This article is written by Sanjay Sawlani, pursuing Certificate course in Advanced Corporate Taxation from LawSikho.com.

Introduction

In every country or jurisdiction, tax is one of the most important sources of revenue to the government and at the same time one of the deciding parameters for economic growth. Today every country’s taxing system is going through a revolutionary change owing to spreading the wings of every country’s business into the global market. Every country is paying its full attention to liberalizing the taxation system and at the same time closing the loopholes to disable the intruders to evade the taxing system to enlarge the revenue to the government. Tax can be defined as a compulsory contribution to the government or state revenue, levied by the government on personal income and business profits or added to some cost of some goods, services, and transactions.

Importance of Taxes

Every government imposes charges on their citizens and business which means raising income or revenue and used in their budgetary demands which were passed by the finance minister every year and it also included financing government and public projects, to make the business environment in the country beneficial for economic growth. Without any taxes, the government will not be able to fulfill the demands of their societies. Taxes are a major source because governments collect this money and use it to finance social projects.

In the Health Sector

Without any taxes, the government cannot make any development in the health sector. The collection of taxes from the citizens of their country directly deposited in the funding of health services such as social healthcare, medical and scientific research, and development expenses, etc.

In the Education Sector

This is another one of the most deserving recipients of tax amounts. In the human capital and education sector governments put a lot of effort into the development of their country. Collection of Money from taxes is used for funding, furnishing, and maintaining the public education system.

In the Governance Sector

In every country, poor governance would have a far-reaching result on the whole country with a huge toll on its economic growth. The government ensures that the taxes of money collected is used in a manner which will give benefits to the citizens of the country. From this taxes of money directly goes to the doctors, army, public servants, police officers, members of parliaments, the postal system, and others.

In the Infrastructure, Transport and Housing Sector

Including the social projects, governments also use this money to fund sectors that are major for the well-being of their citizens such as security, scientific research, etc. Generally, taxes contribute to the gross domestic product of a country, due to this contribution, taxes help encourage economic growth which in turn has a ripple effect on the country’s economy and raise the standard of living of the society, increasing job creation which will help the young and unemployed citizens, etc.

The government also imposes the tax amount to discourage the unwanted activities such as the consumption of liquor, tobacco, smoking, etc. To fulfill these, the governments impose high percentage of taxes on these products which, as a result, raise the cost of these products which helps in discouraging the public in general from buying or selling the above-mentioned products. Sale of Liquor is a major source of revenue for the government in which they have charged high taxes but still, the government is earning much more than expected.

In the USA

The USA is not only a country with increasing income inequality. The USA federal tax system is developing a tax department and the citizens who have high-income households which pay a larger share of their income to the federal department. State and local taxes are much less developed as compared to federal tax and some, such as sales tax, are rigid in which low-income households’ citizens pay a huge share of their total income in sales taxes as compared to the high-income households’ citizens.

In every country, a more developing tax system will reduce income inequality if nothing else changes, however, while federal taxes have become more developing, they also began decreasing in 2001 relative to pre-tax income, thanks to tax cuts at the time of the Bush and Obama administrations. A low average tax rate adjusts the equalizing effect of increased tax progressivity, which in turn will leave a little effect of federal taxes on income inequality.

Since the income tax laws of the US are deemed to be complicated, numerous taxpayers search for and hire the assistance of professionals with the preparation of their taxes the US has a local, state, and federal government, wherein there are obligatory taxes imposed. These taxes are charged or imposed on income, sales, property, estates, imports, capital gains, dividends, goods, and services, as well as other various fees. As citizens, it is a civic duty to pay taxes to help in the growth and progress of the economy and the nation.

In India

There are a variety of taxes applicable to Indian Citizens under the nation’s taxation system.

Direct Taxes: These forms of taxes are levied directly on the taxable income generated by individuals and corporations. The importance of these taxes is that they are paid directly to the government and make up a significant portion of India’s tax generated revenue. Some of the most important direct taxes are income tax, corporate tax, capital gains tax, etc.

Indirect Taxes: The other form of taxes is not levied directly on the taxpayer’s income but rather indirectly when they avail or purchase goods and services. These taxes are included and paid by the consumer to the service provider or goods sold. One of the most important indirect taxes is the Goods and Services Tax, Dividend Distribution Tax, Customs Duty, etc.

