10MainFeat

uresofI
ndi
anTax
St
ruct
ure
Thet enmai nfeatur
esofI ndi
ant
axstructure.Someoft hefeat
uresar e:
1.TheSci ent
if
icDivisi
onofTaxPower s2.Mul ti
pli
cityofTaxStructure3.
LargershareofIndirectTaxes4.Insuf
fici
entTaxRev enue5.Greater
ImportancetoSat eGov ernmenti
nFeder alFiscalSystem 6.I
ncidenceof
Taxati
on7.Pr ogressivenessinTaxStructure8.NarrowBaseandOt hers.

Feat
ure#1.TheSci
ent
if
icDi
vi
sionofTaxPower
s:

Indi
abei
ngaf
eder
ati
on,
ther
eist
heexi
stenceofamul
ti
-l
evel
fi¬nance
syst
em

Theconst
it
uti
onofI
ndi
afor
mst
hebasi
sofdi
vi
sionofpower
sint
o:

(
a)Uni
on,

(
b)St
ate,
and

(
c)Concur
rent
.

Basedonthi
stheconst
it
uti
onhasal
somadeaprov
isi
onf
ordi
vi
si
onof
taxpower
sbetweenthecent
reandt
hest
ates.

Thear eaandspher eoftaxati

onofcent r
eandst atei
sclearl
y
demar catedasperconst i
tut
ionalpr
ovi¬sion.Taxeswhichareinthe
purvi
ewofcent r
algovernmentaccountedf or50percentofi
tsrevenue.
Somet axesareagainlevi
edbyt heCentralgovernmentandthe
proceedsofsucht axesaredi v
idedbe¬tweent hecentr
eandt hestat
e
government s.

Feat
ure#2.Mul
ti
pli
cit
yofTaxSt
ruct
ure:

I
ndiaishavingabr oadbasedandext ensi
vet axst
ructur
e.I
tsmain
feat
ureistheexistenceofmulti
pli
cityoft
axes.Therearebothunion
governmenttaxesandst at
egov ernmenttaxes.Thetaxstr
uctur
e
i
ncludesbothdirectandindi
recttaxes.

Inthecaseofst
atesindir
ecttaxespl
ayadominantrole,
inthe
compositi
onoftaxrevenue.Amongthedir
ecttaxesimposedinI
ndia,
themostimport
antisincomet ax.Ot
herpr
ominenttaxesareweal
thtax
capi
tal
gai
nst
ax,
gif
ttaxet
c.

Theindir
ecttaxesinIndiaConsi
stsofexci
seduti
es,cust
omsdu¬t i
es,
etc.Theimportanttaxeslev
iedbytheuni
ongovernmentareincometax,
corporat
iont
ax, centr
alexci
seduti
es,weal
tht
ax,gif
ttax,cust
om duti
es
etc.

Thest ategov er
nment smai
ntaxesarelandrevenue,sal
etax,st
ate
excisedut i
esentert
ainmentt
ax,st
ampandr egi
strat
ionduti
esetc.The
grosst axrevenueoftheCentr
alGovern¬mentgrewby17. 6percentand
19.9per centin2003-04and2004–05, respect
ivel
y.

Feat
ure#3.Lar
gershar
eofI
ndi
rectTaxes:

InIndiainthetotaltaxrevenuet her
eist hedominati
onofindi
rectt
axes
overdi r
ecttaxes.I
ndirecttaxesshared63%i n1950–51wher eit
i
ncr easedto77%i n2001- 02.Itshowst hatbecauseoftheundevel
oped
char act
eroftheeconomyandgl ari
nginequali
tyini
n¬come, t
hescopeof
dir
ectt axesisli
mited.

Feat
ure#4.I
nsuf
fi
cientTaxRev
enue:

I
n-spit
eofr i
singt r
endi ntaxrev enue,thetotalrevenuer emainedsmall
whencompar edt odev elopedcount ries.Thet axGDPr ati
ogeneral
ly
remainedinther angeof8per centto9per centinIndia(E.Survey2005-
06)wher easitisv er
yhi ghincount ri
eslikeSweden, Fr
ance,West
Germany ,UK,USA, etc.wheret heshar erangesbe¬t ween30t o40
percent.

Feat
ure#5.Gr
eat
erI
mpor
tancet
oSt
ateGov
ernmenti
nFeder
alFi
scal
Syst
em:

I
nI ndianfiscalfeder
ali
sm muchimport
anceisassi
gnedtostat
e
government s.Thef i
eldwi
thinwhi
chtaxrev
enue,ar
erai
sedandspend
regularlyi
sv erywideinI
ndiawhencomparedtomanyfederal
gov¬er nment s.

