, - the ryotwari system and - the mahalwari system. Under zamindari system, the zamindars (and not the tenant farmers) paid land 14 revenue to the state. Land Reform Measures (a) Abolition of Intermediaries (b) Tenancy reforms by i) Regulation of rent ii) Security of tenure, and iii) Conferment of ownership rights on tenants 25m (c) Ceilings on land holdings - Surplus land acquired by government - Land distributed by Govt. (d) Reorganisation of agriculture by i) Consolidation of holdings, and ii) Co-operative farming. 2.98 million hectares 2.18 15,16 17
  25. 5) Other developments Price support policy means prices at which government would be buying agricultural products from farmers. 18
  26. 2.0.2 PROBLEMS OF AGRICULTURAL SECTOR IN INDIA 1. Slow and uneven growth Agriculture faces the problem of - Slow and unplanned growth - Inadequate implementation of HYVP - Inadequate land reforms - Inadequate finance, and 19 - Inadequate warehousing and marketing facilities 20 The growth of agricultural sector is not sufficient to meet the rising demands of fast growing population. The growth of agriculture has remained confined to states like - Punjab, - Haryana, and - Western UP.
  27. 2. 3. Not so modern agriculture HYVP has remained confined to 44% of gross cropped area only. The area under irrigation has increased over the years in India - Rain fed area about 60% - Irrigated area Flaws in Land reforms 40% Bihar has made the least progress in respect of consolidation of holdings. ' Productivity per worker in agriculture is much lower than that in industry. ' Cropping pattern is quite skewed in India. 4. Problems relating to finance Moneylenders' malpractices - Exorbitant rates of interest ranging from 18 to 50%. 24 22m 22m - Manipulation of accounts and cheating of the poor uneducated farmers.
  28. Steps taken to free farmers from the clutches of money lenders ' Commercial banks are providing loans to the agriculture sector at lower interest rate. 196 Regional Rural Banks (RRBs) were established in 1975. The main objective of RRBs is to provide credit and other facilities to: - small and marginal farmers, - agricultural labourers, and - artisans in rural areas. 25m 26 27 Marginal farmer refers to a cultivator who works on a land holding of less than one hectare. An apex bank called National Bank for Agriculture and Rural Development 28 (NABARD) was set up in 1982 to finance rural projects at lower rates of interest.29-30 ' Cooperative credit societies were also established to finance rural projects at lower rates of interest. Problems emerqinq after improvement in aqricultural finance Nearly half of the agricultural bank credit is concentrated in Southern States.
  29. 5. Problems relating to warehousing and marketing 10-15% of agriculture produce gets spoiled or eaten by rats. Administered prices means price level fixed by the Government. Agriculture under XI Plan 31 The plan targets at doubling the growth rate in agriculture as compared to that in X plan. Agricultural growth X Plan Xl Plan less than 2% 4% (actual) (target)
  30. 2.1 : INDUSTRY
  31. 201.0 ROLE OF INDUSTRY IN INDIA • Countries which are industrially well-developed generally have higher per capita income than countries which are not. [Exceptions: Petroleum exporting countries] • Agriculture sector depends upon industrial sector for its growth. 1m • India,a labour surplus economy, needs sectors which absorb the increasing labour force. Over the planning period the share of industrial sector in the GDP of India has increased: 2007-08 25.8% 1m 2-3
  32. 201.1 GROWTH OF INDUSTRIAL SECTOR IN INDIA + Growth rate of industrial output over the planning period: 6.2% p.a. 4 Large Classification of Industries A. Based on size Medium Small ' Large industries which form the basis of the country's index of industrial production include: - mining and quarrying (often referred as mining) - manufacturing; and - electricity, gas and water supply (often referred as electricity).
  33. B. Based on end use Basic goods industries • Basic goods industries Capital goods industries Intermediate goods industries :Minerals, fertilizers, cement, iron & steel, non-ferrous basic metals, electricity etc. • Capital goods industries : Machinery, machine tools, rail-road equipments etc. • Intermediate goods industries : Chemicals, rubber, plastic, coal and petroleum products.
