Tag: taxsystem

The Indian Tax System

There are various references in History which act as evidence that taxation existed in olden times also. Some references are ‘Arthashastra’ by Chanakya, King Dalip’s regime and Caesar Augustus. The word “Tax” originated from “Taxation” meaning ‘an estimate’. These were imposed and collected on the trade of commodities or livestock in a disorganised manner. The importance of tax increased with time and became a source of government income and expenditure.

TAX STRUCTURE IN INDIA 

India has a well developed taxation structure. The tax system in India is mainly a three-tier system which is based between the Centre, State governments and the Local Government organisations. In most cases, these local bodies include the local councils and the municipalities. According to the Constitution of India, the Government has the right to levy taxes on individuals and organisations. However, the Constitution states that none has the right to levy or charge taxes except the authority of law. 

The tax structure in India is divided into two components: Direct Taxes (such as income tax) and indirect taxes (such as custom duty). 

I. Direct Taxes: Direct taxes are those taxes that are not shifted, that is, the incidence of which falls on persons who pay them to the government, the taxpayer. According to Article 265, each tax levied or collected has to be backed by an accompanying law, passed either by the Parliament or the State Legislature. 

The direct taxes in India are: 1. Wealth Tax- 

Wealth tax is one of the major direct taxes in India. It is also known as the Wealth Tax Act, 1957. This tax is applicable to all the citizens of India. Wealth tax is the cess levied on owned property. It applies to those who enjoy property ownership benefits. It is applicable to every property owner till he or she retains the ownership of that particular property. The tax paid on property depends entirely on the current market rate. In case the property is not generating any income, then also wealth tax has to be paid. 

2. Corporate Income Tax- 

Corporate income tax is levied in many different forms in India. Corporate Income Tax is primarily meant to be paid by domestic corporations. Domestic corporations in India pay a minimum income tax rate of 35 per cent along with a surcharge of 2.5 per cent. Corporate income tax is also applicable to foreign organisations that have their own economic bases working in the country. These types of corporations are required to pay tax on 40 per cent of their income along with a surcharge of 2 per cent. This surcharge goes as a reservation for funding the state‘s education. Corporate income tax is also applicable to all the people that are working for any corporation in or outside India. 

3. Personal Income Tax- 

This is the most common form of tax in India. The system of personal income tax in India is very similar to the taxation system in the United States of America. It is based on the personal income of an individual. If the annual income of an individual is under Rs. 1, 80, 000/- then he or she is exempted from paying any personal tax. There are further allowances made under the personal income tax domain for the physically handicapped and elderly. 

II. INDIRECT TAXES: An indirect tax is defined as a tax levied on goods and services rather than on income or profits. Given below are the indirect taxes imposed in India: 

1. Sales Tax- 

Sales tax is the tax levied by the State Government on goods bought and sold in the country. This policy is followed in most industrially developed countries in the world. The taxes levied under sales tax are not the same for all kinds of goods. 

2. Custom Duties-

Custom duties were introduced in India through the Customs Act in 1962. This duty was introduced with the aim of checking illegal exports and imports of goods. Taxes are charged for all the goods that are imported into the country, mainly to protect the industries in India. 

Shortcomings of Indian Tax System: 1. Canon of Justice: The increased activities of the Government of India to develop the infrastructure and economy indicate a regressive tax structure that is against the canon of justice. The lower and middle income groups have to bear more burden of taxation as compared to the higher income groups because the government tries to raise amounts by indirect taxation. 

2. Agricultural Income: Agricultural income is not taxed in India. Hence, there is a higher burden of taxes on the urban areas. 

3. Complex Tax Framework: India has a complex tax framework with contradictory tax exemptions. Efforts are being made by the IT Department to enhance and simplify transparency of the tax system to help the individual taxpayers by reducing their compliance costs. 

4. Removal of Tax Incentives: Tax exemptions are given to achieve the objectives of development but they promote rent seeking behaviour, contributing to the complex tax laws. Exemptions lead to tax leakage and tax abuse which makes the system counterproductive and dysfunctional. 

5. Refunds: Getting refunds of tax from the Income Tax Department is a difficult process. It should be made easier by easy accessibility through internet services and refunding electronically. 

6. PAN: The tax base must be increased by extending PAN to cover all citizens serving as a Citizen Identification Number. 

7. Monopolistic Power of Tax Officials: The tax officials operate within a geographical limit with ambiguously defined roles that leads to abusive behaviour on their part. A high degree of discretionary power and lack of adequate monitoring and reporting mechanisms leads to corruption. The tax officials misuse the rules of the government and extract illegal payments from taxpayers. 

