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Introduction

Taxes are levied by governments on their citizens to generate income for


undertaking projects to boost the economy of the country and to raise the
standard of living of its citizens. The authority of the government to levy tax
in India is derived from the Constitution of India, which allocates the power to
levy taxes to the Central and State governments. All taxes levied within India
need to be backed by an accompanying law passed by the Parliament or the
State Legislature. It is difficult to design a perfect Tax system which is
universally applicable for all times to come. Ability to adapt to changing
realities is critical for a Tax system to sustain and be relevant. Tax Policy and
Tax Administration are no exception and do require to move with time and
place reflecting the social, economic, cultural and political realities.

Indirect Tax

An indirect tax is a tax collected by an intermediary (such as a retail store)


from the person who bears the ultimate economic burden of the tax (such as
the consumer). The intermediary later files a tax return and forwards the tax
proceeds to government with the return. In this sense, the term indirect tax
is contrasted with a direct tax, which is collected directly by government
from the persons (legal or natural) on whom it is imposed. A direct tax is one
that cannot be changed by the taxpayer to someone else, whereas an
indirect tax can be. Examples of Indirect tax are sales tax, per unit tax, value
added tax (VAT), or goods and services tax (GST)

Tax on consumption of goods and services on value added basis, known as


Value Added Tax (VAT) or Goods and Service Tax (GST), has been emerging
as tax of the future. In an increasingly globalized and competitive
environment, direct taxes are being reduced and the current global trend is
to derive higher proportion of revenue from indirect taxes.
Value Added Tax

VAT is an indirect tax on consumption of goods and services, covering every


single commercial transaction and recovered at each stage of value addition
until one reaches the final consumer. It is distinct from turnover tax. VAT
catches all manner of transactions and the word supply indicates any output.
The scope of supply is more than sales. In VAT, it is of no consequence as to
whether the supplier is a manufacturer, wholesaler or a retailer, supply
goods and services or acting as principal or as agent. VAT is charged down
the chain of distribution until reaching a consumer who is not registered for
VAT.

Under VAT, tax is imposed and collected at each stage of value addition in
the course of production and distribution of goods and services. Tax imposed
and paid on input goods and input services is reclaimed as input credit and
the total tax liability at each stage is calculated after granting input tax
credit. Generally a registered person can claim credit for input VAT on goods
and services purchased and used in connection with the taxable outputs.
Input tax credit claimed reduces tax liability. Tax base is effectively limited to
each stage of value addition. VAT secures revenue by being collected
throughout the process of production distribution without distorting
production decision.

VAT is generally required to be paid by the supplier of goods and services.


However, it is the consumer who ultimately bears the burden of VAT as part
of the consumer price. Supplier merely acts as an agent to collect the tax
from the consumer and deposits the amount with the Government. VAT being
a tax on consumption of goods and services, VAT paid at intermediate stages
are only pass through transactions. However, differentiating taxes as direct
and indirect based on the person who bears the burden of the tax is
debatable since burden of a direct tax like Income Tax may also be shifted to
consumers.
VAT is the best form of general consumption tax. However, equity and
distributional effects of VAT and its potentially distorting economic effects are
matters of debate. There is also a view that VAT is a regressive tax. There
is, therefore, a strong reason to introduce measures which will protect the
poor when implementing GST. Though VAT is accepted as an efficient and
simple method to tax goods and services and raise revenue, the issue of
equity and consequent impact on maintaining political equilibrium while
designing VAT cannot be ignored. Re-distributional effect of tax policies,
especially in the context of globalization and liberalization, acquires more
importance when designing a politically acceptable tax system. Tax policy
cannot ignore historical realities.

Taxation and Spending reflected in the Revenue and Expenditure Budgets of


the Government are two dimensions of the Fiscal Policy. Re distributing
income through expenditure is directly used to reduce disparity. Primary
objective of tax policy is to mobilize resources without affecting efficiency
and competitiveness. However, policy makers do need to appropriately
factor the distributional aspects so that the burden of taxation is distributed
in a fair and just way. Empirical evidences support the view that the most
efficient way to reduce income in-equality over the long term is to increase
public investment on the human capital of the poor and making available the
public goods and services to the needy.