Thi
sref
lectst
heimpor
tanceofstategover
nmentinourfederalsyst
em.
Thi
sisbecauseoft
hegrowingr
esponsibil
i
tiesoft
hestategovernment
i
nthedischar
geofdev
elopmentalact
ivi
ti
es.

Feat
ure#6.I
nci
denceofTaxat
ion:

I
nIndi
athei
nci
denceoft
axat
ioni
smuchhi
gheri
nur
banar
east
hani
n
rural
areast
hisisbecauseofthepredomi
nanceofagr
icul
tur
einr
ural
areaandlowincomeofr ur
alhousehol
ds.

Theurbanpopul
ati
ondependsmoreonser
viceandbusinesssect
orand
enj
oyscomparat
ivel
yhi
gherincomeandt
axpayingca¬pacit
y.

Feat
ure#7.Pr
ogr
essi
venessi
nTaxSt
ruct
ure:

Indiantaxst r
uctureisfr
amedi nsuchawayt hatal
lindi
cesofabil
it
yt o
payi staxed.Thedi r
ecttaxisfr
amedinsuchawayt hatastaxbase
i
ncr eases,taxratealsori
sessharpl
y.Exci
sedutiesarelev
iedand
collect
eddi scri
minatel
y,dependi
ngont hety
peofcom¬modi t
yandt he
classofconsumer s.

Feat
ure#8.Nar
rowBase:

Fi
scalexpert
sopinethatthetaxbasei
sverynarrowinIndi
ainthecase
ofbothdir
ectandindi
recttaxes.Apl
anni
ngcommi ssionesti
¬mate
showsthatonlyonepercentofworki
ngpopulat
ioncomesun¬derthe
prev
iewofdirectt
ax.

In2000–01, tot
alincometaxont hecorporat
eincomewasonl y2.
6
percentGDP.Outofapopulationofmor ethan100cr or
es, ar
ound10
mill
ionarecomingundertheIn¬comet axbelt
.TheindirecttaxtoGDP
rat
ioisonly5.
4percentin2003-04.Theser vi
cesector,though
contri
buti
ngthelar
gestshareinGDPwasnotsubj ecttot axti
l
l1993-94.

Servi
cetaxwasi nt
roducedi nt
heyear1994-95.Servi
cesect
or,
even
thoughaccountsformoret han50percentofGDP, cont
ri
but
edRs.
14200/-Cror
esast axin2004-05.Thisisasmal l
sharewhencompared
tothevastpotenti
alf
rom thissect
or.

Feat
ure#9.Compl
exi
tyofI
ndi
anTaxLaws:

Wit
htheint
ensi
onofbr
oadbasedt
axsy
stem,
noofchangeshav
ebeen
i
ntr
oducedint
hetaxst
ruct
ure.

Howev erbothdir ectandIndirecttaxlawsarehighlycompl ex,wit

hal ot
ofloopholeswhi chenabl ethepeopl etoavoi
daswel lastoev adetaxes.
I
nt hi
scont extProf.Kal
doreobser ves“ther
earedef i
niti
onaldefectsin
I
ndia’staxsy st
em, whichgiveselaboratepowertot axauthori
tiesto
i
nterprettaxlawsaccor di
ngt otheirwhimsandf ancies.Thishas
generatedwi despr eadcorrupti
oni ntaxdepar
tment s”.
Feat
ure#10.I
ntegr
ati
onbet
weenCent
reandSt
ateRev
enue:

Aft
erindependenceconcreteeff
ort
swer emadet oorgani
zet hetax
str
ucturesci
entif
ical
lyi
ntunewiththerequir
ementsofaf ederal
setof
government.Atpresentt
hereiswell
-or
ganizedmachineryforthe
col
lecti
ondistr
ibuti
onandexpendit
ureofther ev
enue.

Nowthet
axsystem i
swellst
ruct
uredtogeneratesuf
fi
ci
entr
evenuet
o
meett
herequi
rementsofdev
elopmentobject
ives.

Howev erwecanpoi ntoutanumberofshor tcomingsinI

ndi
antax
str
ucture.I
tisusuall
yarguedthatIndi
antaxsystem i
sunsci
en¬ti
fi
c
becauseitdoesn’tprov
ideanystimulat
ionf
orproducti
oninv
est¬ment
andsav i
ngactiv
iti
esofthegov er
nment.