  34. 2.102 PATTERN OF INDUSTRIAL DEVELOPMENT SINCE INDEPENDENCE 1. 2. Lopsided pattern • The industrial pattern on the eve of independence was quite unbalanced. • Too large and too small industrial units , with very few medium sized units. Ups and downs 28m The industrial sector faced the process of retrogression and deceleration during 1965-1980. Reasons 1. 2. 3. 4. 5. Unsatisfactory performance of agriculture. Slackening of real investment especially in public sector. Slow-down in import substitution. Strict regulation and control over private sector Narrow market for industrial goods, especially in rural areas. 5 6
  35. 3. Shift towards basic, capital and intermediate goods sector. The structure of Indian industry has shifted in favour of basic, capital and intermediate goods sector. The second plan was a very ambitious plan as seeds of industrialization were sowed. The second plan's programme of industrialization was based on Mahalanobis model. ' Mahalanobis model stressed upon the establishment of capital and basic goods industries to provide a strong base for rapid industrialization. 29m 7 8-9 • In the Il plan, three steel plants were set up in the public sector at Bhilai, Rourkela and Durgapur. 10
  36. 4. 5. Massive increase in size and diversification of public sector ONGC, IOC, SAIL, BHEL, HMT, HAL, BEL, ccl, CIL, NTPC, etc. are public sector giants dominating industrial scenario. • The majority of Central Government enterprises belong to the public limited 11 companies. Mammoth growth of small scale industries • Small scale units exist in India: Reasons a. They are labour intensive and India is a labour surplus economy. b. They make possible more equitable distribution of income & wealth. c. They facilitate the creation of a wider entrepreneurial base. • No. of persons engaged in small-scale and cottage industries: 2006-07 312 lakh • Share of small-scale and cottage industries in total industrial employment : • Share of small scale industries in total exports 40% over 12 13-14 15 16 17
  37. 2.1.3 PROBLEMS OF INDUSTRIAL DEVELOPMENT IN INDIA 1. Failure to achieve targets 'X Plan: 8.7% (target growth rate) (actual growth rate) Reasons for failure to achieve targets of Industrial production: a. Poor Planning b. Power, finance and labour problems c. Technical complications etc. Xl Plan : 10% (target growth rate) 2. Under-utilisation of capacity • A large number of industries face under utilization of production-capacity. • Under-utilization of capacity in different industrial sectors. - Magnitude: - Average 200/0-600/0 400/0-500/0 18 19 20 21m 22m
  38. ' Reasons behind under-utilization of capacity: a. b. c. d. e. f. Indiscriminate grabbing and creation of capacities by private enterprise Demand short-falls Over-optimistic demand projections Supply bottle-necks Labour problems and 22m 22m Deliberate under-utilization to create shortages and thereby to corner more profits. 3. Increasing capital output ratio • The incremental capital-output ratio (ICOR) has been rising. 4. • ICOR during the X Plan: Sectoral imbalances 4 In terms of regions, industrial development is quite unbalanced. 21m 23 21m
  39. 5. Industrial sickness ' A sick industrial unit is one which is unable to perform its normal functions and activities of production of goods and services at a reasonable profit on a sustained basis. • Sick industries: Small units Others 4% • Causes of industrial sickness a. b. c. d. e. f. g. h. Financial mismanagement Demand recession Labour unrest Working capital shortage Cost escalations Shortage of raw materials Uneconomic size Out-dated machinery and equipment and so on. 24 25-26,29m 27-28,29m
  40. 2.2 SERVICES
  41. 2.2.O ROLE OF SERVICE SECTOR IN INDIA • Service sector contributes the largest to national income/ GDP: • Working population (or labour force) engaged in service sector: • Share of service sector in total exports of India • India's share in world's total commercial services exports •India's rank in the list of exporters of commercial services 2009-10 2007-08 2009-10 2006 2009 1/3 2.7% 12th
  42. 2.2.1 GROWTH OF SERVICE SECTOR DURING PLANNING PERIOD • As an economy grows - the share of primary sector in GDP falls, - the shares of secondary and tertiary sectors increase. • The tourism industry is growing very fast and has the potential for growing still faster. • India has second largest scientific and technical manpower in the world. • BPO stands for - Business Process Outsourcing
  43. 2.2.2 PROBLEMS OF SERVICE SECTOR IN INDIA Share of service sector in total employment of India less than 25%
  44. CHAPTER 5 UNIT 3 : NATIONAL INCOME IN INDIA
  45. 3.0 BASIC CONCEPTS IN NATIONAL INCOME AND OUTPUT 1. Gross Domestic Product (GDP): It is - the money value - of all the final goods and services - produced in the domestic territory* of a country - during an accounting year. Domestic territory : It includes (a) Political frontiers including territorial waters of the country. (b) Ships and aircrafts operated by the residents of the country between two or more countries. (c) Fishing vessels, oil and natural gas rigs and floating platforms - operated by the residents of the country in international waters, or - engaged in extraction in areas in which the country has exclusive rights of exploitation. (d) Specified govt. establishments abroad i.e. embassies, consulates and military establishments.
