Taxation in India: A brief introduction

This article has been written by Anand Sahu. Anand is currently a CA IPCC student.

A Tax is a compulsory contribution from a person to the expense incurred by the state in common interest of all without reference to any specific benefit conferred on any individual. It is the most important revenue of the Government. It almost amounts to form about 17% of the total national income of our country. By this 17% is almost 17, 18,000 crore which is being paid by General Public, Companies, Business Firms.

Direct Taxes: These are the taxes which are not shifted i.e., the incidence of which falls upon the person who pays them to the government. E.g. Income Tax . But these taxes have a Negative Impact on a national and Personal Scale.

  • The Ability to pay is difficult to determine; only a rough idea can be formed.
  • These Taxes are called Honest Taxes because of undeclared sources of income or evasion; the actual payment may not be strictly according to the ability to pay.
  • Well, this one is related to every tax payer in the country and interesting. Tell me how many Of the Citizens of the country maintain a proper account which makes it difficult for the tax payers to pay and make the work of our CA Articles Immensely difficult and gruesome in the month of February and March.
  • The assessment procedure is also cumbersome requiring expert assistance of tax advisers and Consulting Firms.

Indirect Taxes: Taxes where the burden Shifted through a change in price, the taxes are Indirect. E.g. Sales Tax, Service Tax .These Taxes have a really big Negative impact on the Tax payers.

  • Taxes on Necessaries of life will certainly mean taxing the poor and that will mean taxing rich and poor alike.
  • These Taxes do not create social consciousness because they are often not felt by tax payers.
  • Government is not certain about the proceeds of these taxes.
  • The burden of indirect taxes can be shifted toward forward or backward. In Most cases, the consumers have to bear the ultimate burden of indirect taxes.
  • Evading this type of tax is mostly easy because of methods like smuggling, Falsification of accounts.

Tax Structure in India:  

  • The Population of the economy is more than 120crore. But very small fraction of the population pays income tax in India(less than 3%). Thus Indian Tax Structure relies on a very narrow population Base.
  • The Changing Structure of Tax System in India is evident from the following Chart.

picture1

1970-71

In 1970-71(Pre Reform Period) exercise Duty were Contributing More than half of the central Tax revenue. Income tax, Corporation Tax and Custom duties were 5%, 15%, 21% respectively.

picture2

Tax Structure & Distribution At Present.

At Present the Taxes are more evenly Spread Out than the pre reform period.

Evaluation Of The Indian Tax System:

Tax System and Agricultural and Service Sector:

If You Look Carefully Into the growth of taxation sector in the few years you are sure to find that with the increase in national income, the tax yields in general and from direct taxes in particular have not increased at a rate high enough to show a high degree of income elasticity. Direct taxes were 2.1% of the GDP in 1950-51, it has increased to 7% at Present (Data is Centre and State Combined).

Indian Tax System largely depends upon urban incomes and leaves out almost completely agricultural incomes from the purview of direct taxes. India’s tax system has a much reduced scope of manoeuvrability in the field of personal taxation. Thus, while national Income rises, with about 14% of its originating from agricultural sector, the tax system is not able to tap fully the rising income. The indirect tax system is also characterised by Inelasticity. Both the coverage and the rate schedule have been modified from time to time so that the tax system plays a truly functional role for economic growth, stability and social justice.

It is quite shocking that the service sector accounts for about 60% of GDP, Service tax contribute just 12.8% toward tax revenues and about 1.3 % toward GDP. In Respect of canon of convenience, several measures have been taken such as self assessment, advance payment, deduction of tax at source, assessment on the basis of returns submitted etc. However change in tax law in quick succession disturbs long term business decision making. Indirect taxes although considered to be regressive are quite convenient to collect.

Simplification of Tax System:

Simplification of tax system has also been attempted. Income tax returns have been simplified and made handy. During the Reform Period both Lingam Committee and Chelliah Committee recommended simplification and rationalisation of tax system in India. The Proposed Direct Taxes Code and Goods and Services Tax also aim at simplification of tax laws.

Cost of tax collection (all taxes) has increased over the year from 543 crore in 1990-91 to 8500 crore at present. However it is to be noted that cost of tax collection for the income tax department is one of the lowest in the world at the rate of less than 60 paisa for every 100 Rupees collected.

What Stopping growth of Tax System In India:

Evasion and tax avoidance are reported to be very high. It has been estimated that black money is generated at the rate of 50% of the country’s GDP. Because of this, the black money accumulation is of considerable magnitude. It is growing every year at an exponential rate. The Unaccounted funds are invested into business through diverse means and add further to the existing funds of the black money. A part of it squandered and wasted lavishly on social functions and on anti- social activities. Besides Indian Tax System is also accused of

  • Discouraging Employment
  • Distorting Price
  • Adversely affecting savings

        I agree that Indian Tax System is Complicated and most of the time the consumer suffer but do we just forget the Merits of it on our economy(When we have 120m mouth to feed) and Common People, the question is up to you. Feel Free to let me know of your suggestion and query I will be happy to help.

***

The November book bucket

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