Another Important Factor is GDP Ratio 

The tax to GDP ratio represents the size of the country’s tax kitty relative to its GDP and the size of the Government’s tax revenue indicated as a percentage of the GDP. A higher ratio means that an economy’s tax bounce is strong as the share of tax revenue rise in sync with the rise in the country’s GDP and India despite seeing-higher growth rates and the lower tax to GDP Ratio forced the government to spend on infrastructure and puts pressure on the government to meet its fiscal deficit targets. The infrastructure is developed by governments and when the government collects money from taxes, it plows this money into the development of this infrastructure and in turn promotes economic activity throughout the country. The tax amount is also important to every small, medium, or large business because governments can fund this money back into the economy in the form of loans or other funding forms.

OECD – Action Plan 11 – Measuring and Monitoring BEPS

The adverse fiscal and economic impacts of base erosion and profit shifting (BEPS) have been the focus of the OECD. The tax planning activities of some multinational enterprises took advantage of the mismatches and loopholes in the international tax rules, separating taxable profits from the underlying value-creating activity, BEPS recognized that the scale of the negative global impacts on economic activity and government have been uncertain. Significant tax revenue losses, BEPS causes other adverse economic effects, including tilting the playing field in favor of tax-aggressive MNEs, increasing the corporate debt partiality, misusing foreign direct investment, and reducing the financing of needed public infrastructure.

• Profit Rates of MNE affiliates located in lower-tax countries are higher than their group average worldwide profit rate.

Example: The profit rates reported by MNE affiliates located in lower-tax countries are twice as high as their group worldwide profit range. MDH is showing profitlessness in India (due to high tax rates in India) and showing a profit is high as compared to India in Bangkok (due to lower tax rates in Bangkok).

• The effective tax rates paid by large MNE entities is estimated to be lower than similar enterprises with only domestic operations. This tilts the playing field against local business and nontax aggressive MNE, although some of this may be due to MNE’s greater utilization of available country tax preferences.

Example: MDH (International Company) is showing lower profit due to high tax rates, however, Sree Annapoorna Foods (Domestic Company) is showing high profit in the same jurisdiction.

• The separation of taxable profits from the location of the value-creating activity is particularly clear concerning intangible assets, and the phenomenon has grown rapidly.

Example: The ratio of the value of royalties received to spending on research and development in a group of lower tax countries was six times higher than the average ratio for all other countries and has increased threefold between 2009 & 2012. Royalty is paying high but expenses on research are low.

• Debt from both related parties and third parties is more concentrated in MNE affiliates in higher statutory tax rate countries. The interest to income ratio for affiliates of the largest global MNE in higher tax rate countries is almost 3 times higher than their MNE worldwide third-party interest to income ratio.

Example: MDH company took a huge amount of loan in India (due to High Tax rate in India) for their subsidiary company which was incorporated in Bangkok (low tax jurisdiction).

Effect of COVID-19 on Economy

The outbreak of COVID-19 had enormously impacted too many nations, especially the nationwide lockdowns which have brought social and economic life to a standstill. Due to the pandemic, the tourism industry in the world has been affected The world tourism organization estimated that a fall of 20-30 percent in international tourist arrivals is another adverse impact on the economic growth of every country and will probably be too serious. The UN warned that the effect of coronavirus is expected to have a significant adverse impact on the global economy and the GDP growth of India for the present economy is projected to decline to 4.8%. Due to COVID-19, there was another implication on Capital Markets, Global Oil Markets, that the capital market is forecasting a fund flow to Western Capital Markets, owing to rate cuts and fall in the stock markets the world over and historic drop demand for Oil had dropped the crude oil prices. Another impact on Migratory Labor, the International Labor Organization in its report describes that millions of people working in the informal economy in India are at a risk of falling deeper into poverty due to the coronavirus crisis.

Conclusion

While the importance of taxes to the country’s government cannot be overstated, the Central government also makes various provisions to help citizens save income taxes in India. One of the most effective means of saving income tax in India while safeguarding the financial future of loved ones is to avail of a trusted term insurance plan.

The government of India needs to open more investment options in Income tax law to increase capital formation in the country. The income tax department should organize more taxpayer’s awareness programs for the public in general so that they may understand more clearly the tax law and procedures. Provision for minimum taxes should also be formed for persons other than the company except for individuals like for societies, Firms, and LLPs, etc. The government should enlarge the tax regime to effectively capture the middle and lower business class. The poor people should be tried to be exempted from the indirect tax burden while more indirect taxes should be imposed on the richer section of the society to reduce the income inequality gap. 

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