EXEMPTION

Forms of VAT differ in different countries depending upon the varieties of


objectives to be achieved and their priority. Needs and concerns of
developing and transitional economies may not be similar with that of
developed economies. Though features like single rate with no exemptions,
zero-rating instead of exemptions and immediate refund of unutilized credit
are considered as desirable characteristics of an ideal VAT design, these may
not be possible or desirable in the context of a particular country or
particular time, for political and practical reasons. Some of the bad features
may be inevitable for successful adoption in the first place. It depends lot on
the ability to make difficult choices. Political considerations influence most
tax policy decisions. VAT design needs to be consistent with the objective to
sustain the political equilibrium and to balance equity, efficiency and
sustainability in the fiscal sphere.

VAT is widely followed in developed and developing countries and it is a


major and buoyant source of Government's revenue. VAT with broad base
and uniform rate is neutral to transactions and does not interfere with
patterns of production and consumption. Non-uniform rates and extensive
exemptions affect the neutrality of tax incidence, distort patterns of
consumptions as well as production and distribution and complicate the tax
structure.

Exemptions are derogations to main principles and reduce the tax base.
Special treatment is granted by exempting particular categories of goods and
services. Primary causality of tax exemptions is simplicity.

TYPE OF EXEMPTIONS

There are two types of tax exemptions.

Exemptions without the right to deduction of tax paid on inputs.


Exemptions with the right of deduction of tax paid on inputs, known as
zero-rating.

It is necessary to standardize exemptions in order to achieve a common


basis of assessment. Certain exemptions are required in the public interest
e.g. Medical and Educational services. Certain exemptions are provided on
the reasoning that the supplies are made almost exclusively by Public
Authorities.

Government have been increasingly moving away from business activities.


Consequently, supplies which are traditionally provided only by public
authorities are increasingly being provided by non-public operators within a
competitive environment. Taxing a supply provided by private operators but
exempting the same supply if provided by public authorities creates
distortions of competition. Principle of fiscal neutrality requires treating
supplies which are in competition with each other in the same way
irrespective of the status of the supplier. Status of the supplier should not be
the criteria to determine the tax consequences of a transaction.

CONSEQUENCES

Exemptions inevitably make tax laws and tax administration complex and
provides scope for avoidance and litigation. Direct consequences of tax
exemptions are,

*net revenue loss to Government.

*increase in compliance cost to business

*increase in administrative cost to tax administration.

Invisible consequences of tax exemptions, often adverse, are many.


Appearances could be deceptive. What seems obvious may be different from
what is real. Form may not necessarily reflect the substance. Tax
exemptions, especially mid-stream tax exemptions, apart from making the
tax system complex also result into unintended and adverse tax
consequences.

In certain cases, exemption may give rise to distortion of competition not


immediately but in the future. This effectively prevents private operators
from providing such supplies in future and such cases cannot be merely
treated as hypothetical possibility. Exemptions based on the status of the
service provider by itself give rise to distortion of competition, either
immediately or in the future. If governmental units make sales of goods and
services, there is no general justification in exclusion from tax simply
because the vendor is a governmental unit. Specific justifications for the
exemption need to be provided.

Certain exemptions do not depend upon the kind of goods and services
provided by the supplier but depend upon the nature of the entity. Such
exemptions are known as Entity exemptions. Entity exemptions under VAT
are of two types. The first type is exemption provided to small businesses
based on the annual sales that are below the exemption threshold limit
prescribed. Businesses availing small business exemption generally are not
registered and also do not claim input credit of tax on their taxable
purchases. Customers purchasing goods and services from the suppliers
who avail small business exemption are also denied any VAT benefit.

The second type is exemption provided for all sales or particular sales made
by an entity because of the nature of the entity e.g. Insurance premium
supplied by specific Insurance companies.

Exemption based on the nature of the seller is generally provided to


Government and other specific non-profit organizations. These entities being
the supplier of exempt outputs, are outside the VAT system, but these
entities still required to pay tax on inputs and imports.

