Rationalising the Tax Structure

Economic Affairs Tax System

Any evolving economy needs massive investments from both within the country and overseas. But such investments will not come that easily unless it has a taxation system that is just, fair, transparent and non-discriminatory and motivating enough to enthuse investors to put their monies into productive purposes. This has been realised world over and most developed economies took to a very progressive taxation system particularly the United States and Australia. India is no exception. Successive governments looked at reforms aimed at expanding the tax base and rationalising the tax structure.

Many research papers on the Indian taxation system broadly indicate one thing – that the Indian tax system has come a long way from the narrow based, complicated and confiscatory system to the one that is far more efficient.
Over the years, the thrust and direction of reforms have been taken to improve revenue collection while minimising distortions.
One of the first major reforms in the taxation system was to convert the state level sales tax into VAT. The change in focus paid rich dividends to the tax administration.
In corporate tax, excise, customs and sales taxes, revenue concentration diesel and petrol had high efficiency costs. The personal income tax continued to be narrow based. Reform in the sales tax just begun and a lot remained to be done to evolve destination – based retail VAT.

Taxation Policy Reforms:

Before 1991 India’s overall tax structure had been broadly inefficient and quite inequitable.
The consumption tax base was narrow.
Selected export duties reduced the international competitiveness of traditional exports.
At the sub – national level, state sales taxes caused heavy excess burdens due to input taxes getting built into the prices of final commodities, resulting in tax – on – tax, or cascading taxes.

Sweeping Changes in Tax structure:

Income tax:

When India had embarked on economic reforms, many developing countries had already emerged from the reform process with much lower and fewer income tax rates. India also legislated comparable rates of 10, 20 1nd 30% in 1997-98.
Both the rates and their dispersion were reduced on efficiency grounds.
The scaling back of corporate income tax rates reflected, the twin objectives of administrative feasibility and better tax compliance, but was forces of globalization and the increased international movement of capital.
In India, corporate income tax rates for both foreign and domestic companies were reduced to 35% and 40% respectively.

Central Excises and Customs:

Central excise essentially operates as a VAT that has evolved over almost two decades, with a small beginning n 1986 – 1987, when a VAT-type credit mechanism for selected raw materials was introduced for the production of specified goods. In 1994-1995, capital goods were made creditable.
The emerging quasi-VAT structure was termed Modified VAT or MODVAT
With a further effort to reduce the main rates to only two – 8 and 16 per cent – it was renamed the Central VAT, or CENVAT, in 2001.

Tax Administration:

For any new tax policy reform to succeed, three elements were important, expanding the taxpayer base, computerisation, implementation of the state – level VAT.
One of the biggest achievements in central tax administration was the impressive expansion of the taxpayer net for income tax.
The government appointed in succession two committees under two very senior bureaucrats to come up with a plan that would substantially overhaul the taxation system and bring it on par or tune it with the international taxation system or rates. So the Raja Cheillah committee and the Vijay Kelkar committee came into being. Their recommendations are historic.

The Raja Chelliah Committee:

The taxpayer services should be extended both in quality and quantity and taxpayers should get easy access through internet and email.
PAN (Permanent Account Number) should be expanded and it should cover all citizens.
Block assessment of search and seizure cases should be abolished.
To clear the backlog, the department should outsource the data entry work.
All returns and issue of refunds should be completed in a four month period. Dispatch of refunds should be outsourced.
Government should establish a Tax Information Network to modernize, simplify and rationalize tax collection, particular TDS and TCS.
Abolish the requirement of Tax Clearance Certificate on leaving the country.
Empower CBDT with appropriate administrative and financial powers.

Vijay Kelkar Committee:

The latest impetus to direct tax reforms in India came with the recommendations of the Task Force on Direct and Indirect Taxes under the chairmanship of Vijay Kelkar in 2002.

Its Key Recommendations were:

Administration of Direct Tax:

The tax payers’ service should be extended both in quality and quantity and tax payers should get easy access through internet and email.
PAN should be extended to cover all the citizens.
Block assessment of search and seizure cases should be abolished.
The department must outsource the data entry work to clear the backlog
All returns and issue of refunds should be completed in a four month period. Dispatch of refunds should be outsourced.
A Tax Information Network should be established.
Abolish the requirement of Tax Clearance Certificate on leaving the country.
Empower CBDT with appropriate administrative and financial powers.

Personal Income Tax:

Increase in exemption limit to Rs.1 lakh for the general categories of taxpayers and further exemption for senior citizens and widows.
Rationalize income tax slabs, eliminate surcharge on personal income tax.
Incentivise home loans by providing interest subsidy on home loans @2 per cent.
Increase deduction under Section 80 CCC for contribution to pension funds.

Corporation Tax

Reduce the Corporate tax to 30 per cent for domestic companies and 35 per cent for foreign companies.
The listed companies should be exempted from tax on dividends and capital gains.
Increase rate of depreciation for plant and machinery.
Abolish Minimum Alternate Tax.

Wealth Tax

Abolition of wealth tax.
The DTC and GST have been the biggest reforms initiated by the Government in the direct and indirect tax regime respectively

Key Direct Tax Reforms:

Tax Information Network (TIN)

On behalf of the Income Tax Department, the National Securities Depository Limited (NSDL) established Tax Information Network (TIN). This is a source of the countrywide tax related data. The basic idea behind establishing TIN was to modernise collection, processing, monitoring and accounting of direct taxes using information technology.

Electronic Return Acceptance And Consolidation System (ERACS)

OLTAS is used for uploading to the central system the details of tax deposited in numerous tax collecting branches across the country every day. Central PAN Ledger Generation System (CPLGS).

e-TDS & e-TCS

TDS refers to Tax Deduction at Source. The third parties deduct tax at source and then deposit it at pre-determined bank branched.
Under the scheme named “Electronic Filing of Returns of Tax Collected at Source Scheme, 2005; the corporate and Government deductors have to pay electronically or physically to NSDL.

Other Initiatives in Direct Taxation:

eSahyog : Paperless Assessments

CBDT recently came up with a proposal for paperless income tax assessment over emails.

Sevottam: Efficient Grievance Redressal

To bring new life to the sluggish grievance redressal system, the department is using ‘Sevottam’ Platform that connects all income tax offices in the country. The idea is to address the queries and grievances in real time.

Faster Refunds

The IT department is working towards processing and sending tax refunds within 10 working days.

Pre-filled ITR Forms

The Department is now taking an initiative to offer pre-filled forms which are automatically populated with user/taxpayer data and are downloaded with most information filled already.

PAN Camps

To increase coverage of the PAN

Indirect Tax Reforms:

Reduction In Customs Duties

In 1990, the customs duty on non-agricultural products was around 128 per cent. It was brought down gradually. Currently, the average customs duties are 11-12 per cent; however, they range from 0 to 150 per cent.

Central Excise

Service tax was first introduced on some limited services in 1994-95 at 7 per cent. The rate was gradually increased and so was the number of taxable services. Currently, we pay 14 per cent service tax on around 100 services.

Goods And Services Tax