In this essay we will discuss about Indian Tax Structure. After reading this essay you will learn about: 1. Introduction to Indian Tax Structure 2. Features of Indian Tax Structure 3. Suggestions for improving 4. Reforms and Measures.
- Essay on the Introduction to Indian Tax Structure
- Essay on the Features of Indian Tax Structure
- Essay on the Suggestions for improving Indian Tax Structure
- Essay on the Reforms and Measures of Indian Tax Structure
Essay # 1. Introduction to Indian Tax Structure:
Indian constitution has made a provision for the introduction of federal tax structure. The constitution has made a detail provision for the imposition of various types of taxes both the central government and the state governments. The constitution has made a provision for division of power for levying taxes between the centre and the States in most unambiguous manner.
Taxes are within the purview of Central Government which account for nearly 50 per cent of its revenue, similarly taxes like sales tax and state excise duties, agricultural income tax, land revenue and entertainment tax are within the purview of State Governments. Some taxes are again levied by the Central Government and the proceeds of such taxes are divided between the Centre and State Governments.
Taxes like union excise duties and income tax are within this category. The proceeds of such taxes are shared between the Centre and the States as per the recommendations of Finance Commissions. Some other taxes like stamp duty and excise duties on drugs and cosmetics are levied by the Central Government but the responsibility taxes is assigned on the state governments.
Essay # 2. Features of Indian Tax Structure:
1. Built-in Flexibility and Buoyancy:
Elasticity in tax structure represents its built-in flexibility and increase in tax revenue simultaneously with increase in national income through changes in tax rates and expansion of tax base .represents buoyancy of tax structure.
The National Institute of Public Finance and Policy has estimated both the elasticity and buoyancy of tax structure in India for the period 1970-71 to 1983- 84. As per this study it is observed that the elasticity of Indian tax structure was less than one, i.e, 0 96 and its buoyancy was greater than unity, i.e., 1.21.
Moreover, the study observed that the tax revenue of states was more elastic and buoyant than that of the centre. Among all the taxes Union Excise duty was having its highest degree of buoyancy, i.e., 1.51. But considering the requirement of financial resources necessary for financing various socio-economic project, the tax structure in India may be considered as inadequate, inelastic and also suffering from lack of buoyancy.
2. Narrow Coverage:
Another important feature of Indian tax structure is that it has a narrow coverage of working population in its tax net. As per Planning Commission’s estimates, direct taxes cover only about 1 per cent of the working population of the country. Likewise, excise duties on textiles, tobacco and other manufactured articles are also being paid by a very small section of total consumers especially those who are using only better varieties.
3. Equity Considerations:
Indian tax structure also violates the equity consideration of taxation in some respects. Although Indian tax structure as a whole is considered as a progressive one and the Indirect Taxation Enquiry Committee (1978) also concluded that indirect taxation, in totality is progressive but if we look deep into the structure then it is observed that the same violates the cannon of equity.
Taking the poverty line concept of the planners we can conclude that the burden in indirect taxes in 1993-94 was quite heavy on the population below the poverty line.
4. Multiplicity and Haphazard:
Both the direct and indirect taxes in India are suffering from multiplicity in its application and thus the system is quite haphazard. Direct taxes like wealth tax, gift tax, estate duty, capital gains tax may be placed in the same category. Thus these taxes may be integrated into a single tax system. In order to streamline this system, the government has already adopted MODVAT system in a phased manner.
5. Lacking Administrative Efficiency:
Tax system in India does not have much administrative efficiency. Both direct and indirect taxes and their procedure are highly complex. This has led unscrupulous elements in the tax procedure to evade and avoid tax. In order to realise various objectives through this tax system, the administrative efficiency of the system has declined.
Moreover, misinterpretation of tax laws by the tax authorities, has also resulted in widespread corruption in the tax departments.
6. Predominance of Indirect Taxes:
In India, the indirect taxes are playing a predominant role and the direct taxes are playing a secondary role. Taxation revenue collected by the Centre and States are coming from direct taxes in comparison to that of 80 per cent in Japan and Australia. Thus the major amount of tax revenue collected in India are collected from indirect taxes.