Exempt entity that is denied credit of VAT on inputs used in its exempt
business activities may attempt to avoid tax on some purchases by providing
them in-house rather than purchasing them from outside taxable suppliers.
To prevent such incentive towards vertical integration, some countries treat
certain self-supplies by exempt entities or organizations as taxable supplies
to themselves, notwithstanding the general exemption from VAT on their
outputs.

Zero-rating is a mechanism in VAT system to completely neutralize taxes


from a particular transaction. A supplier of Zero-rated transaction does not
charge VAT on the supply. Still such supplies are classified as taxable supply
but subject to zero rate. Unlike exempt supplies, the supplier of zero-rated
supplies is entitled to recover input credit on the taxable purchases
attributable to the supply. Export of goods is generally zero-rated. Under the
destination principle, services consumed outside the taxing country are zero-
rated and gets taxed in the country of consumption. It is felt desirable to
zero-rate only exports though some countries do zero-rate certain otherwise
taxable domestic transactions.

Cascading effect is one of the major adverse consequences of mid-stream


tax exemption. Exempt seller cannot issue a tax invoice. Purchaser cannot
claim any input credit on such purchases. Embedded taxes become part of
the price and will be subject to VAT again. The purchaser shifts the
embedded tax as cost and passed on to the customers in the form of higher
prices.

Exemption granted under the credit-invoice VAT at intermediate stage of


production or distribution may increase the price paid by the final consumer
as compared to a situation where these exemptions are not provided.

Retail stage exemption reduces revenue but there is a possibility for


reduction in the retail prices in such cases. Although exemptions on retail
sales may be expected to reduce prices to the consumers and VAT revenue
to the Government, exemptions granted in the middle of the production and
distribution chain actually increase the consumer prices and also VAT
revenue over the amounts that would occur if those mid-stream sales are
taxable.

When goods are exempt from VAT, countervailing duty (CVD) is not imposed
on similar goods imported. Tax on imported goods being totally neutralized in
the exporting country, imported goods without CVD have clear competitive
advantage over similar domestically produced goods. Exemption thus
becomes injurious to domestic producers.
Service tax

Service tax refers to tax collected by the government of India from certain
service providers for providing certain services. The person who pays service
tax can be either a service provider or a service receiver or any other person
who is responsible for providing certain services. Indirect Tax is a kind of
indirect tax because the service providers pay the tax and recovers it from
the service receivers who receive or purchase the taxable services. It is a
kind of tax that you pay to the government for enjoying different services
received from various service providers.

Service tax in India came into effect in 1994 following the Finance Act, 1994.
It is imposed on certain services which are taxable under the section 65 of
Finance Act, 1994. The budget 2012 increased the range of services included
under service tax. It incorporated services such as service provided by AC
restaurants, short and long term lodging offered by hotels and private guest
houses etc. under taxable services. As per this new regulation, service tax is
charged from individual providers as well as companies in India. Individual
service providers can pay this tax via cash while companies can pay it on
accrual basis. However, they need to pay this tax only if the value of services
provided by them exceeds Rs. 10lakh in a single financial years. However,
this new additions to service tax rules are not applicable to the state of
Jammu & Kashmir. From the year 2012 onwards, all services, except the ones
specified in the negative list of services, become liable for service tax. The
negative list refers to the services listed in section 66D of the Finance Act,
1994.

Exemptions

Normally, service tax is paid on all services except for those included in the
negative list of services. All service providers including central and state
government service providers as well as private sector service providers are
liable to pay service tax. However, there are a few exceptional scenarios
wherein service providers can avoid paying service tax. Listed below the
major exemptions:

A small scale or individual service provider can enjoy service tax


exemption, if its total turnover of taxable services does not go beyond
Rs. 10 lakhs in a single a financial year.

The recipients are exempted from paying service tax for the goods and
services received from the service provider, if there is written proof
indicating the value of the goods and materials and no credit of duty is
paid on such goods and materials, and if the services have been
rendered under the CENVAT Credit rules.

Service tax is not applicable to the services provided to diplomatic


missions and to the officers a diplomatic mission and their family
members.

Services such as port services, goods transport services and


containerized transport services received by an exporter and used for
export of goods are not taxable. In such cases, service tax paid by an
exporter on the above mentioned situations is refunded to the
exporter.