Manyt axlawsar estr

ingentandri
gidwhichpunishespr udenceand
vi
rtue,butrewardscorrupti
onandev asi
on.Thi
sunsci enti
fi
cbaseoftax
system i
spi npoint
edasaf act
orr
esponsibl
eforgener ati
ngblackmoney
anden¬cour agi
ngt axevasi
on.Compar edtodevelopedcount r
iesl
i
ke
Japan,Aust r
ali
aUSAet c.

Wher e70–80per centofrevenueisgeneratedbydirecttaxes;

inIndi
a
majorporti
onofrevenueisfl
owi ngfr
om indi
r ectt
axes.Thisisnota
healt
hysignofdevelopedtaxstruct
ure.Themai nobjecti
veoftaxati
onis
toreduceglar
ingi
nequalit
yinin¬comedi st
ri
but i
on.

Butin-spit
eofhav i
ngamul t
ipl
i
cityoft
axescover¬ingdiff
erentincome
sourcebase, thet
axmachineryfail
edtor
e¬ducet heincomei nequal
it
y
considerably
.Thisisaser
iousshortcomingsofourtaxsy stem.

Theaccumul
atedt
axarrears,t
hepar¬al
lel
economynourishedbyblack
moneyshowsthef
lowsinourt axsyst
em.Theun-coordi
natedi
neff
icient
andcorr
uptt
axmachinerypin-
pointt
othedefi
ci
encyinourtaxsyst
em.

Toov ercomethesedefectsthegovernmentofIndi
aoverti
meappoint
ed
diff
erenttaxat
ioncommissions.Thesecommi ssi
onswereappoi
ntedt
o
detectandanal y
sesthedefect
sandt osuggestsuit
abl
e
recommendat ions.

TheTaxat ionEnquir
ycommi ssi
onRepor t(1953),Pr
ofKaldorsproposal
fortaxreforms(1956),TheMahav i
rTyagiCom¬mi tt
eeRepor t(
1958),
WanchooCommi tt
eeReport(1970)RajCommi t
teReportonAgr i
cul
tural
taxati
on(1972),Indi
rectTaxEnquir
yCommi tt
eeReport(1976),Chokshi
DirectTaxati
onCommi tt
eeRe¬port(1977)aresomei mportant
measuresadoptedbythecentr
algov
ernmentt
orat
ional
i
zeand
r
evi
tal
izetheIndiant
axstr
ucture.

Af¬ter1990,i
nlieuwi t
ht heeconomi cr eformsandst
ructur
al
adjust¬mentprogr ammes, thecentralgov er
nmenti
nit
iat
edconcret
e
eff
ortst or
ati
onalizethetaxst ruct
ure.TheappointmentofDr.Raj
aJ.
Chelli
ahcommi ttee,popularlycall
edtheTaxRef or
m Commi tt
ee,wasa
boldst ept
oreformt heIndianTaxst ructureint
unewiththechangi
ng
economi cscenario.

Sal
i
entFeat
uresofI
ndi
anTaxSy
stem |
Not
es

TheIndiantaxst
ruct
ure,l
i
keinanyot hercountry
,hasdevel
opedi
n
responsetomanyinfl
uences-soci
al,
polit
icalandeconomic.

Mai
naspect
sofI
ndi
a’
sTaxSt
ruct
ure:

ThePri
nci
plef
eat
uresofI
ndi
a’
staxst
ruct
urecanbebr
ief
lyenumer
ated
asfol
l
ows:

(
1)I
ncr
easi
ngi
mpor
tanceoft
axr
evenue:

Thetaxr ev enuecollect
edbot hbytheCentralandstateGov ernments
haveincreasedf r
om Rs460cr or
eIn1951-52t oRs10,17,107crorein
2008-09r egisteri
nganav eragegrowthof13. 9percent(overthe59
year
sper iod) .Therehasthusbeenasi gnif
icanti
ncreaseint axrev
enue.
Howev er,lookedatanot herway ,t
hetaxrevenue,whichformed88. 6per
centof-t
het otalr
evenuereceiptsin1951-
52decl i
nedto84. 1percentin
2008-09.

Twopossi
blei
nfer
encest
hatcanbedr
awnf
rom t
hesef
igur
esar
e:

(
a)TheCent
ral
andStategovernmentshav
ebeenr
ely
ingl
essont
ax
r
evenuet
ofi
nancet
heirexpendit
ure;
or

(
b)Rev
enuef
rom non-
taxsour
ceshasbeeni
ncr
easi
ngataf
ast
err
ate.