  46. 2. GDP at Current Prices - This is GDP estimated on the basis of the prevailing prices. GDP at Constant Prices/ Real GDP - This is GDP measured on the basis of some base year prices.
  47. 3. 4. GDP at Factor Cost/ GDP at Factor Income (GDPFO = Net value added by different producing units + Consumption of fixed capital = Domestic factor incomes + Depreciation ' The contribution of each producing unit to current flow of goods & services is known as net value added. • Net value added by different producing units is called domestic factor income (DFI) because it gets distributed as income to factor owners. GDP at Market Price (GDPMp) IT-S where, IT = Indirect taxes, and S = Subsidies = GDPFC + Net indirect taxes Net Domestic Product (NDP) = GDP — Depreciation
  48. 5. 6. [ Since, GNP = GDP + NFIAI Gross National Product (GNP) = GDP + NFIA Net National Product (NNP) = GNP — Depreciation = GDP + NFIA — Depreciation = NDP + NFIA where, NFIA = Net factor income from abroad* [ Since, NDP = GDP — Depreciation]
  49. 7. NNP at factor cost (NNPFO or National Income = DFI + NFIA where, DFI = Domestic factor incomes, and NFIA = Net factor income from abroad ' In terms of income earned by the factors of production, NNP at Market Price (NNP MP) = IT -S = NNPFc+ Net indirect taxes where, IT = Indirect taxes, and S = Subsidies
  50. In a nutshell Gross ...Domestic Depreciation NFIA Net Indirect Taxes Net National Personal Income vs. Personal Disposal Income Personal income Sum total of all incomes actually received by an individual during a given year. Personal disposable income = Personal income — Personal taxes = Consumption + Savings Economic activities: Human activities performed in exchange for money or money's worth.
  51. 3.1 METHODS OF MEASURING NATIONAL INCOME There are three methods of measuring national income: (i) Value added method (ii) Income method (iii) Expenditure method.
  52. A. NET VALUE ADDED/ VALUE ADDED/ NET OUTPUT/ PRODUCTION/ PRODUCT INDUSTRY OF ORIGIN METHOD This method measures the net value added (i.e. contribution of each producing enterprise) in the domestic territory of the country. Specific items included in national income i. Own account production of fixed assets by government, enterprises and households. ii. Production for self-consumption. iii. Imputed rent of owner occupied houses. Specific items excluded from national income i. ii. Sale of second-hand goods Note : Brokerage and commission earned by the dealers of second-hand goods are a part of production and hence included. Other items whose net output cannot be valued, e.g. services of housewives, subsistence farming, etc.
  53. B. INCOME METHOD Incomes earned by owners of primary factors of production are included in national income. Specific items excluded from national income i. ii. Transfer incomes : Pensions of retired workers, scholarships, unemployment allowance, donations, interest on public loans etc. Note: "Transfer incomes" for receivers are "transfer payments" for payers. They refer to payments which are made without any exchange of goods and services. Illegal incomes: Windfall gains, death duties, gift tax, sale proceeds of second- hand goods, etc. Personal income includes transfer payments but national income does not. Therefore, the aggregate of personal incomes of all the people of a country cannot be called national income. ' Mixed income of the self employed means combined factor payments which are not distinguishable between labour income and capital income.
  54. C. OUTLAY/ EXPENDITURE METHOD Economic Sectors : For the purpose of this method of measuring national income, an economy is broadly classified into three sectors: (i) Household sector (ii) Business sector (iii) Government sector. Expenditure of different economic sectors : The economic sectors spend their incomes in two ways . (i) Consumption expenditure : They spend a part of their incomes on consumer (ii) Capital expenditure goods and services. : They save a part of their incomes and spend it on capital goods.
