In this blog post, Vaisakhi Muddana, a student at Damodaram Sanjivayya National Law University and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the problems in tax structure and administration in India.   

India has a thriving and continuously adopting new changes in accordance with the state of the country. It has drawn the power to do so from the Constitution of India, which allows the Central government and the State Government to levy taxes. Collecting taxes is a way of income for the government, which is later, used for various purposes in order to boost the economy of the country.

The power to levy taxes has been distributed among a three tiers of the government i.e., Central Government, State Government, Local Bodies. The Central Government is given power to collect taxes in regard with Income Tax, Custom Duties, Central Excise and Sales Tax and Service Tax. The State Government has been empowered to levy taxes in regard to Sales Tax (intra State sale), Stamp Duty, State Excise, Land Revenue, Duty on Entertainment and tax on Profession and Callings. The Local Bodies are empowered to levy taxes on properties, Tax on Markets, Octroi etc.,

Over the past decade, significant changes have been taken place in the tax system wherein slabs for imposition of the tax have undergone major changes, restructuring the rates of any particular tax being levied by the government, tax laws have been simplified for better understanding of the people.  With the recent economic reforms tax structure in India has been in line with the Liberal Policy. Few of the changes include rationalization of tax structure, reduction in corporate tax, introduction of the value added tax, customs duties to be aligned with the ASEAN levels. These reforms have led to a better compliance, better enforcement, and easy payment of the taxes levied.

Taxes are classified into two different types:

• Direct Taxes: The tax paid is known as such because the burden directly falls on the taxpayer. The government levies tax on the residents, business entities and non-business entities. The tax levied depends on the capacity of the individual and the residential status.

The residential status of an individual as per Section 6 of the Income Tax Act, 1961, is determined by the following:

• If the individual stayed in India for minimum of 182 days in the previous year
• If the individual has stayed for a minimum of 60 days in the previous year and 365 days in the previous 4 years immediately preceding the current previous year.

If the above conditions have been satisfied then that individual becomes a resident of India and is therefore, liable to be taxed as per the provisions of the Income Tax Act, 1961.

According to exception in Section 6(1)(c) , any individual if working on any Indian Ship as per the Merchant Shipping Act,1958, or for the purpose of employment outside India, that particular has to stay for a minimum of “182 days” instead of “60 days” as mentioned in the second condition.

The tax is levied under the “Five Different Heads” as mentioned below:

• Income from Salaries
• Income from Business or Profession
• Income from Property
• Income from Capital Gains
• Income from Other Sources

Disadvantages of Direct Taxes:

• Inconvenient: as they are directly being levied to the taxpayer it pinches the taxpayer so they find ways to avoid paying tax
• Evadable: the taxpayer can submit false returns and evade the taxes.
• Social conflict: Direct tax encourages social conflict as not every part members of the society has to pay direct taxes.
• Discourages Savings and Investment: Excessive increase in direct taxes may discourage savings and investment which in long term will affect country’s economy.

• Indirect Taxes: These taxes are levied indirectly on the taxpayer. It is a vast ocean as many number of taxes come under indirect taxes such as Customs, Union Excise Duties, Service Tax, Entertainment Tax, Tax on Vehicle etc., These taxes are governed more by notifications given time to time by the Government rather than an Acts enacted by the Parliament.

Advantages of Indirect Taxes:

• Convenient: Indirect taxes are imposed on Manufacturers, seller’s and traders but their burden is imposed on the consumers who buy the goods and services and thus the consumers are the final tax payers. They are convenient from point of view as taxpayer as he pays indirect taxes in small amounts. Also they are convenient to government as they collect these taxes in lump sum from the manufacturers

• Difficult to evade: Since the consumers tend to pay taxes on the products they buy it is difficult to evade the tax when imposed in this form.

• Wide Coverage: Since people from all over the country buy goods, the tax imposed on them is unavoidable by the people so it covers a wide area.