(
2)Taxr
evenueasaper
cent
ageofnat
ional
income:

Thetot
alt
axrev
enueasapercentageofGDPhasi ncr
easedfr
om 6.
7per
centi
n1950-
51to19.
2percentin2008-09.Al
thoughthi
sisagood
growt
h,thi
scanbecontr
ast
edtothet
axGDPrati
oofdev
eloped
count
ri
es,whi
chrangesbet
ween25and45percent
.

Again,whi
leitisl
ikelyt
ogivetheimpressi
onthatourtaxef
forti
s
rel
ati
velyl
ow, i
tshouldnotbeignoredthati
nalow-incomecountr
yli
ke
I
ndia,ataxGDPr atioofabout20percentimposesquiteaheavybur
den
onthemaj or
ityofpopulat
ion.

(
3)St
ruct
ureofTaxes:

Thesear
ecl
assi
fi
edi
ntot
wot
ypes,
vis.

(
i)di
rectt
axesand

(
ii
)indi
rectt
axes.

Directtaxesi ncludet axesoni ncomeandproper t

y,whereasindir
ect
taxescov ertaxesoncommodi t
iesandser
vices.I
mpor tantdi
recttaxes
areincomet ax,corporatetaxandweal t
htax.Importantexamplesof
i
ndi r
ectt axar eVAT, servicetax,exci
seduti
es,importduties,
etc.Ov er
they ears, I
ndia’
st axst r
uctur
ehadcomet orelymoreoni ndir
ect
taxation.

Theunder lyi
ngrationalewast hatsinceitisdifficul
ttoreachallt
he
i
ndi vi
duals, t
healternativeofpursuingabr oadbasedi ndi
rectt
axis
preferable.Howev er,foll
owingmeasur esinit
iatedinthedirect
ionof
rati
onalisationandsi mpl i
fi
cati
onoft hetaxst ructur
e,therehasbeena
declineint heproportionofindirecttaxesinthecount ry.Thetr
endhas
revealedt hatlowertaxr atesarecompat iblewi t
hhighertaxreali
sat
ion,
givenbet tertaxadmi nistr
ati
onandcompl i
ance.

(
4)Shi
fti
nRel
ati
veI
mpor
tanceofTaxes:

Asaconsequenceoft hefactthatindi
recttaxat
ionhadbeenincreasing
ti
llt
heonsetof1990s, thereoccurredashiftintherel
ati
vei
mpor tance
ofdiff
erenttaxes.Fori
nstance,corpor
ateandi ncometaxeswhichwer e
themaj orsourceoftheUnionrevenuedur i
ngear l
y-
1950s,y
iel
dedpl ace
toexcisedutiesandcustomsdut ies.

Similar
ly,i
ntheStatetaxstructur
e,salestaxreplacedl
andr ev
enueas
themaj orsour
ceofstat erevenue.Theincreasi
ngi mpor
tanceofexcise
revenueandsalestaxr efl
ectedthefavourablechangesintheeconomy
fol
lowingtheprogressoni ndustr
ial
isati
onandexpor tpr
omot i
onfronts.
Ot
hercont
ri
but
oryf
act
orsf
ort
her
elat
iveshi
fti
ntaxst
ruct
urear
e:

(
i)Ther
isei
ndomest
icpr
oduct
ionandpr
icesand

(
ii
)ext
ensi
onoft
het
axcov
erage.

Whilethesedevel
opmentstookpl aceupt othe198Gs,wit
ht heonsetof
thereforminthe1990s,t
herelati
veimpor t
anceof’di
ffer
enttaxeshas
beenundergoingchangesonceagai n.Forinst
ance,t
hesignifi
canceof
personali
ncomet axandcorporat
et axhavebeenont herise,whereas
thatofthecustomsandexcisedut i
esareont hedecl
ine.

(
5)Pr
ogr
essi
veTaxRat
eSt
ruct
ure:

Thetaxst
r uct
urehasbeendesignedinsuchamannert hatall
rel
evant
abi
li
tyi
ndicesareconsider
ed.I
nparti
cular
,thedi
rectt
axst r
uctur
ehas
beenmadepr ogressi
vebyensuri
ngthatasthebasegrowst heyi
eldwil
l
al
soincr
ease.

