The Indian taxation system constitutes of direct and indirect taxes. Direct taxes refer to taxes payable on an Individual’s or Entity’s income and these broadly include income tax, wealth tax, capital gains tax, etc. Indirect tax or goods and services tax refers to taxes imposed on goods and services. This tax does not have to be paid upfront out of ones earning but is collected by the Government on various goods and services which consumers purchase or use.
These taxes collectively influence distribution of resources and economic behaviour.
Impact on allocation of resources:
Direct burden of taxes result in reduced resources in the hands of the tax payers or consumers. Which means the tax payer would now be able to allocate lesser amount than he would have been able to allocate had income tax not have been imposed on his income. Direct tax thus results in reduced resources in the hands of the consumer.
Indirect tax on the other hand would result in increased prices of goods and services. This would ideally require the consumer to allocate more funds to any particular good or service than he would have allocated if prices were lower.
Impact of consumption pattern:
Lower disposable income would lead to reduced consumption. With reduced amount available in the hands of a consumer, he would have to settle for lesser than he would have consumed had his disposable income been higher.
Due to increase in final prices at which goods and services are passed on to end users, the consumers would have to settle for lesser quantities. As a result the consumer would now be able to afford reduced quantum of a goods or services with reduced resources than he would have been able to.
Taxes thus impact the consumption pattern of the consumers.
Impact on savings:
Lesser discretionary income also influences the ability to save. With reduced disposable income, the individual would have to provide for all allocations because of which investments may be impacted adversely. An individual’s ability to save would be negatively impacted due to the influence of taxes.
Impact on Employment Opportunities:
With lower disposable income and reduced consumption pattern, the demand for goods and services is bound to get a hit. It may also mean a shift in consumption pattern from goods and services attracting huge taxes. Reduced demand of certain goods and services may lead to down fall in production of goods which would ultimately impact employment opportunities.
Tax regulations for welfare of consumers:
Imposition of taxes on certain commodities which are rather harmful for consumers may act in the interest of society. For example- High tax impositions on commodities like cigars and liquor would result in higher prices of these commodities and hence make them unaffordable for consumers. In such scenarios taxes work in favour of consumers.
Equality amongst Consumers:
Tax structure is so designed that taxes are payable in accordance with size of the income. That is to say higher taxes are to be paid by those earning more and lower taxes are applicable to low income groups. People earning below a thresh hold are completely exempt from payment of taxes. Thus increasing purchasing power of people below a certain income group and passing on the burden of taxes to those who are comparatively better off. This also aims at parity in the spending capacity of consumers.
Taxes and the applicable rates thus have a huge bearing on the tax payers or the end consumers. There are revisions in tax slabs and rates from time to time to take care of the effects of inflation and rising prices. With exemptions granted up to higher amounts of income or reduction in applicable rates of goods and service taxes to certain goods and services, the consumers stand with more disposable income and vice versa. If you’re looking for corporate or personal tax advice, we’re right here. We offer #taxconsultation services so that you can effectively manage your tax planning.