Challenges In Implementing Tax Reforms In India
Since the early 1990s, India's tax policy has seen major changes; nonetheless,
problems in building a fair, efficient, and revenue-generating tax system still
exist. This article analyses changes in tax policy and revenue patterns at both
the Union and State levels, therefore critically evaluating India's tax system
against a best-practice framework. Particularly with relation to agricultural
and non-agricultural revenue, one of the main flaws of the Indian tax system is
the scattered constitutional assignment of taxing authorities between the Union
and State governments. This structural separation makes it difficult to apply a
thorough income tax, which fuels extensive tax avoidance and evasion.
Furthermore, the policy goals placed on the tax system have produced a
complicated network of preferential treatments and exclusions, thus causing
significant income loss and economic inefficiencies. Often resorting to taxing
industries where income is readily available, the government fuels
inefficiencies and distortions in economic activity even more.
The challenge in properly collecting revenues from the unorganised sector, which makes up a sizable share of the Indian economy, still limits the tax base of India. Further income loss results from multinational companies using tax breaks via base erosion and profit shifting (BEPS). Weak organisational structures and limited administrative capacity among other inefficiencies of the tax administration system restrict the efficient application of tax legislation. The "tyranny of the status quo," wherein reformers fail to see their benefits and those adversely effected fiercely oppose change, is a major obstacle to tax reform in India. This dynamic helps to explain the sluggish and usually useless character of tax changes implemented in the nation.
Driven by shifting macroeconomic goals, globalisation, and changing fiscal demands, tax systems all over have seen notable changes during the last two decades. With varied results, India has instituted a number of direct and indirect taxes to handle revenue and equality issues. Introduced as a historic change, the Goods and Services Tax (GST) sought to streamline the indirect tax system and improve revenue efficiency but its application proved difficult. Likewise, corporate tax changes aimed to boost investment incentives while preserving revenue neutrality; yet, tax dodging problems still abound.
This article also evaluates the ideas motivating India's tax reforms within more general Asian emerging economies, therefore contextualising them. From being just, a means of earning money, taxes now play a macroeconomic function on fiscal stability, equality, and growth. Recent policy choices have been affected by ideas of tax reform include expanding the tax base, lowering distortions, and raising compliance. Their implementation in India has, however, been hampered structurally and politically, therefore compromising the success of reforms.
In essence, even if India has adopted notable tax policy reforms, basic issues still exist in widening the tax base, enhancing compliance, and lowering distortions. Improving India's tax system still depends mostly on strengthening tax administration, tackling tax dodging techniques by international companies, and guaranteeing more efficient taxation of the unorganised sector. The report emphasises that improving the efficiency, equality, and simplicity of India's tax system still presents a difficult task needing constant political will and administrative creativity even after eight years of ongoing changes.
Introduction
By affecting resource allocation, investment choices, and income distribution, taxation shapes the economic scene of a nation in fundamental terms. Any nation's tax system is a fundamental tool for generating public income as well as for influencing economic efficiency and equality. Responding to changing economic structures, globalisation, and the need of fiscal sustainability during the last two decades, tax systems all over have seen major changes. Although the type and scope of tax changes have differed between nations, their fundamental goals have been mostly the same: improving income collecting, reducing economic distortions, and guaranteeing equity in taxes.
Driven by both internal and international elements, developing nations like India have seen significant tax changes during the 1990s. Many of these changes have been carried out in reaction to financial crises as nations confronted growing budget deficits and dwindling outside aid. As Richard Bird (1993) correctly observed, "fiscal crisis has proven to be the mother of tax reform." But in many instances, tax changes have been ad hoc, mostly targeted at satisfying short-term revenue demands rather than accomplishing long-term structural changes. India too has gone through a sequence of tax changes started during times of economic crisis but eventually adjusted to fit more general macroeconomic goals.
The shift from centrally planned economies to market-oriented systems has been among the most important forces behind tax revisions in emerging nations. Taxation has to be changed systematically from a public sector-driven, import-substituting industrialisation approach to a market-based resource allocation system. Designing tax policies ensuring international competitiveness became essential as nations embraced globalisation and linked with foreign markets. Taxes became a strategic weapon for economic development and stability, transcending their simple function as a means of income collecting. In this regard, India's tax changes from the early 1990s have aimed to produce a system fit for global best practices as well as fair and efficient one.
For many years, significant fundamental inefficiencies defined India's tax structure. Designing a coherent and harmonic tax system has been difficult due to the scattered constitutional assignment of taxing authorities between the Union and State administrations. The difference between agricultural and non-agricultural income taxes has been a major problem as it has given tax avoidance and evasion routes. Furthermore, the many exclusions and special treatments have caused major income loss and economic inefficiencies. The difficulties in taxing the large unorganised sector, which makes up a significant fraction of India's GDP, has also limited her tax system. Further aggravating income loss are multinational companies using tax breaks via base erosion and profit shifting (BEPS).
When the Goods and Services Tax (GST) was adopted in 2017, India underwent a historic change meant to streamline its indirect tax system by substituting a single destination-based value-added tax for many indirect levies. Technical problems, income shortages, and the complexity of the multi-tiered tax system have presented difficulties for GST even if it has simplified tax administration and raised compliance. In direct taxes, too, measures aimed at lowering tax complexity and expanding the tax base have included efforts to create a Direct Tax Code (DTC). Different stakeholders have opposed these changes, however, which makes their execution challenging.
Often referred to as the "tyranny of the status quo," one of the main challenges to tax reform in India, politics typically shapes tax policy changes as people who stand to lose from them generally become resentful while those who gain from them are usually not appreciative. Tax reform is not just a technical exercise but also a very political process shaped by conflicting interests in democratic countries like India. Often delayed and incremental tax policy changes rather than complete overhauls have resulted from opposition from entrenched interest groups, bureaucratic inertia, and questions over short-term revenue consequences.
Tax reform is a top issue for India despite structural difficulties. The nation must simultaneously minimise tax distortions that can impede economic development and generate enough income to cover its rising public spending obligations. India's tax-to--- GDP ratio has been quite constant despite many reform initiatives, which emphasises the necessity of further policy changes. Furthermore, the federal character of India's politics has made it difficult to balance and coordinate tax policy at many tiers of government. Inefficiencies and tax compliance difficulties for consumers follow from the absence of harmonisation between Union and State taxes.
Recent years have also seen increasing discontent among international companies over India's tax policy, which fuels ongoing conflicts and legal uncertainty. Taxing foreign capital flows and difficulties implementing transfer pricing rules have highlighted the necessity of more clarity and consistency in tax laws. Concurrent with these developments in technology and digitalisation provide fresh chances for enhancing tax administration and compliance. Artificial intelligence (AI) and data analytics used in tax enforcement may assist lower tax evasion rates and increase revenue collecting effectiveness.
One should be able to separate thorough tax reforms from little adjustments in the tax code. While yearly budget changes can bring little changes to tax rates and exemptions, systematic tax revisions fundamentally change policy direction. Simple, consistent, predictable tax systems will help to guarantee that changes do not cause disturbance to economic activity. Nonetheless, especially in a complicated and democratic country like India, any tax reform is an ongoing process rather than a one-time occurrence.
This study attempts to provide a thorough overview of India's tax policy and recent changes, thereby examining the change of the tax system from the early 1990s. It looks at the justification for many tax reform projects, their achievements, and the difficulties still in their execution. Drawing similarities with other emerging nations, the report also places India's tax changes in line with more general global trends. This paper aims to add to the continuing conversation on bettering India's tax system by evaluating current tax policy changes, trends in tax collections, and continuous reform ideas.
Research Objectives
Research Problem
Significant structural and administrative problems with India's tax system compromise its efficiency, equality, and capability for producing income. The split constitutional division of taxation authorities between the Union and State governments is one of the main problems as it results in revenue collecting inefficiencies, jurisdictional disputes, and tax evasion openings. Implementing a coherent and effective taxation system is challenging as the absence of a harmonic tax structure has resulted in revenue leaks and variations in tax enforcement across several jurisdictions.