Therehas,
theref
ore,
beenagr
adualmovetowar
dspr
esumpt
ive
methodsoftaxat
ioninwhi
chf
act
orsli
ke:

(
i)Emer
genceofaser
viceor
ient
edeconomy
,

(
ii
)Pr
oli
fer
ati
onofsmal
lbusi
nesses,

(
ii
i)Rapi
dindust
ri
ali
sat
ion,

(
iv)I
ncr
easei
nthenumberoft
axpay
ersand,
abov
eal
l
,

(v)Theneedt odev i
ceway sandmeans, whichcouldensur erev enue
fl
owswi thoutmuchst rainontheadmi ni
str
ativesetuparegi vendue
recognit
ion.Inthefi
eldonindirectt
axes,ontheotherhand, dut i
eshav e
beensol evi
edt hatcommodi t
ies,whichareconsumedbyt her elat
ivel
y
well-
to-
docl assesaretaxedmor e.Thus,t
axationhasbeenusedasone
ofthemai ninstrumentstoachievethedif
ferentsoci
o-economi c
objecti
vesoft hecountry
.
suchareas.Suchenterpr
isesar
egi
vent
axhol
i
day
sdur
ingt
hei
nit
ial
stagesofthei
roperati
on.

(
vi)Taxat
ioncanal
sobeusedt
oensur
epr
icest
abi
l
ity
:

Taxesreducethedisposableincomeofi ndi
vidual
sandr educetheir
purchasi
ngpower.Nat u¬ral
l
yt hepressur eonthecommodi tymar ketsis
reduced.However
,thisisonlyapar toftheargument .Highindi
recttaxes
l
ikeexcisedut
yorsal estaxraisethepricesoft het
axedgoodsandl ead
toinfl
ati
on.Afal
li
nt hedemandf orsuchgoodsmayl eadtosectoral
recessi
on.

(vi
i
)Taxesareal
sousedf
orexer
cisi
ngcont
rol
overt
hebehav
iourof
consumers:

I
tissomet i
mesusedtodiscouragetheconsumptionofunnecessar
yor
harmfuli
temsli
keli
quors,t
obacco,cert
aindrugs,
etc.Theresour
ces
re¬l
easedther
ebyaredevotedt
ot heproduct
ionofnecessarygoods.

(vi
i
i)Taxesli
kecustomsdutiesarealsousedt ocontr
olimportsof
cert
aingoodswhicharedomest i
call
yav ail
ableli
keT.V.sets,
ref
ri
gerator
s,motorcarsmachinery,
wi nesandot herl
uxurygoods.The
i
deaistocutt hei
mportbil
l,
while,si
mul taneousl
y,encouragi
ng
domesticproduct
ionofimportsubsti
tutes.

(i
x)Taxsy st
em i
salsousedtopromotev ert
ical i
ntegr
ationamongfir
ms.
Thiscanbedonebyacumul ati
veexciseduty .Thistaxislevi
edonthe
tot
alvalueofeachfi
rm’sout
put.Thi
smeanst hatgoodsmi ghtbet
axed
manyt i
mesi nt
hecourseofproduct
ioniftherear eseveralver
ti
cal
l
yun-
i
ntegrat
edf i
rmsinv
olvedint
heirpr
oduction.

Greatsavingsintaxli
abil
it
yaretobemadebybuy i
ngupone’ssupplier
s
andt hef
irmst owhom onesellsone’sgoods.I
fiti
sbeli
evedthat
vert
icali
ntegrati
onisthemosteffici
entwaytoorgani
seindust
rial
producti
on,thentheintr
oduct
ionofacumul ati
veexci
sedutywill,
ifi
tis
l
argeenough, inducethedesi
redintegr
ati
on.

(x)Profi
tsindicatet
oinvestorswhicharethemostef f
ici
entf
ir
msand,
theref
ore,thef i
rmstoinvestin.Pr
ofi
tsalsoi
ndicatetofi
rmswhich
productstopr oduceandwhi chproduct
iveprocessesmakemor e
economi caluseofscarcer e¬sour
ces.

Ataxsyst
em whichaccent
uat
esthediff
erenti
alsbet
weent
heprof
it
able
andtheunpr
ofi
tabl
eusuall
yhel
pssteerresourcesi
ntot
hemostef
fi
cient
fi
rmsandprocessesandi
ntot
hemostr
api
dlygr
owi
ngsect
orsoft
he
economy.

Concl
usi
on:

Ther
eareoft
enconfl
ict
samongthesegoal
s.Asi
mplet
axsystem i
snot
al
wayseff
ici
entandequi
tymayr
equir
egivi
ngupsomesimpl
ici
ty

Thefoll
owi
ngpoi
ntshi
ghl
i
ghtt
heei
ghtmaj
ordef
ect
sint
het
axst
ruct
ure
ofI
ndia.