7. Inter-Sectoral Imbalances:
Tax structure in India is suffering from inter-sectoral imbalance as the income from agricultural sector is not taxed properly. Rich farmers in-spite of having a huge income are not included within the purview of Indian tax structure. Thus the impact of taxation on the various sectors are not at all balanced.
8. Heavy Incidence:
Incidence of taxation is very heavy in India. According to a study made by Indian chamber of commerce, Calcutta, the incidence of taxation, both individual and corporate, is the highest. It is observed that in India 0.5 per cent of the population bears the entire burden of personal tax and 0.2 per cent of the population normally bears 80 per cent of the total tax burden.
The corresponding percentages in U.K. and U.S.A. were 39 per cent and 31 per cent of the total population respectively. Considering all these above mentioned features, Prof. Kaldor described the Indian tax system as inefficient and inequitable.
Essay # 3. Suggestions for Improving Indian Tax Structure:
Considering the shortcomings of Indian tax structure, following measures may be suggested for its improvement:
1. Predominance of indirect taxes should be streamlined and higher reliance should be given on direct taxes.
2. Steps must be taken to extend the coverage’s of taxes by spreading the tax net for attaining equity and also to raise the amount of revenue.
3. The regressive character of the Indian tax system must be modified so as to reduce the burden of such taxes on the poorer sections of the society. Taxes like excise duty on necessities, sales tax etc. must be modified.
4. Tax administration should be tightened to plug the loopholes arising out of leakages and evasions along with streamlining of the tax collection machinery.
5. The rates of direct taxes like income tax, corporation tax at the higher level must be reduced to encourage the tax payers to come within the tax net and also for providing additional incentive for increasing investment.
6. Taxes of capital gains on urban land values, rentier income, income from speculative activity and other incomes must be rescheduled to tap the scope of additional taxation.
7. Tax assessment procedures for both direct and indirect taxes must be streamlined so as to encourage the tax payers to approach the tax officials instead of evading or avoiding taxes illegally.
Essay # 4. Reforms and Measures of Indian Tax Structure:
In August 1991, the Government set up a Tax Reforms Committee under the Chairmanship of Dr. Raja J. Cheiliah to examine the existing tax structure and to recommend a comprehensive reform of both the direct and indirect tax system. The Committee submitted its interim report in February 1992.
In this report the Committee stressed the importance of lower rates of taxation, a narrower spread between the entry rate and the maximum marginal rate and fewest special exemptions and deductions. In respect of indirect taxes the Committee recommended a reduction in the general level of tariff and in the dispersion of tariff rates and the abolition of end-use exemptions and concession.
The basic philosophy guiding these recommendations with which the government has full support is to cut through the welter of detailed changes which have been incorporated over the last 40 years, to serve narrow objectives and restore the tax system to its primary function of generating revenue in an efficient and equitable manner.
The report also stresses the need of introducing stability and rationality in the tax structure. The committee wanted to make the tax system and tax laws quite simple. The Committee is also of the view that the present system of tax administration must be modernized and tax enforcement must be improved considerably.
The Cheiliah Committee recommended the following measures in respect of particular taxes:
1. The direct tax system must be made more effective and for that income tax regime should have lower rates of taxation with a narrower spread between entry rate and the maximum marginal rate and should contain a minimum of tax incentives.
2. The system of subjecting in income of both partnership firms and the partners to taxation resulted in double taxation and thus it should be avoided.
3. In order to improve the present tax on long term capital gains and to adjust it with the inflation that have occurred over time, a system of indexation is to be adopted to sort out the problem.
4. In order to make a distinction between productive and non-productive wealth for levying wealth tax, productive assets like shares, securities, bonds etc. should be exempted from the purview of wealth tax.
5. In respect of custom duty of report recommended a reduction in general tariff and reduction in the dispersion in tariff rates and rationalisation of the system. The report suggested that reforms in this respect should be gradual.
6. In respect of excise duties, the report recommended switching over to ad-valorem rates on a number of particles in order to ensure buoyancy in revenue as a result of increased prices. The report suggested to revise the specific rates (where it is retained) every year considering inflationary rise in prices.
A number of suggestions contained in the Interim Report of Cheiliah Committee were implemented in 1992 budget. Some of these changes included changes in income tax, wealth tax, capital gains, excise duty, import duty etc. Again in 1993-94 budget, some other changes were incorporated as per recommendations of Cheiliah Committee Report and these changes were mostly in the area of excise duty, custom duty etc.