The extensive tax avoidance and evasion, especially among multinational companies and the unorganised sector, raises even another urgent issue. Using aggressive tax planning techniques to reduce their tax obligations, multinational corporations take advantage of weaknesses in international tax treaties, participate in base erosion and profit shifting (BEPS), India's huge unorganised sector stays mostly outside the official tax system at the same time, therefore lowering the total tax base and taxing the official economy disproportionately. Effective resolution of these problems by current legislative and administrative systems calls for more forceful policy interventions.
The "tyranny of the status quo" wherein political and bureaucratic opposition slows down or blocks required policy changes adds even another obstacle to tax reform in India. While individuals who stand to gain from changes may not actively promote them, others who depend on the current system can object to improvements. Rather than systematic, forward-looking tax measures that may boost revenue generating, lower distortions, and increase compliance, this opposition has produced fragmented, reactive changes.
Given these difficulties, this study aims to critically investigate how the constitutional division of tax authorities, tax avoidance and evasion methods, and political opposition to change together affect the efficacy of India's tax system. The report seeks to pinpoint possible remedies and legislative suggestions meant to improve tax compliance, revenue collecting, and significant tax changes in India.
Research Questions
Research Methodology
This paper is completely based on the secondary method of research approach where the data used are collected and analysed from the legal documents w.r.t the Challenges in Implementing tax reforms in India and other related document and other legislative texts and existing literature from a selected website such like Jstor etc of Tax reforms in India. The research is carried out in such a way that it offers a thorough knowledge of Taxation and its implications on real estate and relateddifficulties and the effectiveness of taxation in making effective real estate transaction to reduce the disparities.
Literature Review:
Analysis
India has been striving at Union level to simplify and rationalise the tax system by changing both direct and indirect taxes since 1991. Recommendations for the rationalising and simplification of both taxes, which the Tax Reform Committee (TRC) [1]with Raja Chelliah suggested, were carried out between 1991 and 1995. 2003–04 saw a thorough assessment of the tax system; more subsequent studies have concentrated on research and revenue projection.
To increase revenue production by widening the tax base and streamlining tax structures, successive administrations have tried to change the direct and indirect tax systems. The Chelliah Committee advised rationalising the highest marginal rate to 30% in 1997 and reducing the tax bracket count. Now the tax is paid at 10% on earnings exceeding `2.5 lakhs up to `5 lakhs, 20% on incomes between `5 lakhs and `10 lakhs, and 30% above that.
Regarding corporate tax, the difference between tightly owned and broadly held corporations was erased, and in 1993–1994 tax rates were uniform at 40%. The policies implemented, however, have lacked direction; the dividend tax rate rose to 20% in 2000-01, then dropped to 10% in 2001-02, then applied to shareholders.
The Finance Minister committed in the 2015–16 budget to gradually lower tax benefits and cut corporation tax to 25% over the following three years.
India has been enacting changes since 1991 aimed at lowering and rationalising customs taxes, harmonising excise taxes, and broadening the base of service tax. Still, there are various rates, including particular rates for agricultural goods and reduced tariffs levied on inputs, which provide high effective rates of protection on outputs. As the reform of Union excise duty carried out in 1986–1987 shows, ill-prepared tax changes may be more damaging than any reform.
Though this was adopted without appropriate planning, the Jha Committee advised that Union excise taxes should be converted into a manufacturing stage value-added tax. Complications followed from this, too high tax credits, and lost income[2]. Following years have witnessed significant convergence in tax rates until 2008-09, when efforts were made to lower taxes on various categories, particularly processed food products. Reducing the threshold, trimming the exemption list, and classifying products like processed food into the higher rate category can help to greatly simplify future rationalising.
Originally, the Constitution did not provide the Union or State governments authority to tax services either. But in 1994 the Union Government imposed levies on three services: non-life insurance, stock broking, and telephones. Entry 92-C in the Union List enabled the 88th Amendment of the Constitution to allow the Union Government to impose the tax. In 2011 the Expert Group on Taxation of Services advised moving to the negative list, uniting the threshold and rates between excise duty and service tax, and allowing input tax credit between products and services to create a manufacturing stage GST.
Although the Indian Constitution gives states the authority to impose several taxes, only the tax on sale and purchase of products provides almost 60% of the state tax income. Additional significant state taxes include taxes on transportation, stamp charges, registration fees on property transactions, and taxes on alcoholic beverages. From the standpoint of income, land revenue and agricultural income tax have lost relevance. Local bodies have been allocated less significant levies such entertainment tax and energy charge.
Value-added tax on products from 2005-06 was the main State level change. [3]Talk has been continuous about the Union and State governments' adoption of dual GST. Two documents published by the Empowered Committee of State Finance Ministers for public review have failed to generate agreement on matters concerning the structure and running policies of the tax.
As the Union and States as well as the States among themselves have not been able to agree on numerous matters, the target date for GST has been constantly revised. April 2016 is the day the current Finance Minister plans to apply the tax. Passed in the Lok Sabha but not the Rajya Sabha, the 122nd Constitution Amendment Bill has been referred to the Select Committee of the Rajya Sabha.
GENERAL ANTI-AVOIDANCE RULES
General Anti-Avoidance laws (GAAR) as an all-encompassing anti-avoidance clause has helped the Indian Tax Law system to simplify from a convoluted array of laws. The Vodafone decision was among the most divisive ones made. By mainly concentrating on the general anti-avoidance rules and the retroactive modification pertaining to indirect transfer, the author investigates the feasibility of GAAR in the present Indian tax law environment.
The paper investigates the many permutations and combinations of events whereby GAAR might be used or denied in great detail and offers perfect circumstances wherein other options could be investigated as replacements for the same. The Shome Committee recommended postponing GAAR introduction by three years to provide time for educating tax officials on the application of GAAR clauses and building suitable policies and procedures.
The Indian Income Tax Act (ITA) has been changed to define "commercial substance"[4] as a change in the economic position by means of business risk or net cash flows. Under section 102, the word "connected person" should refer to "associated person"; under section 92A, "associated enterprise". Five members—one CCIT, one Commissioner of Income Tax, a former High Court judge, and Chief Commissioners of Income Tax—should make up the Approving Panel. Before calling GAAR, the committee advises separating tax mitigating from tax avoidance and allowing equivalent adjustments for the same taxpayer in many years. The tax audit report should record tax avoidance techniques beyond a certain level.
The Committee has that GAAR not be used in situations of tax advantages acquired by Indian corporations by not reporting dividend's post-introduction of Dividend Distribution Tax (DDT) and subsequent buy back of shares after collecting reserves. This limitation relates to situations involving capital gains on sale of shares of an Indian firm V by G and H, where V were obtained after liquidation of intermediate Indian holding company X. Regarding investments in India routed via F1 nation offering exemption from capital gain in source country, GAAR cannot be claimed. In situations of holding-subsidiaries, mergers executed under High Court decisions, routing of offshore trading operations, tax deductions, asset leasing, and capital gains on sale of preferred shares by workers, GAAR should not apply.
In certain cases where it cannot be used, the General Anti-Avoidance Provision (GAAR)[5] is relevant. Higher earnings in SEZ units result, for instance, from manufacturing from non-SEZ operations being moved to SEZ units at a reduced cost. Transfer pricing rules and other anti-avoidance clauses help to pay expenses for group businesses and transactions amongst connected parties. When short-term capital loss is matched with other sources, GAAR might be triggered. It also applies when an Indian firm with no declared dividends since 2003 accumulates reserves used to buy-back shares, and the buy-back offer is not accepted by other shareholders, resulting in capital gains on sale of shares.