• Elastic: Some of the indirect taxes are elastic in nature, when government wants to raise the revenue they increase the indirect taxes.
• Universality: Both rich and the poor pay the tax equally so it has a universal appeal

Disadvantages of Indirect Taxes:

• Inequitable: The Burden of Indirect Taxes is more on poor people than Rich People. Hence Indirect Taxes are considered to be Inequitable
• Uneconomical: As government has to make a lot of expenses for collection of the Indirect Taxes, This Taxes are Considered as uneconomical. Final Consumer has to pay much higher amount than received by the government.
• Uncertainty: Amount of Indirect Tax Collection cannot be predicted as increase in Indirect Tax Results in Increase in Prices of the commodity and thus reduces the demand of the commodity. Hence there is always uncertainty over the amount of indirect taxes collected
• Inflationary: As Indirect Taxes increases the prices of the commodity, they are considered as inflationary. If Government depends more on indirect taxes, then Inflation will keep on increasing.

Though Indian Tax Structure has undergone changes from time to time still it is far from being the epitome of impeccable tax structure. The government is facing many problems such as:

• Tax Evasion: It is one of the main problems faced in India. People evade tax through illegal and unfair means. They may claim lesser profit, gains or turnover than the actual. They get the tax refunded, by making misrepresentation before the tax authorities. People evade tax by means of Smuggling, Evasion of Sales Tax, VAT, Income Tax, Customs Duty, Excise Duty etc.,

Taxes being the major source of income for the Government, evading of tax causes economic inequality, many projects have be put on hold, welfare programs have to set aside. The reasons for the evasion of tax are that there is a high rate of taxation, failure to curb bribery, lack of simplified procedures (though the government is still in the process of simplifying the procedure), existences of too many taxes, and lack of organized and systematic administrative structure.

The government has taken few measures in order to ensure that the tax evasion is eliminated in the form of Penalties and Prosecutions, on the recommendation of the Wanchoo Committee the Settlement Committee was established to provide mechanism for final disposal of cases, P.Chidambaram the then Finance Minister of India has introduced Voluntary Disclosure of Income Scheme wherein “30% tax and 100% mental relief”

• Reliance on Indirect Taxes: The share of Indirect taxes has gone up in the last two years compared to that of the previous years. This is because they apply equally to both rich and poor without consideration for the income levels. If this carries on then the government takes a major hit in the revenue of the Government as direct taxes which are levied based on the income levels tend to bring more revenue to the Government.

• Black Money: A country having flow of Black Money is also known as having a Parallel Economy through an illegal economic operation. The money, which is being made by the people without being accounted for it to the government, is known as Black Money.

Black Money has an impact on the economy as it provides us with the false information about the actual economy. Due to which the economic planning looses it’s worth, because they are based on macro economic parameters, which completely ignore the black money. It will have a serious effect on the country’s economic fiscal system as most of the Government income is based on the taxes collected.

As per the Direct Taxes Enquiry Committee “Black money and tax evasion, which go hand in hand, have the effect of seriously undermining the equity concept of taxation and warping its progressiveness. Together, they throw a greater burden to the economy.”

The black money creates inequalities among people. The overall consumption pattern is titled in favor of rich and elite classes.

• Vast number of taxes: As the number of taxes are more, different collecting authorities cause multiplicity of taxes in India

• Collection of taxes:  The amount spent to collect the taxes are increasing from year to year which causes a dent in the revenue of the government.

Due to Multiplicity of taxes there is unhappiness among citizens of India regarding tax structure. Taxes by Union Government, State Governments and the local governments have resulted in difficulties and harassment to the taxpayer. The Tax System has failed to stop tax evasion and curb the growth of parallel economy. White paper issued by Indian government on black money in 2012 tells that parallel economy exist the same amount of Indian GDP. Therefore, though the current tax structure is good but it is far from being ideal and still it has many more changes to be made in order to see that there are no loopholes in the system.