8. Lack of Supervision: There is a lack of supervision and monitoring of officers and holding them accountable for their actions. There must be promotion and enforcement of ethical standards, merit based recruitments, promotion procedures and regular staff rotation schemes to prevent the creation of a nexus. 

9. Decrease in Tax Revenue due to Corruption: Corruption decreases tax revenue, which leads to a shortfall in the funds of the government. This forces governments to resort to public borrowing and public debt, thereby endangering fiscal sustainability. Corruption adds to the adverse effect over investment and growth. 

10. Broadening the Tax Base: The majority in India do not file personal income tax. To bring them into the tax net, the government adopted a “one-in-six” scheme under which an individual satisfies one out of six criteria. This measure has increased the number of individual income tax payers, but a lot needs to be done still. 

India was different from other countries as they were made by the Indian citizens without any sort of external interference. 

There are different types of taxes in India. The system of taxation in India is clearly vested in the hands of authorities such as the central government, state government and the local governments. The taxes that are levied by the central government are on personal income, central excise, custom duties and service tax.

Why do we need taxes?

Taxes constitute a major source of revenue for modern governments. The total revenues of modern states besides tax revenues, non–tax revenues, customs and excise duties etc. also constitute parts of the revenue system. Tax revenues are important and useful as they do not create any liability to the state. Taxation is the only practical means of raising the revenue to finance government spending on the goods and services that most of us demand. Setting up an efficient and fair tax system is, however, far from simple, particularly for developing countries. 

Purpose of Taxation: Taxation is an important part of the national economic development. It serves many purposes, which are as follows: 

1. Pace of Economic Development: Tax policy can affect the pace of economic development and the way the rewards of that development are distributed. 

2. Improvement of Different Sectors: Collection of revenue helps to improve the performance of different sectors of the country. It cannot perform its administrative and development activities without collection of revenue. It is the main objective of tax. 

3. Redistribution of Income: It means the transfer of income from some individuals to others caused by progressive tax. Such redistribution from rich to poor reduces inequality. This can be accomplished by increasingly higher taxes, for example, estate and income tax. 

4. Correction of Externalities: Taxes can correct externalities and other forms of market failure such as monopoly. The purpose of taxes is to enable the government to regulate social welfare activities and to create a market to induce such activities. Also, government spending by using collection of taxes by increasing productive capacity and thus overcoming market failure. For example, health care may lead to a more healthier and productive workforce. 

5. Import Taxes: Import taxes may control imports and therefore help the country’s international balance of payments and protect industries from overseas competition. Indigenous industries may be awarded protection by way of taxation with the help of imposition of high custom duties on foreign goods.

Objectives and Principles of Tax: 

1. Tax as a Percentage of GDP: The current economic turmoil and recession requires special measures from governments. Degrees of taxation must be clearly stated as a percentage of Gross Domestic Product. Substantial tax gains show that there is quite a lot of burden on individuals as well as business houses. There must be an appraisal done before a tax is levied to question the requirement for new regulations and to set up a precise and up-to-date estimate of costs.  

2. Tax Simplification and Stability: Tax legislation and operation should be simple and straightforward to understand and comply with. To avoid too much time consumption in coping up with tax compliance, the volume of legislation must be kept to a minimum. Amendments in tax law, especially those that are opposite to earlier tax breaks or incentives that were the basis of business planning, must be reduced as much as possible.  

3. Openness, Transparency and Accountability: Tax policies should be transparent and without bias, but for a part of a declared discriminatory policy such as one required for promoting new businesses. There is a wider political question about the extent to which it is appropriate to use taxation as an instrument of social policy, for example, penalising smoking by heavy duties or environmental taxes to mitigate climate change.  

4. Certainty: This principle has been given by Adam Smith and explained earlier. The law should be framed in such a way that its interpretation must be the same whosoever analyses it. Authorities must be capable to amend and alter long established practices to which businesses are used to. Taxpayers must have certainty over Revenue authorities’ interrelations. 

5. Tax Competitiveness: The globalisation of business implies that every nation must make sure that its tax rates are competitive and its administration user friendly. Tax is a significant issue and a deciding factor in setting up a business. 

6. The tax base of a nation is more important than its rate. For instance, the headline corporate tax.

7. Efficiency: Efficient tax systems need to be developed so that the amounts due to the government can be collected without any delay, avoidance or evasion. Such efficiency would prevent the build-up of a black economy on one hand, and help the taxpayers in tax payment procedure on the other. 

Hence, a tax system that is rational, equitable and simple needs to be created. To promote growth, a stable revenue stream is needed so that inequalities are reduced and economic sustainability is achieved.