Particularly with regard to indirect transfer of underlying assets in India, the Finance Act, 2012 included retroactive changes to define the source rule of taxation of non-residents in India. These changes caused concerns regarding stability of tax rules in India, predictability, and clarity. The Prime Minister established an Expert Committee to investigate the relevance of the retroactive modification on indirect transfer and offer its suggestions to the government. The suggestions seek to soothe public worries and guard the tax base from erosion brought on by indirect asset transfer in India. The modifications encompass loans, services, forward contracts, property transfers, among other operations. Protecting the tax base from erosion and guaranteeing the fairness of tax rules in India is the goals here.
The paper suggests retroactive changes to Indian tax legislation to fix mistakes or anomalies, eliminate technical flaws, safeguard the tax base, or limit concerns to clarification. It implies that these adjustments should only take place seldom and after consultation with relevant parties. The provisions of the Finance Act, 2012 on taxes on indirect transfers should not be explained considering constraints in the definition of "transfer" and computation methods. According to the paper, no one should be handled as a "assesses" in default" for deals involving foreign firm shares with underlying Indian assets. The study also advises that, should they provide significant value from Indian assets, transfers of shares or interest in overseas corporations should not be taxed in India.
The proposals of the Expert Committee seek to weaken the General Assets and Alternatives (GAAR) clauses in India thereby provide more protection against random use of GAAR by tax authorities. The recommendations comprise omitting the phrase "an asset or" from Explanation 5 to clause (i) of sub-section (1) of Section 9, defining "substantially" as a threshold of 50% of the total value derived from assets of a company or entity, and so clarifying the phrase "directly or indirectly". Due by September 30, 2012, the final report will provide clarification on the meaning of several words and phrases and the application of changed clauses.
For many reasons, India's tax structure has changed significantly within the last two decades. The development strategy and philosophical perspective of the eras will determine the different motive behind these changes. Many emerging nations started their tax changes immediately in order to increase revenues to help to offset approaching economic difficulties. These changes, however, are generally ad hoc and do not seek to improve long-term tax system performance.
Evolution of a tax system to satisfy the criteria of worldwide competitiveness is one of the most crucial factors for recent tax changes in many developing and transitional countries. The state's viewpoint on development has moved from a centrally planned development strategy to market-based resource allocation. To guarantee world competitiveness, the tax structure has to change to fit the needs of a market economy.
The idea of tax reform has changed significantly throughout time to fit the evolving view of the function of the government. New methods to reform stress on reducing tax policy distortions to maintain the competitiveness of the economy. To reduce inadvertent distortions in relative pricing, this entails lowering the marginal rates of both direct and indirect taxes as well as minimising tax rate difference. [6]
At least three alternative models are offered by conventional wisdom on tax reforms: the supply-side tax model (SST), the Harberger tax model (HT), and the optimum tax (OT) model. A unified tariff plus a broad-based VAT (value-added tax) make up the fundamental HT reform package for developing nations that are price takers in the international market.
Reducing tax rates—especially direct tax rates—helps India to lower public expenses by thus minimising disincentives on employment, saving, and investment. Combining components of three models, this method considers administrative, political, and information limitations in developing and executing reforms while including theory and prior reform experiences. The best practice method seeks to minimise relative pricing distortions and increase income productivity.
Usually, reforms have concentrated on widening the base of taxation, lowering tax rates, and decreasing rate differentiation in both direct and indirect taxes. Reduced marginal rates guarantee horizontal fairness, lower disincentives to labour, save, and invest, and help to increase tax compliance. Reforms in indirect taxes call for a broad-based VAT with little exemption augmented by a few luxury excises. Taxes should replace import duties; export taxes should be removed; and tariff dispersion should be reduced. All save a tiny number of individuals with income levels less than twice the national per capita income should pay personal income tax. Emphasising horizontal equality also suggests improving tax administration and creation of appropriate information technologies and automation.
Three stages have gone through India's tax system: a consistent rise in tax-GDP ratio from the 1970s to mid-1980s. From the perspective of the economic resource needs, nonetheless, the degree of tax collections is insufficient. Following tax changes implemented in 1992, direct tax share rose by approximately ten percent to 24% in 1997–1998.
Both central and state governments under the Indian federal system have revenue capabilities; the latter generates around 37% of the overall income. The Seventh Schedule of the Constitution outlines respectively state and central government income sources. [7]Except for those on alcohol and customs charges, the federal government has great tax powers on non-agricultural income and wealth, business earnings, excise duties, and excise taxes.
With property taxes and taxes on the entering of products into a local area for use, consumption, or sale, the 72nd and 73rd Constitutional amendments further define specific revenue sources to urban and rural local governments. Local governments mostly rely on devolution of resources from the state governments; they have very little authority for income generating.
Since independence, efforts at tax reform have aimed to increase income generation to support significant development projects. Nevertheless, because the suggestions fit the mindset of the day, they do not greatly reflect economic efficiency. With the marginal tax rate as high as 93.5% in the early 1970s, the tax system has generated massive incentives for tax avoidance and evasion.
Conversion of union excise taxes into a modified value added tax (MODVAT) in 1986 was the most significant change done before 1991. Though efforts to rationalise and simplify the systems have been taken, they cannot be regarded as complete.
Initiating tax changes in 1991 as part of the structural reform process after the economic crisis of that year was the Tax Reform Committee (TRC). To suggest thorough tax system changes, the TRC mixed economic ideas with common sense knowledge. Three sections—interim, final, and reforming the tariff structure—make up the report. Reducing the percentage of trade taxes in overall tax income, raising domestic consumption taxes by converting domestic excises into VAT, and thus boosting the relative contribution of direct taxes were the key goals.
Maintaining progressivity without encouraging evasion, the TRC suggested cuts in important taxes like customs, personal and corporate income taxes, and excise rates. Among the measures were widening the base of all taxes, streamlining of legislation and processes, development of an appropriate information system, computerisation of tax returns, and overhaul of administrative and enforcement tools.
In line with states, the TRC also advised turning taxes on domestic manufacture into value-added taxes and distributing them wholesale. The central VAT was therefore extended to the wholesale level with revenues from the increased charge given to the states, but the suggestions fell short of creating a coordinated domestic trade tax system.
Although most of the TRC's recommendations have been followed by the government in stages, certain adjustments have not quite matched the TRC advice. For instance, personal income taxes witnessed notable reductions in tax rates, exemptions limitations, and incentives for self-employed income earners.
For both local and international businesses, corporate income taxes have been steadily down to 35% and 48% respectively. Little has been done, nevertheless, to widen the base of company tax as tax holidays and incentives for investment in other sectors provide depreciation allowances, exemption for exporters, and other benefits. Corporate earnings have therefore not grown at all. Introduced in 1997-1998, a Minimum Alternative Tax (MAT) guarantees minimal tax payments. Tariffs have also dropped; the average rate of tariff is only around 25%, whereas the highest rate of import tax in 1997-98 was 40%. There are still several tax rates, and changes in them with time.
The MODVAT capability has been gradually streamlined and rationalised; most items have their tax transformed from a particular into an ad valorem charge. Under the MODVAT,[8] credit on input taxes under the MODVAT has been expanded to a greater number of commodities; roughly 80% of items covered by excise charges furnished with the compliance index.
Since 1991, selective taxes on services have been instituted covering a wide range of services including transporters, car rentals, air travel agents, architects, interior designers, management consultants, chartered accountants, cost accountants, company secretaries, credit rating agencies, market research agencies, underwriters, private security/detectives, real estate agencies, and mechanised slaughter houses.
State tax systems have not progressed commensally; sales taxes have stayed flat and become convoluted. Input and capital goods taxes have helped to create a cascade wherein consumers pay more than the government generates. Independent and overlapping commodities tax regimes at the national and state levels make coordinated and harmonic growth of domestic trade taxes challenging.
To suggest policies to harmonise and rationalise the domestic trade tax system, the Indian government set up a research committee. The panel examined the flaws in the current tax system and advised states to progressively migrate to consumption-type, value added taxes based on destination-based principles. The research committee advised, at the central level, total switching over to the manufacturing stage VAT. Existing sales taxes were to be converted, at the state level, into retail stage destination VAT. Appointed to convince governments to rationalise their tax structures was a committee of finance ministers.