Def
ect#1.Hi
ghRat
eandLowYi
eldofDi
rectTaxes:

InI
ndia,
asinot
herLDCs,t
herateofdi
recttaxisv
eryhi
ghbutt
he
cont
ri
buti
ontot
hetotal
taxrev
¬enueisverylow.

I
nt he1950s, therat eofi ncomet axi nIndi awasoneoft hehighesti nthe
wor l
dbutt her ev¬enuewasv er
yi nsignif
icant .Thisisbecausehi ghtax
ratesencour agedt axev asionandav oidanceonal argescale.Itmaybe
notedint hiscont extt hattaxav oidancer eferst oarrangingone’ s
fi
nan¬cial affair
swi thint hel awsoast omi nimi setaxa¬tionli
abi l
iti
es,as
opposedt otax-evasi onwhi chi sf ail
ingtomeetact ualtaxli
abi l
i
ties
through,e.g.,notdecl aringi ncomeorpr ofit.Sot heGov ernment
graduall
yr educedt het axrat eov erthey ear s.Inspiteoft hi
s,ther ateof
i
ncomet axi nIndiai soneoft hehi ghestint hewor l
dev entoday .The
highertaxr ate(includingsur charge)atpr esenti s30%( plussurchar geof
2%) .

Def
ect#2.LowCont
ri
but
ionofI
ncomeTax:

Al¬thoughther ateofi ncomet axisthehighesti

nIndi
a,t
hecont r
ibuti
on
from suchisv erylow.Taxev asi
onseemst obet hepr
imaryreason.
Anot herr
easoni st hehighexempt ionli
mitinacountr
ywherepercapi t
a
i
ncomei sverylow.I nIndia,t
heexempt ionli
mithasbeenrai
sedf r
om
ti
met oti
me, butthel evel
sofnat i
onalandpercapitai
ncomeshav e
fail
edt oi
ncreasepr oport
ionatel
y.

Conse¬quentl
y,moreandmorepeoplehavemanagedtocomeoutof
thetaxnet
.Indi
a’spercapi
tai
ncomein1999-2000wasRs.16,
047at
curr
entpri
cesbuttheexempti
onli
mitincaseofper
sonal
incometax
wasRs.50,000.Ifotherdeduct ionsar ebroughtintoconsi
derat
ion( such
asinvest
menti napprov edGov ernmentsecur i
tiessuchasNSCs, unit
sof
UTI,ofpubli
cprovidentf und,
ori nsurancepoli
cies),t
heexemptionl i
mit
wouldbeev enmor e.Itisapityt hatthepercentageofpeoplepay i
ng
i
ncomet axinIndiaatpr esentisl essthanone.Nat ur
all
y,t
hemaj or
rel
i
ancei sonindi
rectt axes.I
nf act ,
anunduer eli
anceonindir
ectt axes
i
sacommonf ea¬tureoft hesyst em ofLDCs.

Def
ect#3.Doubl
eTaxat
ionofDi
vi
dends:

Moreo¬ver,duetodoubl etaxati
onofdiv
idend,therateofdomest i
c
savi
ngandcapi t
alformat i
onhasf ai
ledt
oincreaseappr eci
abl
y.
Compani espaycor
por a¬ti
onandot hert
axes( suchasexcesspr of
itt
ax
orsurt
ax )t
otheGov er
nment .Aporti
onofnetpr ofi
taftertaxi
susuall
y
dist
ri
butedamongshar ehold¬er
sintheform ofdivi
dend.Apor ti
onof
suchdivi
dendincomei sagai ntaxedawayinthef orm ofpersonal
i
ncomet ax.

Consequent l
y,thosewhopayt axondi v idendi
ncomecannotsavemuch
andcompani esf i
ndi ti
ncreasi
nglydiff
iculttor
aisefi
nanci
alr
esources
onal ar
gescal e.Iti
sof t
enal¬l
egedt hatoneoft hecauseofi
ndustri
al
stagna¬ti
oninI ndiahasbeent hehighr ateoft
axati
onandslowgr owth
ofcorporatecapital.Theprobl
em hasassumedser i
ousproport
ionsin
recentyears.

Def
ect#4.AbsenceofAgr
icul
tur
alI
ncomeTax:

An¬ot herfeatureofIndia’staxsy stem isthatt hereisnot axon

agricult
uralincome.Agr icult
urei st hedomi nantsectoroft heIndian
economy .Thecon¬t r
ibutionofagr i
cultur
eandr el
atedact ivi
ti
est o
Indi
a’sGDPwas29. 3%i n1999- 00.Pl annedi n¬vestmentonagr icult
ure
hasal soincreasedov erthey ear s.Butagr icultur
ehasf ai
ledtomakeany
cont r
ibuti
ont otheintr
oduct ionoft heGov er n¬ment ’
st axrevenue.Since
agricult
ureisaSt atesubj ect,t
hei ntr
oduct i
onoft heagr i
cult
uralincome
taxsy stem attheCent r
al lev
el hasnotbeenpossi ¬ble.Thisisanot her
reasonf orunduer el
ianceoni ndirectt axes.

