This article throws light upon the ten main features of Indian tax structure. Some of the features are: 1. The Scientific Division of Tax Powers 2. Multiplicity of Tax Structure 3. Larger share of Indirect Taxes 4. Insufficient Tax Revenue 5. Greater Importance to Sate Government in Federal Fiscal System 6. Incidence of Taxation 7. Progressiveness in Tax Structure 8. Narrow Base and Others.
Feature # 1. The Scientific Division of Tax Powers:
India being a federation, there is the existence of a multi-level finance system.
The constitution of India forms the basis of division of powers into:
(b) State, and
Based on this the constitution has also made a provision for division of tax powers between the centre and the states.
The area and sphere of taxation of centre and state is clearly demarcated as per constitutional provision. Taxes which are in the purview of central government accounted for 50 percent of its revenue. Some taxes are again levied by the Central government and the proceeds of such taxes are divided between the centre and the state governments.
Feature # 2. Multiplicity of Tax Structure:
India is having a broad based and extensive tax structure. Its main feature is the existence of multiplicity of taxes. There are both union government taxes and state government taxes. The tax structure includes both dried and indirect taxes.
In the case of states indirect taxes play a dominant role, in the composition of tax revenue. Among the direct taxes imposed in India, the most important is income tax. Other prominent taxes are wealth tax capital gains tax, gift tax etc.
The indirect taxes in India Consists of excise duties, customs duties, etc. The important taxes levied by the union government are income tax, corporation tax, central excise duties, wealth tax, gift tax, custom duties etc.
The state governments main taxes are land revenue, sale tax, state excise duties entertainment tax, stamp and registration duties etc. The gross tax revenue of the Central Government grew by 17.6 percent and 19.9 percent in 2003-04 and 2004 – 05, respectively.
Feature # 3. Larger share of Indirect Taxes:
In India in the total tax revenue there is the domination of indirect taxes over direct taxes. Indirect taxes shared 63% in 1950 – 51 where it increased to 77% in 2001-02. If shows that because of the undeveloped character of the economy and glaring inequality in income, the scope of direct taxes is limited.
Feature # 4. Insufficient Tax Revenue:
In-spite of rising trend in tax revenue, the total revenue remained small when compared to developed countries. The tax GDP ratio generally remained in the range of 8 percent to 9 percent in India (E. Survey 2005-06) where as it is very high in countries like Sweden, France, West Germany, UK, USA, etc. where the share ranges between 30 to 40 percent.
Feature # 5. Greater Importance to Sate Government in Federal Fiscal System:
In Indian fiscal federalism much importance is assigned to state governments. The field within which tax revenue, are raised and spend regularly is very wide in India when compared to many federal governments.
This reflects the importance of state government in our federal system. This is because of the growing responsibilities of the state government in the discharge of developmental activities.
Feature # 6. Incidence of Taxation:
In India the incidence of taxation is much higher in urban areas than in rural areas this is because of the predominance of agriculture in rural area and low income of rural households.
The urban population depends more on service and business sector and enjoys comparatively higher income and tax paying capacity.
Feature # 7. Progressiveness in Tax Structure:
Indian tax structure is framed in such a way that all indices of ability to pay is taxed. The direct tax is framed in such a way that as tax base increases, tax rate also rises sharply. Excise duties are levied and collected discriminately, depending on the type of commodity and the class of consumers.
Feature # 8. Narrow Base:
Fiscal experts opine that the tax base is very narrow in India in the case of both direct and indirect taxes. A planning commission estimate shows that only one percent of working population comes under the preview of direct tax.
In 2000 – 01, total income tax on the corporate income was only 2.6 percent GDP. Out of a population of more than 100 crores, around 10 million are coming under the Income tax belt. The indirect tax to GDP ratio is only 5.4 percent in 2003- 04. The service sector, though contributing the largest share in GDP was not subject to tax till 1993-94.
Service tax was introduced in the year 1994-95. Service sector, even though accounts for more than 50 percent of GDP, contributed Rs. 14200/- Crores as tax in 2004- 05. This is a small share when compared to the vast potential from this sector.
Feature # 9. Complexity of Indian Tax Laws:
With the intension of broad based tax system, a plethora of changes have been introduced in the tax structure.
However both direct and Indirect tax laws are highly complex, with a lot of loopholes which enable the people to avoid as well as to evade taxes. In this context Prof. Kaldore observes “there are definitional defects in India’s tax system, which gives elaborate power to tax authorities to interpret tax laws according to their whims and fancies. This has generated wide spread corruption in tax departments”.
Feature # 10. Integration between Centre and Sate Revenue:
After independence concrete efforts were made to organize the tax structure scientifically in tune with the requirements of a federal set of government. At present there is well-organized machinery for the collection distribution and expenditure of the revenue.
Now the tax system is well structured to generate sufficient revenue to meet the requirements of development objectives.
However we can point out a number of short comings in Indian tax structure. It is usually argued that Indian tax system is unscientific because it doesn’t provide any stimulation for production investment and saving activities of the government.
Many tax laws are stringent and rigid which punishes prudence and virtue, but rewards corruption and evasion. This unscientific base of tax system is pin pointed as a factor responsible for generating black money and encouraging tax evasion. Compared to developed countries like Japan, Australia USA etc.
Where 70 – 80 percent of revenue is generated by direct taxes; in India major portion of revenue is flowing from indirect taxes. This is not a healthy sign of developed tax structure. The main objective of taxation is to reduce glaring inequality in income distribution.
But in-spite of having a multiplicity of taxes covering different income source base, the tax machinery failed to reduce the income inequality considerably. This is a serious short comings of our tax system.
The accumulated tax arrears, the parallel economy nourished by black money shows the flows in our tax system. The un-coordinated inefficient and corrupt tax machinery pin-point to the deficiency in our tax system.
To overcome these defects the government of India over time appointed different taxation commissions. These commissions were appointed to detect and analyses the defects and to suggest suitable recommendations.
The Taxation Enquiry commission Report (1953), Prof Kaldors proposal for tax reforms (1956), The Mahavir Tyagi Committee Report (1958), Wanchoo Committee Report (1970) Raj Committe Report on Agricultural taxation (1972), Indirect Tax Enquiry Committee Report (1976), Chokshi Direct Taxation Committee Report (1977) are some important measures adopted by the central government to rationalize and revitalize the Indian tax structure.
After 1990, in lieu with the economic reforms and structural adjustment programmes, the central government initiated concrete efforts to rationalize the tax structure. The appointment of Dr. Raja J. Chelliah committee, popularly called the Tax Reform Committee, was a bold step to reform the Indian Tax structure in tune with the changing economic scenario.