Though there is general agreement on the need of state-level sales tax system improvements, relatively little real rationalising has been done. The 1991 economic crisis caused a notable drop in income, which in turn sharply changed the tax-GDP ratio. The tax-GDP ratio dropped drastically to less than 15% in 1993–1994; even with modest recovery since then, it still falls short of 15%.
Revenues have showed a notable rise even although rates of both personal and corporate income taxes have dropped greatly. As a percentage of GDP and overall tax income, the share of direct tax income shown notable rise. It is unclear, nevertheless, what degree the rise in revenue productivity comes from administrative actions, greater compliance resulting from reduced marginal tax rates, and higher public sector compensation adopted in line with pay commission recommendations.
Eight years of tax reform notwithstanding have numerous troubling aspects in the tax system still exist. India still has a great difficulty in increasing the tax system's efficiency; much more has to be done to reach hard-to-tax populations.
Conclusion And Suggestions
Suggestions
India's tax structure has seen major changes meant to increase revenue generation and support economic development. Simplifying the tax system by lowering exemptions and deductions has been a main emphasis because it increases the tax base. Though its implementation has met difficulties owing to concessions between the Union and State governments, the establishment of the Goods and Services Tax (GST) was a fundamental step to unify several indirect taxes.
Emphasising the importance of professionalising, better using technology, and taxpayer-friendly techniques to boost compliance and lower conflicts, efforts to enhance tax administration have focused on Maintaining the tax base depends still mostly on addressing problems such base erosion and profit shifting by multinational companies. Recent budgets have included middle class tax cuts meant to increase spending and spur economic growth. Still, it is difficult to strike the mix between guaranteeing long-term budgetary sustainability and offering instant comfort. Constant changes seek to establish a tax system that is fair, simple, and fit for investment, therefore complementing India's more general economic goals.
Conclusion
Direct tax changes in India are very important for guaranteeing social and financial justice, improving revenue collecting, and promoting sustainable economic development. India can build a more efficient and growth-oriented taxing system by simplifying the tax structure, extending the tax base, enhancing compliance, and matching with global best practices. Such changes might boost income efficiency, raise investment, and help more equitable economic growth by means of their support of Still, ineffective tax laws discouraging investment and saving provide difficulties. Reducing capital gains tax rates, along with more general structural changes, economists contend might boost long-term development and encourage economic activity. Although the advantages of certain tax cuts should not be exaggerated, they might have a major effect on the economy and help to create a more active financial environment.
Following demonetisation, India carried major tax changes meant to promote economic sustainability and match tax policies with long-term development objectives. Through their encouragement of social fairness, environmental accountability, and economic growth, these changes have helped to support sustainable development. India has to keep improving its tax policies to keep this trend, making sure they encourage equitable and sustainable development while nevertheless being consistent and predictable. Given ideas like tax neutrality and the demand elasticity of financial products like stocks, the taxation structure for the securities market also calls for a more methodically thorough redesign.
Furthermore unresolved in India's tax policy is the use of General Anti-avoidance Rules (GAAR). Although intended to reduce tax evasion, questions about its arbitrary implementation and possibility to generate confusion among taxpayers and investors remain. The proposals of the Expert Committee seek to allay these worries by suggesting further measures to prevent tax officials from misusing GAAR. Should the government approve these suggestions, not only would retroactive taxation—a long-standing annoyance of foreign investors—but also provide much-needed clarity on indirect transfers and taxability of prior transactions. A more open and consistent tax environment will increase investor confidence and help mergers and acquisitions (M&A) in India to go forward.
India's tax reform initiatives have to ultimately combine compliance enforcement with economic incentives and revenue generating. A carefully calibrated tax policy may help to reduce distortions, improve tax administration efficiency, and inspire voluntary compliance. The success of these changes will rely on the government's capacity to provide stability, predictability, and justice in tax policy, therefore creating an environment that promotes long-term budgetary sustainability and continuous economic development. India can create the foundation for a rich and internationally competitive economy by constantly improving and using careful tax policy.
References:
The challenge in properly collecting revenues from the unorganised sector, which makes up a sizable share of the Indian economy, still limits the tax base of India. Further income loss results from multinational companies using tax breaks via base erosion and profit shifting (BEPS). Weak organisational structures and limited administrative capacity among other inefficiencies of the tax administration system restrict the efficient application of tax legislation. The "tyranny of the status quo," wherein reformers fail to see their benefits and those adversely effected fiercely oppose change, is a major obstacle to tax reform in India. This dynamic helps to explain the sluggish and usually useless character of tax changes implemented in the nation.
Driven by shifting macroeconomic goals, globalisation, and changing fiscal demands, tax systems all over have seen notable changes during the last two decades. With varied results, India has instituted a number of direct and indirect taxes to handle revenue and equality issues. Introduced as a historic change, the Goods and Services Tax (GST) sought to streamline the indirect tax system and improve revenue efficiency but its application proved difficult. Likewise, corporate tax changes aimed to boost investment incentives while preserving revenue neutrality; yet, tax dodging problems still abound.
This article also evaluates the ideas motivating India's tax reforms within more general Asian emerging economies, therefore contextualising them. From being just, a means of earning money, taxes now play a macroeconomic function on fiscal stability, equality, and growth. Recent policy choices have been affected by ideas of tax reform include expanding the tax base, lowering distortions, and raising compliance. Their implementation in India has, however, been hampered structurally and politically, therefore compromising the success of reforms.
In essence, even if India has adopted notable tax policy reforms, basic issues still exist in widening the tax base, enhancing compliance, and lowering distortions. Improving India's tax system still depends mostly on strengthening tax administration, tackling tax dodging techniques by international companies, and guaranteeing more efficient taxation of the unorganised sector. The report emphasises that improving the efficiency, equality, and simplicity of India's tax system still presents a difficult task needing constant political will and administrative creativity even after eight years of ongoing changes.
Introduction
By affecting resource allocation, investment choices, and income distribution, taxation shapes the economic scene of a nation in fundamental terms. Any nation's tax system is a fundamental tool for generating public income as well as for influencing economic efficiency and equality. Responding to changing economic structures, globalisation, and the need of fiscal sustainability during the last two decades, tax systems all over have seen major changes. Although the type and scope of tax changes have differed between nations, their fundamental goals have been mostly the same: improving income collecting, reducing economic distortions, and guaranteeing equity in taxes.
Driven by both internal and international elements, developing nations like India have seen significant tax changes during the 1990s. Many of these changes have been carried out in reaction to financial crises as nations confronted growing budget deficits and dwindling outside aid. As Richard Bird (1993) correctly observed, "fiscal crisis has proven to be the mother of tax reform." But in many instances, tax changes have been ad hoc, mostly targeted at satisfying short-term revenue demands rather than accomplishing long-term structural changes. India too has gone through a sequence of tax changes started during times of economic crisis but eventually adjusted to fit more general macroeconomic goals.
The shift from centrally planned economies to market-oriented systems has been among the most important forces behind tax revisions in emerging nations. Taxation has to be changed systematically from a public sector-driven, import-substituting industrialisation approach to a market-based resource allocation system. Designing tax policies ensuring international competitiveness became essential as nations embraced globalisation and linked with foreign markets. Taxes became a strategic weapon for economic development and stability, transcending their simple function as a means of income collecting. In this regard, India's tax changes from the early 1990s have aimed to produce a system fit for global best practices as well as fair and efficient one.
For many years, significant fundamental inefficiencies defined India's tax structure. Designing a coherent and harmonic tax system has been difficult due to the scattered constitutional assignment of taxing authorities between the Union and State administrations. The difference between agricultural and non-agricultural income taxes has been a major problem as it has given tax avoidance and evasion routes. Furthermore, the many exclusions and special treatments have caused major income loss and economic inefficiencies. The difficulties in taxing the large unorganised sector, which makes up a significant fraction of India's GDP, has also limited her tax system. Further aggravating income loss are multinational companies using tax breaks via base erosion and profit shifting (BEPS).