Def
ect#5.I
mpor
tanceofI
ndi
rectTaxes:

I
nIndia,i
mportanceofindir
ecttaxeshasincreasedovertheyearswhich
i
mpl i
esthatt
heimpor t
anceofdi ¬r
ecttaxeshasdiminished.I
nabsolute
t
erms( i
.e.
,i
ntermsofr upee)thecontr
ibuti
onofdirecttaxeshas
i
ncreasedbutthepercentagecontri
but
ionofsucht axesintotal
tax
r
evenuehasdecl i
nedasTabl e5.1shows.
I
ti sobser v
edthatt axr evenueasaper cent¬ageofGDPhasi ncreased
from 9in1960- 61t o15i n2001-02.Dur i
ngt hesameper i
od,the
percent¬agecont r
ibutionofdirecttaxeshasdecl i
nedandt hatofi ndi
rect
taxesincreased.Howev er,wit
htheintroduct i
onoft axref
ormsi nrecent
years,thera¬ti
oofi ndirecttodir
ecttaxeshascomet oabout27. 6:
72.4
i
n2001- 02.Thi
si st hemostsi gnifi
cantchanget hathasoccur redin
I
ndi a’
st axstr
uct ur
ei nt hewholeplanper iod.Itseemst hatsubst anti
al
reli
anceoni ndirectt axesisunavoidableinourcount r
yinthef oreseeable
future.

Def
ect#6.Pr
ogr
essi
veTaxesonI
ncome:

TheGov ¬ernmenthasmadet hesystem ofdir

ectt axprogres¬siveand
progressivenessi sconsider
eddesirableintheinterestofequityandfor
reducingthedi s¬parit
iesinthedi
stri
butionofincomeandweal th.But
progressivetaxesencour agedtaxev asi
onandav oidanceandhav e
fai
ledt oreducei nequali
ti
esofincomeandweal th.

Def
ect#7.Wi
deni
ngt
heI
ndi
rectofTaxNet
:

Overtheyears,t
heindi
recttaxnethasbeenspr eadwide.Almostallt
he
commoditiesthatwebuybearhi ghi
ndir
ecttaxesassal estax,
excise
duty
,cust
omsdut y,
octr
oi,cessandsoon.Atpr esent,Cent
ral
Governmentrevenuefr
om t womaintaxes,
viz.,unionexci
sedutiesand
cust
omsaccount sforabout80%oft hetot
al r
ev enue.

Thecoll
ect
ionfr
om theset
wot axesamountedt
oRs.81,720cror
esand
Rs.54,
822cror
es,r
especti
vel
y,in2001-
02.However
,themajordef
ectof
thepresentsystem ofindi
recttaxesisthecascadingeffect(i
.e.,t
he
cumulati
v eburden)ofsucht axes.I
nIndiawef i
ndamul tipl
ic¬ityof
l
evies.Thesamecommodi tyorfactorofproduct
ion(suchasr aw
materialorpur
chasedcom¬ponent )istaxedmor ethanonceasi t
passesthroughdi f
fer
entstagesofpr oducti
onanddi st
ri
bution.

Thereist
axsuchasSt at
esalestaxonani tem onwhi chunionexcise
duti
eshasalreadybeenpaid.Thereis,
forinstance,notonlyexciseduty
orsalest
axonf ini
shedcarsbutalsoonty r
es,tubesandot her
components.Duet othemulti
pli
cit
yoflev¬iesthecascadingeffect
cannotbeavoided.Thus,i
ndir
ecttaxeshavecausedcost -pushinflat
ion
i
nIndia.

Def
ect#8.Regr
essi
veNat
ure:

Moreov er,i
ndi
recttaxeshavebecomemor eandmoreregressi
veover
theyears.Sucht axesareusuallyimposedoncon¬sumptiongoods.In
general,poorpeoplehav eahighpr opensi
tyt
oconsumet hanther
ich
people.Infact,
themar ginal
propensi t
ytoconsumegradu¬all
y
decreaseswi t
hani ncreasei
ni ncome.