Tax Measures and Reforms, 1994-95:
Reform of the tax system as a whole has been an important element of structural reforms. The strategy followed in this respect has aimed at moving towards a simpler system of taxation with, moderate rates, few exemptions and a wider tax base. In earlier budgets these principles were implemented in respect of direct taxes.
The 1994- 95 budget continued to rely on all these principles in respect of direct taxes and undertaken major reform of indirect taxation system, which continues to account for over 71 per cent of the total tax revenue of the centre. In respect of both excise and custom duties, there has been a drastic cut in the number of end use notifications, which will greatly reduce the possibility of disputes and the scope for discretion.
Moreover, the number of rate categories was reduced sharply, the peak were brought down and a significant switchover was effected from specific to ad-valorem duties in order to strengthen the built-in revenue elasticity. The system of credit for taxes paid on inputs, known as MODVAT was extended to petroleum and capital goods.
All these changes in the structure of commodity taxation have brought MODVAT closer to a VAT type of system, which will ultimately facilitate the eventual introduction of a full fledged Value Added Tax. Moreover, a modest beginning was also made in order to extend indirect taxes on services such as, telephones, non-life insurance and stock brokers. VAT principles do not, however, apply to such service taxes.
Moreover, tax reforms have induced a structural shift in the composition of tax revenue. Accordingly, the share of direct taxes in the gross revenue of the Centre jumped from 19.1 per cent in 1990-91 to 28.4 per cent in 1994-95, with a corresponding decline in the share of indirect taxes from 78.9 per cent to 71.3 per cent over the same period.
Moreover, the share of customs revenue in gross tax revenue dropped from about 36 per cent in 1990-91 to around 29 per cent in 1994-95. The reduction in the general level of customs tariff is reflected in a sharp reduction of the collection rate from 44 per cent in 1991-92 to nearly 30 per cent in 1993-94.
Overall, tax reforms since July 1991 have helped in correcting structural imbalances in the entire tax system, which by and large engender inefficiencies and distortions. However, the increase in the share of direct taxes is definitely an improvement from the point of view of attaining both equity and economic efficiency.
Tax Measures and Reforms 1991-92 to 1995-96:
Reform in the tax system as a whole has been one of the key elements of the structural reforms initiated since July 1991. These reforms have encompassed both direct and indirect taxes and have moved towards a tax structure which is simple, relies on moderate tax rates with a wider base and better enforcement and serves the objectives of equity and efficiency. Substantial progress has been achieved in this regard in the past five years.
Over the past five years, a number of structural changes covering both direct and indirect taxes were undertaken. Unlike earlier isolated attempts to modify the tax system these changes were part of a medium term programme of tax reform.
They were geared to move towards a tax structure which is not only simple and moderate but also provides the incentives and signals consistent with developing an internationally competitive and dynamic economy. The budget for 1995-96 continued the emphasis on simplification, lower rates and greater buoyancy.
Overall tax reforms since July 1991 have helped in correcting the imbalance in the structures of revenue source. Direct taxation is the most equitable and efficient form of raising revenue. Prior to reforms high tax rates in the realm of direct taxation did not yield high collections.
It is noteworthy that the share of direct taxes in GDP rose from 2.1 per cent in 1990-91 to an estimated 2.9 per cent in 1995-96. Again the share of direct taxes in the gross tax revenue of the Centre rose from about 19 per cent in 1990-91 to an estimated 29 per cent in 1995-96. Other dimension is the drop in the share of customs revenue in GDP and their contribution to the gross tax revenue for Centre.
This is a healthy trend from the point of view of equity and efficiency.
Following are some of the tax Reforms introduced in India from 1991-92 to 1995-96.
A. Reforms of Direct Taxes:
1. The initial exemption limit for the levy of income tax was raised from Rs 22,000 in 1991 to Rs 50,000 in 1998. The number of slabs for income tax was also reduced from 4 to 3. The maximum marginal rate of personal income tax was reduced from 56 per cent, inclusive of surcharge, to 30 per cent.
2. The system of presumptive tax (lump-sum) for small traders, retailers and small road transport operators was introduced.