When the Goods and Services Tax (GST) was adopted in 2017, India underwent a historic change meant to streamline its indirect tax system by substituting a single destination-based value-added tax for many indirect levies. Technical problems, income shortages, and the complexity of the multi-tiered tax system have presented difficulties for GST even if it has simplified tax administration and raised compliance. In direct taxes, too, measures aimed at lowering tax complexity and expanding the tax base have included efforts to create a Direct Tax Code (DTC). Different stakeholders have opposed these changes, however, which makes their execution challenging.
Often referred to as the "tyranny of the status quo," one of the main challenges to tax reform in India, politics typically shapes tax policy changes as people who stand to lose from them generally become resentful while those who gain from them are usually not appreciative. Tax reform is not just a technical exercise but also a very political process shaped by conflicting interests in democratic countries like India. Often delayed and incremental tax policy changes rather than complete overhauls have resulted from opposition from entrenched interest groups, bureaucratic inertia, and questions over short-term revenue consequences.
Tax reform is a top issue for India despite structural difficulties. The nation must simultaneously minimise tax distortions that can impede economic development and generate enough income to cover its rising public spending obligations. India's tax-to--- GDP ratio has been quite constant despite many reform initiatives, which emphasises the necessity of further policy changes. Furthermore, the federal character of India's politics has made it difficult to balance and coordinate tax policy at many tiers of government. Inefficiencies and tax compliance difficulties for consumers follow from the absence of harmonisation between Union and State taxes.
Recent years have also seen increasing discontent among international companies over India's tax policy, which fuels ongoing conflicts and legal uncertainty. Taxing foreign capital flows and difficulties implementing transfer pricing rules have highlighted the necessity of more clarity and consistency in tax laws. Concurrent with these developments in technology and digitalisation provide fresh chances for enhancing tax administration and compliance. Artificial intelligence (AI) and data analytics used in tax enforcement may assist lower tax evasion rates and increase revenue collecting effectiveness.
One should be able to separate thorough tax reforms from little adjustments in the tax code. While yearly budget changes can bring little changes to tax rates and exemptions, systematic tax revisions fundamentally change policy direction. Simple, consistent, predictable tax systems will help to guarantee that changes do not cause disturbance to economic activity. Nonetheless, especially in a complicated and democratic country like India, any tax reform is an ongoing process rather than a one-time occurrence.
This study attempts to provide a thorough overview of India's tax policy and recent changes, thereby examining the change of the tax system from the early 1990s. It looks at the justification for many tax reform projects, their achievements, and the difficulties still in their execution. Drawing similarities with other emerging nations, the report also places India's tax changes in line with more general global trends. This paper aims to add to the continuing conversation on bettering India's tax system by evaluating current tax policy changes, trends in tax collections, and continuous reform ideas.
Research Objectives
- To examine the impact of divided constitutional taxation powers
- To identify the key factors leading to tax avoidance and evasion in India.
- To assess the role of the "tyranny of the status quo".
Research Problem
Significant structural and administrative problems with India's tax system compromise its efficiency, equality, and capability for producing income. The split constitutional division of taxation authorities between the Union and State governments is one of the main problems as it results in revenue collecting inefficiencies, jurisdictional disputes, and tax evasion openings. Implementing a coherent and effective taxation system is challenging as the absence of a harmonic tax structure has resulted in revenue leaks and variations in tax enforcement across several jurisdictions.
The extensive tax avoidance and evasion, especially among multinational companies and the unorganised sector, raises even another urgent issue. Using aggressive tax planning techniques to reduce their tax obligations, multinational corporations take advantage of weaknesses in international tax treaties, participate in base erosion and profit shifting (BEPS), India's huge unorganised sector stays mostly outside the official tax system at the same time, therefore lowering the total tax base and taxing the official economy disproportionately. Effective resolution of these problems by current legislative and administrative systems calls for more forceful policy interventions.
The "tyranny of the status quo" wherein political and bureaucratic opposition slows down or blocks required policy changes adds even another obstacle to tax reform in India. While individuals who stand to gain from changes may not actively promote them, others who depend on the current system can object to improvements. Rather than systematic, forward-looking tax measures that may boost revenue generating, lower distortions, and increase compliance, this opposition has produced fragmented, reactive changes.
Given these difficulties, this study aims to critically investigate how the constitutional division of tax authorities, tax avoidance and evasion methods, and political opposition to change together affect the efficacy of India's tax system. The report seeks to pinpoint possible remedies and legislative suggestions meant to improve tax compliance, revenue collecting, and significant tax changes in India.
Research Questions
- Whether have tax reforms in India since 1991 impacted the simplicity, rationalising, and efficiency of direct and indirect taxation, and what challenges persist in implementing a comprehensive Goods and Services Tax (GST) framework?
- How effective is the General Anti-avoidance Rule (GAAR) in addressing tax avoidance in India, particularly in cases of indirect transfers, and what are the challenges in its implementation inside the Indian tax law framework?
- Whether difficulties still exist in harmonising the direct and indirect tax systems across Union and State governments? How have India's tax changes since 1991 affected revenue generating, tax system efficiency, and compliance?
Research Methodology
This paper is completely based on the secondary method of research approach where the data used are collected and analysed from the legal documents w.r.t the Challenges in Implementing tax reforms in India and other related document and other legislative texts and existing literature from a selected website such like Jstor etc of Tax reforms in India. The research is carried out in such a way that it offers a thorough knowledge of Taxation and its implications on real estate and relateddifficulties and the effectiveness of taxation in making effective real estate transaction to reduce the disparities.
Literature Review:
- Tyranny of the Status Quo: The Challenges of Reforming the Indian Tax System
The article by Sriram P. Govind investigates how the Goods and Services Tax (GST) can affect Indian business and tax dynamics. India's present GST system, which has been attacked for its complexity and cascading consequences, is said to be required for the GST regime to be implemented there. The suggested concept comprises a dual system of GST wherein a State GST replaces the present State VAT and a Central GST replaces the current CENVAT.
This approach seeks to standardise the system, ideas, and practices as well as eliminate the present Central Sales Tax system for interstate transactions.- Under the planned GST system, every trader must register; a standard threshold limit and a compounding cut-off of Rs. 50 lakhs of gross yearly sales define this.
- Whereas State tax administrations will take over the SGST, the Central Board of Excise & Customs will apply the CGST.
- Common IT infrastructure and a Taxpayers Information Network will help audits and tax levy.
- The proposed dual GST system in India seeks to provide concurrent authority for indirect taxes to the central and state governments.
- It should eliminate current tax laws, harmonise tax collecting, give dealers with multi-state operations centralised registration and assessment, safeguard casual dealers, guarantee 100% refunds for exporters, let new businesses keep exemptions and incentives, simplify documentation and Form F, and streamline adjudication procedures.
- Tax Reform in India: Achievements and Challenges by M. Govinda Rao
Over the last two decades, India's tax structure has changed significantly to fit market-based resource allocation and satisfy demands from outside competition. Three models—the optimum tax (OT), Harberger tax model (HT), and supply-side tax model—have shaped the tax changes. Major tax authority of the central government covers non-agricultural income, business earnings, excise taxes, and excise charges. Aiming to lower trade taxes, boost domestic consumption taxes, and raise direct taxes, the Tax Reform Committee (TRC) suggested thorough tax system changes since 1991. Reforms' pace and substance, however, have not quite matched the TRC recommendations. Though individual and corporate income taxes have dropped, revenues have shown a notable rise; the tax ratio is nonetheless not at pre-reform levels.