Thuspoorpeopl e,whospendt hemaj orport

ionoftheirsmalli
ncomeon
consumpt iongoods,paythemaxi ¬mum amountofi ndir
ecttaxes.Thus,
overthey ears,
thedir
ecttaxsystem hasbecomel essandl ess
pro¬gressiveduetogradualr
educt i
oninthepersonalincomet axrat
e,
whileindi
recttaxeshavebecomemor eandmor eregressiv
eduet othe
i
nclusionofmor eandmor eitemsi ntheexci
senet.

Asimpleexampl ewil
lcl
assif
ythepoint.Supposeweconsi
dert
wo
i
ndivi
dual
s—Mr .XandMr .Y.Thei
rmont hlyincomesar
eRs.3,
000and
Rs.10,
000,respect
ivel
y.Mr.XspendsRs.2, 000permont
hon
consumpti
ongoodsandMr .YRs.4,000.Supposether
eis10%exci
se
dutyonal
lit
emsofconsumpt i
on.

Sothet
axbur
denoft
het
woi
ndi
vi
dual
smaynowbecal
cul
atedas
fol
l
ows:

Tabl
e5.
2:Regr
essi
venessofI
ndi
rectt
axes
Thus,i
nabsoluteterms, Mr.Ypay sRs.400t
ot heGover
nmentint
he
for
m ofindi
recttaxes.ButMr .XpaysonlyRs.200.Butt
hetaxonMr.X
i
smuchhi gherthant hatofMr .Y,
asTable5.2shows.Mr.Xpays6.
6%
ofhismonthlyi
ncomei ntheform oftax,
whil
eMr .Ypay
sonly4%.

Thisexampl emakesi tcl

earthatindi
rectt
axesarehighl
yr egr
essi
vein
nature.Theyfal
lmor eheav¬il
yonpeopl ewhohav eastrongpropensit
y
toconsumeandl essheavil
yont heri
chpeoplewhohav east rong
propensityt
osave.Thi si
sanot heri
mpor t
antchangethathasoccurred
i
nI ndia’
staxstr
uctureduri
ngt heplanperiod.

Howev er,t
hetaxationmeasur esunder takenint herecentyearsintendto
achiever efor
msi nt hestruct
ureofalltypesoft axesandaredesi gnedto
fur
thert hebasicobj ecti
vesofeconomi cgr owt h,equit
y,si
mplici
tyand
buil
t-i
nr evenue-
raisingcapacity.Accordingl
y ,personali
ncomet axhas
beenr estruct
uredwi t
hlowertaxes,fewersl absandhi gherexempt ion
l
imit.

Thesy st
em oftaxati
onoff i
rmsbyel i
minati
ngthedisti
ncti
onbetween
reg¬isteredandunregister
edfirmshasbeenr e-
val
uedt owidenthetax
net;aschemeofpr esumpt i
vetaxa¬ti
onhasbeenintroducedforpett
y
traders,andsmal lt
ransportoperat
ors.Toplugt
heloopholesand
l
eakageofr evenue,minors’i
ncomehasbeencl ubbedwi t
hthatofthei
r
parents.

Taxat i
onofcapi¬talgainshasbeencompl et
elyrestr
uctur
ed, sot
hatonly
capitalgai
nsnetofpr iceincr
eases,wouldbetaxed.Sever
almeasur es
aimingati mprovi
ngt axcompliance—suchasv olunt
arydi
sclosur
e
rel
ianceandsi mplif
yingtaxadmi ni
str
ati
on—hav ebeenint
roduced.Sti
l
l
mor ereformsaredueandt heGov ¬er
nmentwillhavetoadoptsome
mor eeffecti
vemeasur es.

Tr
endsi
ntaxr
evenuei
nthepost
-r
efor
m per
iod:

I
nthepost
-r
efor
m per
iod(1991-
92t
o2000-
01)tot
alt
axrev
enuehasa
pr
opor
ti
onofGDPhasf al
l
enbyabout1%duetoafal
li
ntheindi
rectt
ax
component.Thi sisduet otherati
onali
sati
onofcust om andexci
se
duti
esin1990.Di r
ecttaxrevenueasapr oport
ionofGDPhasr i
senf r
om
2%in1991-92t o2. 8%in2000- 01.Thi
scomposi ti
onalchangesinthe
str
uctur
eoft axr evenuehasbeeni nthedesir
eddi r
ecti
onasdi r
ecttaxes
aregeneral
l
yl essdi st
ort
ionaryinimpactthanindi
recttaxes,
i.
e.,di
rect
taxdonothav eexcessbur den