  55. Accordingly, total expenditure in an economy consists of the following: (i) Final goods and services produced in the current period (ii) Financial assets (iii) Goods produced in preceding years (iv) Raw materials and intermediate goods and services (v) Transfer payments
  56. (i) Expenditure on final goods and services produced in the current period - included in national income. Total expenditure on final goods and services / Gross domestic expenditure Consumption expenditure Investment expenditure/ Total domestic investment Private consumption of household sector Govt. consumption expenditure Private investment by business sector Govt investment expenditure Net domestic investment (new capital formation) Replacement investment Net domestic investment Replacement investment (ii) Expenditure on financial assets ' Expenditure on financial assets indigenously produced and owned - excluded from national expenditure. ' Net Foreign Investment, i.e. net expenditure on financial assets of foreign countries - included in national expenditure.
  57. (iii) Expenditure on goods produced in preceding years (iv) (v) - excluded from national income. Expenditure on raw materials and intermediate goods and services - excluded from national income. Note: Demand for intermediate consumption arises in all the producing sectors of an economy. Expenditure on transfer payments - excluded from national income. Hence, National Income = Expenditure on final goods and services + Net foreign investment National investment = Total domestic investment + Net foreign investment
  58. AGGREGATES RESULTING FROM THE EXPENDITURE METHOD (MEASURED AT MARKET PRICES) Gross domestic expenditure = Consumption expenditure + Investment expenditure = Consumption expenditure + Total domestic investment = Consumption expenditure + Net domestic investment + Replacement investment Gross domestic expenditure — Replacement investment = Consumption expenditure + Net domestic investment Net domestic expenditure = Consumption expenditure + Net domestic investment Net national expenditure = Consumption expenditure + Net domestic investment + Net foreign investment Gross national expenditure = Consumption expenditure + Net domestic investment + Net foreign investment + Replacement investment = Consumption expenditure + Total domestic investment + Net foreign investment = Consumption expenditure + National investment
  59. Domestic Gross Net foreign investment Replacement investment National Net
  60. PROBLEMS IN MEASUREMENT OF NATIONAL INCOME a) b) c) d) e) f) Presence of a large non-monetized sector Lack of appropriate and reliable data Problem of double counting Problem of transfer payments Difficulties in classification of working population Unreported illegal income
  61. 3.2 TRENDS IN INDIA'S NATIONAL INCOME GROWTH AND STRUCTURE 1. 2. Trends in GDP For almost 3 decades (1950-80) the average GDP growth rate was about 3.5 % per annum. ' Prof. Raj Krishna termed this rate, i.e. 3.5% as the Hindu rate of growth. ' India has never been able to achieve its targeted rate of growth. Trends in Per Capita Income • Per capita income is the average income of people in a country. • Per Capita Income = Per capita net national product = NNP + Population ' It is highest in Kerala. • XI Plan GDP growth rate: (Ta rget) 9.5% p.a.
  62. CHAPTER 5 UNIT 4 : BASIC UNDERSTANDING OF TAX SYSTEM IN INDIA
  63. 4.0 MEANING OF DIRECT AND INDIRECT TAXES Meaning of Tax A tax is a compulsory contribution from a person to the expenses incurred by the State in common interest of all without reference to specific benefits conferred on any individual. Types of Taxes 1. 2. Direct Taxes Taxes the incidence of which falls on the person who pays them to the Govt., e.g. income tax. Indirect Taxes Taxes the incidence of which is shifted through a change in price, e.g. VAT. • The incidence of taxes refers to who ultimately bears the money burden of the tax.
  64. 4.1 MERITS AND DEMERITS OF DIRECT AND INDIRECT TAXES Merits of Direct Taxes 1. 2. 3. 4. 5. Progressive i.e. imposed according to the ability of the person to pay. Income elastic revenue due to progressive nature Civic consciousness Relative certainty of proceeds Transfer of income from the rich to the poor Demerits of Direct Taxes 1. 2. 3. 4. 5. Difficulty in determination of ability to pay Tax evasion by way of undeclared sources of income Pinching Proper maintenance of accounts Burdensome assessment procedure
  65. Merits of Indirect Taxes 1. 2. 3. 4. 5. Convenience in assessment & collection Relative difficulty in evasion as realized at the appropriate point. Not pinching Not necessarily regressive if differential and levied on ad valorem basis Discouragement to intoxication Demerits of Indirect Taxes 1. 2. 3. 4. 5. Regressive, e.g. taxes on necessaries means taxing the rich and the poor equally No civic consciousness Uncertainty of proceeds Backward/ forward shift of burden Tax evasion through smuggling, falsification of accounts etc.