Services provided to international organizations and the United Nations


are not taxable.

Service tax is not applicable to the services provided to a developer of


Special Economic Zone or a unit of Special Economic Zone.
INSURANCE

Insurance is an important aid to commerce and industry. Every business


enterprise involves large number of risks and uncertainties. It may involve
risk to premises, plant and machinery, raw material and other things. Goods
may be damaged or may be destroyed due to fire or flood. Some risk can be
avoided by timely precautions and some are unavoidable and are beyond the
control of a business. These unavoidable risks can be protected by
insurance.
Insurance in India covers both the public and private sector organisations. It
is listed in the Constitution of India in the Seventh Schedule as a Union List
subject, meaning it can only be legislated by the Central government.

Insurance Companies

The insurance industry of India consists of 53 insurance companies of which


24 are in life insurance business and 29 are non-life insurers. Among the life
insurers, Life Insurance Corporation (LIC) is the sole public sector company.
Apart from that, among the non-life insurers there are six public sector
insurers. In addition to these, there is sole national re-insurer, namely,
General Insurance Corporation of India (GIC Re). Other stakeholders in Indian
Insurance market include agents (individual and corporate), brokers,
surveyors and third party administrators servicing health insurance claims.

Out of 29 non-life insurance companies, five private sector insurers are


registered to underwrite policies exclusively in health, personal accident and
travel insurance segments. They are Star Health and Allied Insurance
Company Ltd, Apollo Munich Health Insurance Company Ltd, Max Bupa
Health Insurance Company Ltd, Religare Health Insurance Company Ltd and
Cigna TTK Health Insurance Company Ltd. There are two more specialized
insurers belonging to public sector, namely, Export Credit Guarantee
Corporation of India for Credit Insurance and Agriculture Insurance Company
Ltd for crop insurance.

TAXABLE SERVICE RELATED TO INSURANCE

Services covered in this category are the services provided by


insurance agents to the insurance company in relation to marketing of
insurance policies.
The service providers are insurance agents, insurance surveyors and
loss adjusters, actuaries and insurance consultants.
The service tax is applicable to services provided on or after 16th
July,2001 and any payment made for the services provided prior to this
date will not liable to tax even though payment is made on or after the
16th July,2001.

ESSENTIAL INGREDIENTS

Service providers providing services in relation to both type


of insurance i.e. general and life then only service relating to general
insurance is subject to service tax.
In case of insurance agent it has been specifically provided in the
rules person liable to pay service tax will be the concern insurance
company who has appointed agent not the agent himself.
Service provider like actuary or insurance intermediary are re imbursed
certain out of pocket expenses like traveling, boarding, etc. on actual
basis. This expense are reimbursed on actual basis in addition to the
prescribed fee such reimbursable actual expenses are not subject to
service tax.
Taxable service may be provided to policy holder including re insurance
or insurer or any person in one or more of the following service like
actuarial valuation, soliciting, etc.
The services must be provided by:
a) An actuary or
b) An intermediary or insurance intermediary, or
c) An insurance agent

TAXABLE VALUE

Value of taxable service shall be the gross amount charged by the


service provider for such service rendered by him, includes the commission,
fee or any other sum received by actuary or intermediary or insurance
intermediary or insurance agent from insurer. Rule 6 of the Service Tax Rules,
1994, provides for payment of Service Tax only on the amount received and
not on the amount raised for the services provided. As such Service Tax is
payable only on the amount actually received.

EXEMPTIONS AND EXCLUSIONS


Pocket expenses, which are reimbursable on actual basis, such as
travelling, Boarding and Lodging expenses, are not subjected to
Service Tax subject to production of documentary evidence in this
respect.
The Service Tax is applicable to services provided on or after16th
July2001 and any payment made for the services provided prior to this
date will not liable to tax even though payment is made on or after
16th July 2001.
It has been decided to exempt the service tax leviable on life insurance
business(as per Notification No. 9/2002 ST dated 1-82002) As a result ,
service tax is not payable on the service provided by an insurer to a
policy holder in relation to life insurance business.