3. A number of provisions were introduced to widen the tax base. These included presumptive taxation for small business, estimated income scheme for persons engaged in the business of civil construction, plying, leasing or hiring of trucks, tax deduction at source introduced on interest income on term deposits income in respect of units of mutual funds, professional fees and host of contracts.
4. The incentive structure for savings in the form of financial asset has been strengthened. The wealth tax, which was earlier applicable to all personal assets such as bank deposits, shares and other securities. The threshold limit for levy of wealth tax was raised to Rs 15 lakh.
5. The rates of corporate income tax, which were 51.75 per cent for a widely held company and 57.5 per cent for a closely held company have been unified and reduced to 46 per cent. All these rates are inclusive of a 15 per cent surcharge. Surcharge is leviable only in case of companies having income above Rs 75,000. Without the 15 per cent surcharge the rate of corporate tax would be 40 per cent which is the same as the maximum marginal rate of personal taxation. Long-term capital gains tax on domestic companies was reduced from 40 to 30 per cent.
6. Tax rate on foreign companies (branches) was reduced from 65 per cent to 55 per cent. There is no surcharge on the foreign companies.
7. Five year tax holiday for investments in infrastructure facilities (highways, bridges, airports, ports and mass rapid transport), power generation and distribution in backward states and electronics hardware and software parks were allowed.
B. Reforms in Indirect Taxes:
Following reforms were made in respect of custom duties during 1991-92 and 1995-96:
1. Import duties were inordinately high in India and in several cases more than 300 per cent prior to reform. A phased reduction in the peak rate of customs duty was undertaken in each of the five budgets since 1991 and accordingly the peak rate of custom duty was reduced to 110 per cent in 1992, 85 per cent in 1993, 65 per cent in 1994 and 50 per cent in 1995 with exception of passenger baggage’s, alcoholic beverages, dried grapes, almonds and ball and roller bearings.
2. The import duty on capital goods for general projects and machinery which was 85 per cent prior to reforms was brought down and unified for nearly 80 per cent of machinery, at 25 per cent in 1995 Reduction in customs duty on power projects and related machinery to 20 per cent and for fertilizer projects to nil. This was accompanied by lowering of duties on ferrous and non-ferrous metals to 35/40 per cent in 1995.
3. The number of duty rates have been brought down to 12 (including nil rate) at present.
Following reforms were made in respect of excise taxes during 1991-92 and 1995-96:
1. Switch over from a system where excise duties were specific and numerous and varying in nature with a large number of exemptions to one largely based on ad valorem basis with lower duty rates and exemptions.
2. Ambit of MODVAT (tax credit for taxes paid on inputs) was extended to capital goods, specified quality control, testing, pollution control and R&D equipment, POL and spun yarn made from fibres.
3. Switch over from specific to uniform ad valorem rates of 10 per cent on all petroleum products with the exception of motor spirit.
4. The number of duty rates have been brought down to 10 (including nil rate at present).
For the first time, service tax was introduced by imposing a 5 per cent tax on amount of telephone bills, premium payments for non life insurance and on commission/brokerage charged by the stock brokers. Overall, tax reforms in India since July 1991 have helped in correcting the imbalance in the structure of revenue sources.
The share of direct taxes already rose from 2.1 per cent in 1990-91 to 2.9 per cent in 1995-96. The share of direct taxes in the gross tax revenue of the Centre has also increased from about 19 per cent in 1990-91 to an estimated 29 per cent in 1995-96.
The aggregate tax collection during 1995-96 recorded a hefty increase of 27.4 per cent over the previous year’s collection. During this period increased tax compliance and widening of tax base persisted. The tax reforms introduced in India are to continue with more and more new measures to be incorporated in near future.
The country is now looking for the formulation of simple and transparent tax laws. In this direction, the Central Board of Direct Taxes (CBDT) has called for withdrawal of all the concessions as the only reform prescription for devising a simple and transparent tax structure.
The CBDT is of the opinion that “the ideal tax structure would be the one which is simple and easily administrable and where, tax exemptions are gradually phased out…………. Rewriting of Income-tax laws is the most important step in the ongoing economic reforms.” Under this present trend of growing tax reforms, if the current trend of increased tax compliance and widening of tax base persists, the direct tax revenue will double within next two years.