  66. 4.2.O DIRECT TAXES IN INDIA A. INCOME-TAX : Income tax is a tax on the income of a person, i.e. an individual or ' Meaning an entity. ' Introduction : Income Tax in India was introduced in 1860. ' Discontinuation : It was discontinued in 1873. ' Reintroduction : It was reintroduced in 1886. : Important types of income tax are • Types i) Personal income tax and ii) Corporate income tax. ' Agricultural tax : It belongs exclusively to the state governments in India. - This tax has not developed as a major source of revenue for the State Governments.
  67. 1. Personal income tax ' Leviablity ' Heads of income ' Deductions etc. Slabs ' Progressive Tax rates . It is levied on the income of Income from salary, - Individuals, - Hindu Undivided Families - Unregistered firms and - Other associations of people. 2. 3. 4. 5. Income from house property, Profits and gains of business or profession, Capital gains and Income from other sources. : On account of life & medical insurance, savings in PPF and certain notified instruments • Whole income is divided into slabs and it is taxed on the basis of slab into which it falls. : As income increases, tax rate increases. : In 1973-74, the marginal rate of income tax was as high as 97.75%. - It has been brought down gradually to 30% in 1997-98 and remains there. - Tax rates are generally different for different persons.
  68. 2. Corporate Tax ' Leviability Rationale . It is levied on the incomes of registered companies and corporations. . A joint stock company being a separate entity should be taxed separately. ' Flat rate, rebates and exemptions : Though the corporates are being taxed at a flat ' Difference in tax rates ' Tax exemptions & tax holidays rate, there are provisions for various kinds of rebates and exemptions. : Tax rates are different for Indian companies and foreign companies. : Some companies (e.g. export houses) are given tax exemptions & tax holidays.
  69. B. TAXES ON WEALTH AND CAPITAL 1. Estate duty ' Introduction Leviability Aboliton 2. Wealth tax ' Introduction ' Leviability : It was first introduced in India in 1953. : It was levied on the total property passing to the heirs on the death of a person. : It was abolished in 1985. : Annual tax on wealth was introduced in 1957. : It was levied on the wealth of people, e.g. land, bonds, shares etc. ' Exempt properties : Agricultural land and funds in Provident Account were exempt. ' Abolition : With effect from 1.4.1993, it has been abolished on all assets except certain specified assets. For example residential houses, farm houses, urban land, jewellery, bullion, motor car, etc.
  70. 3. Gift tax ' Introduction ' Leviability ' Abolition ' Reintroduction Head of taxability : It was first introduced in 1958. : It was leviable on all - donations to recognized charitable institutions, - gifts to women dependents, and - gifts to wife. : Gift tax was abolished in 1998. : Gift tax was partially reintroduced in April 2005. : Gifts received from any person or persons, if the aggregate value exceeds Rs 50,000, have been made taxable u/h "Income from other sources". - Certain exemptions have, however, been given. Movable & immovable properties : With effect from 1.10.09, even movable and immovable property given as gift would attract tax if its value exceeds Rs. 50,000.
  71. 4.2.1 INDIRECT TAXES 1. Custom Duties ' Leviability Calculation ' Reduction : These are levied on exports and imports of goods. : Import duties are generally levied on ad valorem basis i.e. on the basis of value. : On some commodities, specific import duties, i.e. per unit taxes on imports are levied. : Since rationalization measures taken in1991, the custom duty structure has been pruned. 2. Excise Duties ' Leviability : An excise duty is levied on production of goods. ' Reduction in rate categories & exemptions notifications : Over the years, number of rate categories has been reduced and number of exemptions notifications have also been brought down. Defects of taxes on inputs - distortion of the production structure - cascading of taxes (i.e. compounding of tax liability) and - incorrect assessment of the tax incidence.
  72. MODVAT (Modified Value Added Tax) ' Rationale : To remove above defects. ' Introduction : It was introduced in 1986-87. : Under MODVAT a manufacturer got full reimbursement Merit of excise duty paid on the raw materials or components. This system prevented payment of duties on earlier duties paid. • Defects • MODVAT suffered from many shortcomings. The most important being the existence of a number of rates on output and inputs. This led to disputes relating to classification of both the output and inputs. ' Meaning of 'Value Added': It is the value difference between sales and purchased items. • VAT covers the entire value of inputs whereas under MODVAT vs. VAT MODVAT credit was given in respect of duty paid inputs only.