- Significance of Tax Reforms as a Solution to Economic Problems by Saurabh Chandra and Bhumika Muchan
The effect of recent tax reforms to India on economic development and growth is investigated qualitatively here. The study looks at how these developments could influence important sectors like manufacturing, services, agriculture, and commerce internationally. It takes into account how the developments can influence income distribution, corporate performance, and investing trends. The report also examines administrative capacity and compliance problems as well as the possible prospects and difficulties of enacting tax reform. It comes to the conclusion that, in spite of eight years of changes, the Indian tax structure still significantly impedes development. Modern economies cannot function without taxes; they provide governments the required money to support public goods and services, social welfare initiatives, and infrastructure projects as well as to fund their operations.
- Issues in Tax Reforms by Azizul Islam
This study investigates recent tax revisions in Asian emerging nations with an eye towards macroeconomic use of taxes. It underlines the significance of lump-sum taxes, revenue-generating transfers for resources, and income-generating taxes' indirect nature. The study also covers the difficulties in estimating the income aim of a government and the causes behind the tax policy abandonment for other goals. Furthermore, covered in the article are the possible revenue-productiveness of value-added taxes (VAT) and the trade-off between efficiency and equality in indirect taxes. The report comes to the conclusion that income taxes should have some influence on equality. They shouldn't be completely useless.
- Changing Tax Reforms in India - What Next? by Anil Talreja
General Anti-Avoidance laws (GAAR) as an all-encompassing anti-avoidance clause have helped the Indian Tax Law system to simplify from a convoluted array of laws. To provide time for tax officer training, the Shome Committee recommended postponing GAAR introduction by three years. Revised to define "commercial substance" as a change in the economic situation by adjusting business risks or net cash flows, the Indian Income Tax Act (ITA). Before calling GAAR, the Committee advised differentiating tax mitigation from tax avoidance and allowing matching adjustments for the same taxpayer in many years. Aiming to guard the tax base against erosion, the Finance Act, 2012 included retroactive changes to clarify the source rule of taxation on non-residents in India.
Analysis
India has been striving at Union level to simplify and rationalise the tax system by changing both direct and indirect taxes since 1991. Recommendations for the rationalising and simplification of both taxes, which the Tax Reform Committee (TRC) [1]with Raja Chelliah suggested, were carried out between 1991 and 1995. 2003–04 saw a thorough assessment of the tax system; more subsequent studies have concentrated on research and revenue projection.
To increase revenue production by widening the tax base and streamlining tax structures, successive administrations have tried to change the direct and indirect tax systems. The Chelliah Committee advised rationalising the highest marginal rate to 30% in 1997 and reducing the tax bracket count. Now the tax is paid at 10% on earnings exceeding `2.5 lakhs up to `5 lakhs, 20% on incomes between `5 lakhs and `10 lakhs, and 30% above that.
Regarding corporate tax, the difference between tightly owned and broadly held corporations was erased, and in 1993–1994 tax rates were uniform at 40%. The policies implemented, however, have lacked direction; the dividend tax rate rose to 20% in 2000-01, then dropped to 10% in 2001-02, then applied to shareholders.
The Finance Minister committed in the 2015–16 budget to gradually lower tax benefits and cut corporation tax to 25% over the following three years.
India has been enacting changes since 1991 aimed at lowering and rationalising customs taxes, harmonising excise taxes, and broadening the base of service tax. Still, there are various rates, including particular rates for agricultural goods and reduced tariffs levied on inputs, which provide high effective rates of protection on outputs. As the reform of Union excise duty carried out in 1986–1987 shows, ill-prepared tax changes may be more damaging than any reform.
Though this was adopted without appropriate planning, the Jha Committee advised that Union excise taxes should be converted into a manufacturing stage value-added tax. Complications followed from this, too high tax credits, and lost income[2]. Following years have witnessed significant convergence in tax rates until 2008-09, when efforts were made to lower taxes on various categories, particularly processed food products. Reducing the threshold, trimming the exemption list, and classifying products like processed food into the higher rate category can help to greatly simplify future rationalising.
Originally, the Constitution did not provide the Union or State governments authority to tax services either. But in 1994 the Union Government imposed levies on three services: non-life insurance, stock broking, and telephones. Entry 92-C in the Union List enabled the 88th Amendment of the Constitution to allow the Union Government to impose the tax. In 2011 the Expert Group on Taxation of Services advised moving to the negative list, uniting the threshold and rates between excise duty and service tax, and allowing input tax credit between products and services to create a manufacturing stage GST.
Although the Indian Constitution gives states the authority to impose several taxes, only the tax on sale and purchase of products provides almost 60% of the state tax income. Additional significant state taxes include taxes on transportation, stamp charges, registration fees on property transactions, and taxes on alcoholic beverages. From the standpoint of income, land revenue and agricultural income tax have lost relevance. Local bodies have been allocated less significant levies such entertainment tax and energy charge.
Value-added tax on products from 2005-06 was the main State level change. [3]Talk has been continuous about the Union and State governments' adoption of dual GST. Two documents published by the Empowered Committee of State Finance Ministers for public review have failed to generate agreement on matters concerning the structure and running policies of the tax.
As the Union and States as well as the States among themselves have not been able to agree on numerous matters, the target date for GST has been constantly revised. April 2016 is the day the current Finance Minister plans to apply the tax. Passed in the Lok Sabha but not the Rajya Sabha, the 122nd Constitution Amendment Bill has been referred to the Select Committee of the Rajya Sabha.
GENERAL ANTI-AVOIDANCE RULES
General Anti-Avoidance laws (GAAR) as an all-encompassing anti-avoidance clause has helped the Indian Tax Law system to simplify from a convoluted array of laws. The Vodafone decision was among the most divisive ones made. By mainly concentrating on the general anti-avoidance rules and the retroactive modification pertaining to indirect transfer, the author investigates the feasibility of GAAR in the present Indian tax law environment.
The paper investigates the many permutations and combinations of events whereby GAAR might be used or denied in great detail and offers perfect circumstances wherein other options could be investigated as replacements for the same. The Shome Committee recommended postponing GAAR introduction by three years to provide time for educating tax officials on the application of GAAR clauses and building suitable policies and procedures.
The Indian Income Tax Act (ITA) has been changed to define "commercial substance"[4] as a change in the economic position by means of business risk or net cash flows. Under section 102, the word "connected person" should refer to "associated person"; under section 92A, "associated enterprise". Five members—one CCIT, one Commissioner of Income Tax, a former High Court judge, and Chief Commissioners of Income Tax—should make up the Approving Panel. Before calling GAAR, the committee advises separating tax mitigating from tax avoidance and allowing equivalent adjustments for the same taxpayer in many years. The tax audit report should record tax avoidance techniques beyond a certain level.
The Committee has that GAAR not be used in situations of tax advantages acquired by Indian corporations by not reporting dividend's post-introduction of Dividend Distribution Tax (DDT) and subsequent buy back of shares after collecting reserves. This limitation relates to situations involving capital gains on sale of shares of an Indian firm V by G and H, where V were obtained after liquidation of intermediate Indian holding company X. Regarding investments in India routed via F1 nation offering exemption from capital gain in source country, GAAR cannot be claimed. In situations of holding-subsidiaries, mergers executed under High Court decisions, routing of offshore trading operations, tax deductions, asset leasing, and capital gains on sale of preferred shares by workers, GAAR should not apply.
In certain cases where it cannot be used, the General Anti-Avoidance Provision (GAAR)[5] is relevant. Higher earnings in SEZ units result, for instance, from manufacturing from non-SEZ operations being moved to SEZ units at a reduced cost. Transfer pricing rules and other anti-avoidance clauses help to pay expenses for group businesses and transactions amongst connected parties. When short-term capital loss is matched with other sources, GAAR might be triggered. It also applies when an Indian firm with no declared dividends since 2003 accumulates reserves used to buy-back shares, and the buy-back offer is not accepted by other shareholders, resulting in capital gains on sale of shares.