IMPACT OF GST ON INSURANCE POLICIES


GST is a value-added tax, which will eliminate the cascading effect or double-taxation effect on
the cost of goods and services down the value chain. GST will certainly impact the structure,
incidence, computation of indirect taxes leading to a comprehensive restoration of the current tax
regime in the country.

The insurance industry is also not going to remain untouched from its impact. It will certainly be
going to have an impact on the insurance industry as well as policyholders. Typically,
policyholder's pay service tax on the risk element of the premium component whereas the
investment element of the policies is usually out of the service tax scope. With the
implementation of the GST, insurance policies including life, health and motor will all be costlier
from April 2017 as taxes will go up by at least 3 % or 300 basis points.

Basically, the premium of an insurance policy depends on the type of an insurance policy you are
buying. Life insurance plans are broadly categorised as term plans, endowment plans, ULIPs and
pension plans.

Term Plan

Term plans purely offer death benefit and are termed as pure risk protection plans. In such plans
sum assured is paid to the nominee, if insured dies during the term of the policy. And if
policyholder survives the policy term, he has to forgo the entire premium as no maturity value is
paid in term plans, apart from the term plans with a return of premium (TROP) option.

The premium component of a term plan comprises the majority of the risk element to provide
insured a risk cover throughout the tenure of the policy. At present, service tax of 15 % is
imposed on the premium cost of the term plans. With the implementation of GST, the tax is
expected to rise to 18 % in the first year and also on renewal premium from April 2017. This
means the premium will get costlier by 3 % or 300 basis points.

Endowment Plans

Endowment plans or traditional insurance savings plans offers both death and maturity benefit,
whichever occurs first. Currently, endowment plans attract a service tax of 3.75 % on the
premium in the first year of the policy and are expected to rise to 4.5 % in the first year under the
new tax regime. As of now, 1.88 % of the service tax is levied on endowment plan's premium for
the second year which is expected to rise to 2.25 % from the second year onwards after the
implementation of GST.

ULIP

Unit Linked Insurance Plans (ULIPs) also offer dual benefit of insurance and investment. At
present, service tax of 3.5 % is levied on protection part of ULIPs in the first year and 1.75 %
from second year onwards. This would go up to 4.5 % in the first year and 2.25 % from second
year onwards.

Health Insurance Plan

Currently, health plan premium attracts a service tax of 15 % on its premium cost. With the
introduction and implementation of the GST, the cost of purchasing the health insurance will
become expensive as it will attract a tax of about 18 % on premium from April 2017.

Motor Insurance

Motor insurance premium also attracts the service tax of 15 % which will rise to 18 % from April
2017, if the rate is fixed up to this specified percentage mark.

CONCLUSION

In principle, a more inclusive tax base combined with targeted subsidy to the
consumption basket of the poor would be a desirable option. If that is not
possible, it may be better to supply such items at a reduced rate rather than
to exempt them completely. However, for administrative and other practical
considerations in certain cases it may be justifiable to exclude these items
which constitute major consumption expenditures of the poor.

Tax system should reduce the operating cost in the formal sector and
increase the operating cost in the informal sector. Exemptions may
discourage formalization of the economy. Despite continuing popularity and
demand for exemptions, tax incentives are proved to be ineffective. They
reduce revenue and complicate the fiscal system without achieving the
stated objectives. Simple tax system encourages people to come to formal
sector from informal sector. A complex tax system has got inbuilt tendency
to discourage entrepreneurs to move towards formal tax system.
Experiences show that loading more and more objectives on a tax system
through incentives, however well-meaning they are, do not achieve the
desired objectives.

Extensive use of tax incentives, apart from reducing the availability of


resources required in funding essential public sector activities, complicates
tax administration, facilitates evasion, encourages corruption, increases
litigation and makes the tax system inefficient.

Experiences clearly prove that tax exemptions encourage rent-seeking and


provide scope for lobbying and special interest groups. Though the world is
full of opportunities, seizing and encashing the opportunities is in ones own
hand. Growing may not be a painless process. Difficult decisions are to be
taken to secure our future. World belongs to the strong and not the meek.
India has to continue the journey with pride and confidence. We have to be
an active player in creating the future instead of being a spectator in
watching it happen.