  73. CENVAT (Central Value Added Tax) ' Rationale ' Introduction Structure : To remove the problems of MODVAT. : It was introduced in 2000-01. - Only one basic excise duty of 8% applicable to all the excisable commodities - Some special excise duties in addition to CENVAT leviable on a few mentioned goods. - The basic excise paid on inputs is deducted from the excise collected on output so that only tax on value added is paid. • Merits • Demerits i) Simple. ii) Transparency in the system of union excise duty. iii) Replacement of physical checking of goods by an account based system. iv) Reduction in cascading effect of input taxation. i) existence of some cumbersome procedures. ii) inadequate coverage of CENVAT iii) scope of tax-evasion etc.
  74. 3. Sales Tax ' Leviability ' Paid by whom? , Merit ' Demerits : Sales tax is levied on sales. However, many commodities are not covered by sales tax : Registered trading concerns - These registered concerns shift the burden of sales tax to the customers. . More on luxuries and less or almost nil on necessaries. (a) Cascading effect : Inputs are first taxed and output is taxed again. (b) Lack of transparency (c) Narrow base (d) Different procedures followed by different states ' Forms of sales tax in India : (i) State sales tax ' State sales tax ' Central sales tax (ii) Central sales tax. : This is tax on transactions within a state. - This is gradually being replaced by VAT in various states in India. : This is inter-state sales tax. - It is non-rebatable tax. - It is incongruent with the system of VAT. Therefore, it is being phased out in stages. - At present it is 2%.
  75. VAT (value Added Tax) ' Meaning : It is a multistage sales tax with credit for taxes paid on business purchases. Tax is levied on value added to a product/ service at each stage of its production and distribution. - It is levied by state governments. Ex Inputs worth Rs. are purchased and sales are worth Rs. in a month. Input tax rate and output tax rate are 4% and 10% respectively. Show input tax credit and calculation of VAT. ' Introduction : 1999 ' Implementation : April, 2005 (in some states) ' Present no. of states/ union territories implementing VAT : 33 ' Merits (a) Non-cascading (b) Abolition of other taxes, e.g., turnover tax, surcharge, additional surcharge etc. (c) (d) (g) (h) Rationalisation of overall tax burden General fall in price Higher growth rate of tax revenue Increase in the competitiveness of Indian exports by zero rating of exports Provision of self-assessment by dealers Increase in transparency
  76. 4. Service Tax ' Meaning • Introduction : It is a form indirect tax imposed on specified services called taxable services. : 1994-95 No. of services covered by service tax network over the years: More than 100 ' Tax rate : w.e.f. 24.02.09
  77. 4.2.2 FEATURES OF TAX STRUCTURE IN INDIA (ii) (iii) (iv) (v) (vi) (vii) One of the highest taxed Third World countries Manifold increase in tax revenue Greater reliance on indirect taxes: Ratio of direct to indirect taxes: 1950-51 1990-91 - Since 1990-91, following rationalization, the proportion of direct taxes has 40:60 20:80 increased: Reliance on a very narrow population base Highly insufficient tax revenue Continuous change in relative importance of various taxes Progressive direct taxes & Differential indirect taxes 2008-09 40:60 (viii) Agricultural income exempt from income-tax
  78. 4.2.3 EVALUATION OF THE INDIAN TAX SYSTEM Negative aspects i) iii) v) vi) vii) Non-conformity to canon of equity - The tax yields have not increased at a rate enough to show a high degree of income elasticity Inadequate increase in tax revenue: Direct taxes - 2008-09 Non-conformity to canon of elasticity Insignificant contribution of service sector to tax revenues Increase in tax collection cost 6.5% of GDP 2007-08 More than 3700 crore • However, tax collection cost of India is lowest in the world : only 60 paise for every Rs. 100 collected as tax. High tax evasion and avoidance: Black money is generated at the rate of 50% of a) Other accusations: b) c) GDP. discouraging employment, distorting prices and adversely affecting savings.
  79. Positive aspects i) ii) Simplification and rationalization of tax system - Recommended by i) The Booth Lingam Committee, and ii) The Chelliah Committee Modification of tax ambit and tax rates from time to time - Purpose : growth, stability and social justice. Increase in compliance with canon of convenience

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