Particularly with regard to indirect transfer of underlying assets in India, the Finance Act, 2012 included retroactive changes to define the source rule of taxation of non-residents in India. These changes caused concerns regarding stability of tax rules in India, predictability, and clarity. The Prime Minister established an Expert Committee to investigate the relevance of the retroactive modification on indirect transfer and offer its suggestions to the government. The suggestions seek to soothe public worries and guard the tax base from erosion brought on by indirect asset transfer in India. The modifications encompass loans, services, forward contracts, property transfers, among other operations. Protecting the tax base from erosion and guaranteeing the fairness of tax rules in India is the goals here.
The paper suggests retroactive changes to Indian tax legislation to fix mistakes or anomalies, eliminate technical flaws, safeguard the tax base, or limit concerns to clarification. It implies that these adjustments should only take place seldom and after consultation with relevant parties. The provisions of the Finance Act, 2012 on taxes on indirect transfers should not be explained considering constraints in the definition of "transfer" and computation methods. According to the paper, no one should be handled as a "assesses" in default" for deals involving foreign firm shares with underlying Indian assets. The study also advises that, should they provide significant value from Indian assets, transfers of shares or interest in overseas corporations should not be taxed in India.
The proposals of the Expert Committee seek to weaken the General Assets and Alternatives (GAAR) clauses in India thereby provide more protection against random use of GAAR by tax authorities. The recommendations comprise omitting the phrase "an asset or" from Explanation 5 to clause (i) of sub-section (1) of Section 9, defining "substantially" as a threshold of 50% of the total value derived from assets of a company or entity, and so clarifying the phrase "directly or indirectly". Due by September 30, 2012, the final report will provide clarification on the meaning of several words and phrases and the application of changed clauses.
For many reasons, India's tax structure has changed significantly within the last two decades. The development strategy and philosophical perspective of the eras will determine the different motive behind these changes. Many emerging nations started their tax changes immediately in order to increase revenues to help to offset approaching economic difficulties. These changes, however, are generally ad hoc and do not seek to improve long-term tax system performance.
Evolution of a tax system to satisfy the criteria of worldwide competitiveness is one of the most crucial factors for recent tax changes in many developing and transitional countries. The state's viewpoint on development has moved from a centrally planned development strategy to market-based resource allocation. To guarantee world competitiveness, the tax structure has to change to fit the needs of a market economy.
The idea of tax reform has changed significantly throughout time to fit the evolving view of the function of the government. New methods to reform stress on reducing tax policy distortions to maintain the competitiveness of the economy. To reduce inadvertent distortions in relative pricing, this entails lowering the marginal rates of both direct and indirect taxes as well as minimising tax rate difference. [6]
At least three alternative models are offered by conventional wisdom on tax reforms: the supply-side tax model (SST), the Harberger tax model (HT), and the optimum tax (OT) model. A unified tariff plus a broad-based VAT (value-added tax) make up the fundamental HT reform package for developing nations that are price takers in the international market.
Reducing tax rates—especially direct tax rates—helps India to lower public expenses by thus minimising disincentives on employment, saving, and investment. Combining components of three models, this method considers administrative, political, and information limitations in developing and executing reforms while including theory and prior reform experiences. The best practice method seeks to minimise relative pricing distortions and increase income productivity.
Usually, reforms have concentrated on widening the base of taxation, lowering tax rates, and decreasing rate differentiation in both direct and indirect taxes. Reduced marginal rates guarantee horizontal fairness, lower disincentives to labour, save, and invest, and help to increase tax compliance. Reforms in indirect taxes call for a broad-based VAT with little exemption augmented by a few luxury excises. Taxes should replace import duties; export taxes should be removed; and tariff dispersion should be reduced. All save a tiny number of individuals with income levels less than twice the national per capita income should pay personal income tax. Emphasising horizontal equality also suggests improving tax administration and creation of appropriate information technologies and automation.
Three stages have gone through India's tax system: a consistent rise in tax-GDP ratio from the 1970s to mid-1980s. From the perspective of the economic resource needs, nonetheless, the degree of tax collections is insufficient. Following tax changes implemented in 1992, direct tax share rose by approximately ten percent to 24% in 1997–1998.
Both central and state governments under the Indian federal system have revenue capabilities; the latter generates around 37% of the overall income. The Seventh Schedule of the Constitution outlines respectively state and central government income sources. [7]Except for those on alcohol and customs charges, the federal government has great tax powers on non-agricultural income and wealth, business earnings, excise duties, and excise taxes.
With property taxes and taxes on the entering of products into a local area for use, consumption, or sale, the 72nd and 73rd Constitutional amendments further define specific revenue sources to urban and rural local governments. Local governments mostly rely on devolution of resources from the state governments; they have very little authority for income generating.
Since independence, efforts at tax reform have aimed to increase income generation to support significant development projects. Nevertheless, because the suggestions fit the mindset of the day, they do not greatly reflect economic efficiency. With the marginal tax rate as high as 93.5% in the early 1970s, the tax system has generated massive incentives for tax avoidance and evasion.
Conversion of union excise taxes into a modified value added tax (MODVAT) in 1986 was the most significant change done before 1991. Though efforts to rationalise and simplify the systems have been taken, they cannot be regarded as complete.
Initiating tax changes in 1991 as part of the structural reform process after the economic crisis of that year was the Tax Reform Committee (TRC). To suggest thorough tax system changes, the TRC mixed economic ideas with common sense knowledge. Three sections—interim, final, and reforming the tariff structure—make up the report. Reducing the percentage of trade taxes in overall tax income, raising domestic consumption taxes by converting domestic excises into VAT, and thus boosting the relative contribution of direct taxes were the key goals.
Maintaining progressivity without encouraging evasion, the TRC suggested cuts in important taxes like customs, personal and corporate income taxes, and excise rates. Among the measures were widening the base of all taxes, streamlining of legislation and processes, development of an appropriate information system, computerisation of tax returns, and overhaul of administrative and enforcement tools.
In line with states, the TRC also advised turning taxes on domestic manufacture into value-added taxes and distributing them wholesale. The central VAT was therefore extended to the wholesale level with revenues from the increased charge given to the states, but the suggestions fell short of creating a coordinated domestic trade tax system.
Although most of the TRC's recommendations have been followed by the government in stages, certain adjustments have not quite matched the TRC advice. For instance, personal income taxes witnessed notable reductions in tax rates, exemptions limitations, and incentives for self-employed income earners.
For both local and international businesses, corporate income taxes have been steadily down to 35% and 48% respectively. Little has been done, nevertheless, to widen the base of company tax as tax holidays and incentives for investment in other sectors provide depreciation allowances, exemption for exporters, and other benefits. Corporate earnings have therefore not grown at all. Introduced in 1997-1998, a Minimum Alternative Tax (MAT) guarantees minimal tax payments. Tariffs have also dropped; the average rate of tariff is only around 25%, whereas the highest rate of import tax in 1997-98 was 40%. There are still several tax rates, and changes in them with time.
The MODVAT capability has been gradually streamlined and rationalised; most items have their tax transformed from a particular into an ad valorem charge. Under the MODVAT,[8] credit on input taxes under the MODVAT has been expanded to a greater number of commodities; roughly 80% of items covered by excise charges furnished with the compliance index.
Since 1991, selective taxes on services have been instituted covering a wide range of services including transporters, car rentals, air travel agents, architects, interior designers, management consultants, chartered accountants, cost accountants, company secretaries, credit rating agencies, market research agencies, underwriters, private security/detectives, real estate agencies, and mechanised slaughter houses.
State tax systems have not progressed commensally; sales taxes have stayed flat and become convoluted. Input and capital goods taxes have helped to create a cascade wherein consumers pay more than the government generates. Independent and overlapping commodities tax regimes at the national and state levels make coordinated and harmonic growth of domestic trade taxes challenging.
To suggest policies to harmonise and rationalise the domestic trade tax system, the Indian government set up a research committee. The panel examined the flaws in the current tax system and advised states to progressively migrate to consumption-type, value added taxes based on destination-based principles. The research committee advised, at the central level, total switching over to the manufacturing stage VAT. Existing sales taxes were to be converted, at the state level, into retail stage destination VAT. Appointed to convince governments to rationalise their tax structures was a committee of finance ministers.
Though there is general agreement on the need of state-level sales tax system improvements, relatively little real rationalising has been done. The 1991 economic crisis caused a notable drop in income, which in turn sharply changed the tax-GDP ratio. The tax-GDP ratio dropped drastically to less than 15% in 1993–1994; even with modest recovery since then, it still falls short of 15%.
Revenues have showed a notable rise even although rates of both personal and corporate income taxes have dropped greatly. As a percentage of GDP and overall tax income, the share of direct tax income shown notable rise. It is unclear, nevertheless, what degree the rise in revenue productivity comes from administrative actions, greater compliance resulting from reduced marginal tax rates, and higher public sector compensation adopted in line with pay commission recommendations.
Eight years of tax reform notwithstanding have numerous troubling aspects in the tax system still exist. India still has a great difficulty in increasing the tax system's efficiency; much more has to be done to reach hard-to-tax populations.
Conclusion And Suggestions
Suggestions
India's tax structure has seen major changes meant to increase revenue generation and support economic development. Simplifying the tax system by lowering exemptions and deductions has been a main emphasis because it increases the tax base. Though its implementation has met difficulties owing to concessions between the Union and State governments, the establishment of the Goods and Services Tax (GST) was a fundamental step to unify several indirect taxes.
Emphasising the importance of professionalising, better using technology, and taxpayer-friendly techniques to boost compliance and lower conflicts, efforts to enhance tax administration have focused on Maintaining the tax base depends still mostly on addressing problems such base erosion and profit shifting by multinational companies. Recent budgets have included middle class tax cuts meant to increase spending and spur economic growth. Still, it is difficult to strike the mix between guaranteeing long-term budgetary sustainability and offering instant comfort. Constant changes seek to establish a tax system that is fair, simple, and fit for investment, therefore complementing India's more general economic goals.
Conclusion
Direct tax changes in India are very important for guaranteeing social and financial justice, improving revenue collecting, and promoting sustainable economic development. India can build a more efficient and growth-oriented taxing system by simplifying the tax structure, extending the tax base, enhancing compliance, and matching with global best practices. Such changes might boost income efficiency, raise investment, and help more equitable economic growth by means of their support of Still, ineffective tax laws discouraging investment and saving provide difficulties. Reducing capital gains tax rates, along with more general structural changes, economists contend might boost long-term development and encourage economic activity. Although the advantages of certain tax cuts should not be exaggerated, they might have a major effect on the economy and help to create a more active financial environment.
Following demonetisation, India carried major tax changes meant to promote economic sustainability and match tax policies with long-term development objectives. Through their encouragement of social fairness, environmental accountability, and economic growth, these changes have helped to support sustainable development. India has to keep improving its tax policies to keep this trend, making sure they encourage equitable and sustainable development while nevertheless being consistent and predictable. Given ideas like tax neutrality and the demand elasticity of financial products like stocks, the taxation structure for the securities market also calls for a more methodically thorough redesign.
Furthermore unresolved in India's tax policy is the use of General Anti-avoidance Rules (GAAR). Although intended to reduce tax evasion, questions about its arbitrary implementation and possibility to generate confusion among taxpayers and investors remain. The proposals of the Expert Committee seek to allay these worries by suggesting further measures to prevent tax officials from misusing GAAR. Should the government approve these suggestions, not only would retroactive taxation—a long-standing annoyance of foreign investors—but also provide much-needed clarity on indirect transfers and taxability of prior transactions. A more open and consistent tax environment will increase investor confidence and help mergers and acquisitions (M&A) in India to go forward.
India's tax reform initiatives have to ultimately combine compliance enforcement with economic incentives and revenue generating. A carefully calibrated tax policy may help to reduce distortions, improve tax administration efficiency, and inspire voluntary compliance. The success of these changes will rely on the government's capacity to provide stability, predictability, and justice in tax policy, therefore creating an environment that promotes long-term budgetary sustainability and continuous economic development. India can create the foundation for a rich and internationally competitive economy by constantly improving and using careful tax policy.
References:
- Ahmad, Ehtisham and Nicholas Stern, 1991. The Theory and Practice of Tax Reform in Developing Countries (Cambridge, University Press).
- Bagchi, A, 1994. "India's tax reform: a progress report", Economic and Political Weekly, vol. XXIX, 22 October, pp. 2809-2815.
- Bird, R.M., 1989. "Administrative dimension of tax reform in developing countries", in Malcolm Gillis, ed., Tax Reform in Developing Countries (London, Duke University Press).
- Bird, R.M., 1993. "Tax reform in India", Economic and Political Weekly, vol. XXVIII, 11 December, pp. 2721-2726.
- Burgess, Robin and Nicholas Stern, 1993. "Tax reform in India", Working Paper No. 45, STICERD, London School of Economics.
- Dasgupta, Arindam and Dilip Mookherjee, 1998. Incentives and Institutional Reform in Tax Enforcement (Oxford University Press).
- Harberger, Arnold, 1990. "Principles of taxation applied to developing countries: what have we learned" in Michael Boskin and Charles McLure, Jr., eds., World Tax Reform: Case Studies of Developed and Developing Countries (San Francisco, ICS Press) pp. 25-46.
- India, 1994. Reform of Domestic Trade Taxes in India: Issues and Options, Report of the Study Team (Chairman: Dr Amaresh Bagchi).
- Joshi, Vijay and I.M.D. Little, 1996. India's Economic Reforms 1991-2001 (New Delhi, Oxford University Press).
- Silvani, Carlos and Katherine Baer, 1997. Designing a Tax Administration Reform Strategy: Experiences and Guidelines, Washington, DC (International Monetary Fund).
- McLure Jr., Charles, 1990. "Appraising tax reform", in Michael Boskin and Charles McLure Jr., eds., World Tax Reforms: Case Studies of Developed and Developing Countries, San Francisco (International Center for Economic Growth): pp. 279-88.
- Please, Stanley, 1967. "Saving through taxation: reality or mirage", Finance and Development, 4(1): 24-32.
- Gillis, Malcolm, 1990. "Tax reform and the value-added tax: Indonesia", in Michael Boskin and Charles McLure Jr., eds., World Tax Reform: Case Studies of Developed and Developing Countries, San Francisco (International Center for Economic Growth).
- Burgess, Robin and Nicholas Stern, 1992. Taxation and Development, London (London School of Economics).
- Stotsky, Janet, 1995. "Summary of IMF tax policy advice", in Parthasarathi Shome, ed., Tax Policy Handbook, Washington, DC (International Monetary Fund): 279-83.
- Ahmad, Ehtisham and Nicholas Stern, 1991. The Theory and Practice of Tax Reform in Developing Countries (Cambridge, University Press).
- Bagchi, A, 1994. "India's tax reform: a progress report", Economic and Political Weekly, vol. XXIX, 22 October, pp. 2809-2815.
- Harberger, Arnold, 1990. "Principles of taxation applied to developing countries: what have we learned" in Michael Boskin and Charles McLure, Jr., eds., World Tax Reform: Case Studies of Developed and Developing Countries (San Francisco, ICS Press) pp. 25-46.
- Talreja, Anil. (2013). Changing tax reforms in India what next. National Law School of India Review, 24(2), 75-88.
- GAAR. (n.d.). BYJUS. https://byjus.com/free-ias-prep/general-anti-avoidance-rule-gaar/#:~:text=General%20Anti%2DAvoidance%20Rules(GAAR,the%20objective%20of%20avoiding%20tax.
- Compliance index is defined by Dasgupta and Mookherjee (1998, pp. 73-74) as the fraction of taxes that are liable that is actually paid.
- There is also a commodity tax at the local level called "octroi". This is a tax on the entry of goods into a local area for consumption, use or sale.
- BankBazaar, & BankBazaar. (n.d.). Modified Value Added Tax (MODVAT). BankBazaar. https://www.bankbazaar.com/tax/modified-value-added-tax.html
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