Tax reforms are always difficult. They involve the redistribution of wealth, which inevitably results in protests. However, if done correctly, they can significantly increase tax revenues, which in turn can fund better infrastructure, education, health care, etc.
Well-designed tax reform can generate significant public support. It can be presented as a way to achieve greater equality and justice, and thereby garner political support.
The most important thing to remember when designing a tax reform is to make sure that the new system is simple, fair, and transparent. A complicated tax system leads to high compliance costs, which can easily be circumvented by clever tax evaders.
This is why it is essential to start with a good design so that it is easy to understand, and the compliance costs are low.
Tax Structure in India -
The tax structure in India is a three-tier federal structure. The central government, state governments and local municipal bodies make up this structure. Taxes are classified under two categories namely direct taxes and indirect taxes. The largest difference between these taxes is their implementation. Direct taxes are paid by the assessee while indirect taxes are levied on goods and services.
A) Direct Taxes:
Direct taxes are those which the taxpayer pays directly from his income/ wealth/estate etc. They are levied on individuals and corporate entities and cannot be transferred to others. These include Income Tax, Wealth Tax, Gift Tax, Corporate Tax, Estate Duty, Fringe Benefits Tax etc.
B) Indirect Taxes:
Indirect taxes are taxes that are not directly paid by the assessee to the government authorities. These are levied on goods and services and collected by intermediaries (those who sell goods or offer services). These include Value Added Tax (VAT), Customs Duty, Excise Duty, Goods and Service Tax etc.
The Journey of India's Tax Reform -
1974: Report of LK Jha Committee suggested introduction of VAT system.
1986: Introduction of restricted VAT called "MODVAT".
1991: Chelliah Committee report recommended "VAT/GST" and recommendations accepted by the Government.
1994: Service Tax introduction.
1999: Empowered Committee formation on State VAT.
2000: Introduction of Uniform Floor State Tax Rates and abolition of tax-related incentives granted by State Governments.
2003: Implementation of VAT system in Haryana.
2004: Strong progress towards introduction of CENVAT.
2005-06: Implementation of VAT based taxation system in 26+ states in India.
2007: First GST Stuffy released by Mr. P. Shome in January; Finance Minister speech carries the introduction of GST in Budget; CST phase out starts in April 2007; joint working group created and reports submitted.
2008: EC rolls out the GST Structure of Taxation System in April 2008.
2009: Date proposed for Implementation as April 1, 2010.
2010: Department of Revenue commented on GST discussion paper and finance minister suggested probable GST rate.
2011: Team was created to lay down the road map for GST and 115th Constitutional Amendment Bill for GST was laid down by the Parliament.
2012: Negative list regime for service tax was implemented.
2013: Parliamentary Standing committee submitted its report on the Bill.
2014: 115th Amendment Bill lapsed and was reintroduced in 122nd Constitutional Amendment Bill.
How efficient is India's tax system -
A country with a population of over 1.3 billion people, an economy the size of China's and a per capita income that puts it among the top ten wealthiest countries in the world cannot be expected to have a perfect tax system. Yet there are many who feel that India has one of the best systems in the world. This is not surprising since most other developing nations do not even have a system at all.
But how efficient is India's tax system? A recent report by the World Bank, based on its own study and data from various international organisations such as the Organisation for Economic Co-operation and Development (OECD), suggests that the Indian system is far from perfect. The report says that despite the fact that tax revenues account for almost half of the government's budget, the collection rate remains abysmally low—just 13 per cent. In contrast, tax revenue in developed economies like Germany or Japan is about 60 per cent.
The poor performance of the Indian tax system is partly due to the fact that the country does not have a uniform tax structure. It has no sales tax, and only two indirect taxes: excise duty and customs duties. All other taxes are levied directly by states and local bodies.
However, the situation is even worse than what the report suggests. Tax evasion is rampant. Many Indians evade taxes through underreporting of income, fraud, smuggling and bribery. In fact, it is estimated that more than 90 per cent of India's total tax revenues are lost to corruption. For example, the Customs Department is supposed to collect Rs 700 billion in annual revenue, but it is believed that at least Rs 400 billion is siphoned off each year.
Income tax is the worst offender. The Income Tax Act was amended in 1976 to introduce the concept of "income without production". This meant that income from unearned sources such as interest, dividends and rents were taxed at a lower rate than earned incomes. But this led to widespread evasion. In fact, between 1991 and 1996, the income tax department collected less than 50 per cent of its targeted revenue.
Since 1994, the government has tried to solve the problem of under-reporting of tax by introducing a parallel system called the Goods and Services Tax (GST). Under GST, all goods sold in India will be taxed uniformly. This should help reduce tax evasion since every transaction will now become subject to tax. However, the implementation of GST has been plagued with problems.
India's GST tax reform -
The Indian government has announced a new Goods and Services Tax (GST) to replace the existing value-added tax. The new system will be implemented from April 1, 2017. It is expected to help bring down prices of consumer goods by making them cheaper as it removes the burden of multiple taxes on each product. It also seeks to reduce the cost of doing business in India. Let us look at the journey of tax reform in India.
The biggest problem is that the GST is complex and cumbersome. There are around 5,000 items that fall under the purview of GST. If any one of these is not properly defined as a taxable good or service, then it becomes difficult for the government to enforce the law. Moreover, since the government wants to tax everything except agricultural produce, the definition of what constitutes a taxable item has become extremely complicated. The result is that the process of registering new businesses and products under GST has slowed down drastically.
Another problem is that the GST Council, the body that decides the rates of taxation, is dominated by representatives of large industrialists and business groups. Since the council has no elected members, it is prone to be captured by vested interests. There is also the problem of the circular economy. The circular economy refers to the idea that goods and services can be reused instead of being thrown away after use.
The Goods and Services Tax is not the only problem. Another is the multiplicity of taxes levied by different states and local bodies. As a result, the government spends a lot of time collecting taxes from individuals and businesses. This is time-consuming and costly. Moreover, the government does not have enough trained manpower to manage the tax system.
Tax inspectors are required to inspect thousands of taxpayers every day, and there is a shortage of them. The number of inspectors is estimated to be just 10,000, which is barely one inspector for every 2 million people.
The tax system is riddled with loopholes. One of the main problems is that there are no uniform standards for assessing income and wealth. This means that a businessman in Delhi may not pay the same tax as a businessman in Mumbai.
Tax collection in India -
The following figure shows that direct tax collection and indirect tax collection increased from Rs. 648966 crores and Rs. 1230177 crores in 2013-14 to Rs. 996185 crores and Rs. 2015743 crores in 2017-18. Direct tax and indirect tax collectively increased from Rs. 1879143 crores in 2013-14 to Rs. crores in 2017-18.
Contribution Of Direct and Indirect Taxes In Total Revenue -
The following shows that direct taxes contributed 33.35% (on an average) in total tax collection:
whereas indirect taxes contributed 66.95% (on an average) in total tax collection. This shows that the amount received from indirect taxes is almost double than the amount received from direct taxes.
Where Does Money Come From?
The following shows shows that general sales tax is the major contributor in indirect tax revenue collection followed by union excise duties, service tax, custom duty and state excise duty. While other taxes contributed Rs. 15008 crores in indirect tax revenue collection in 2017-18.
Among various countries which have adopted GST, France was the first country to adopt GST in the year 1960. The following shows the GST models along with their applicability in different countries of the world.
GST Models Implemented By Various Countries Like Australia, China, USA, Brazil, Canada and India
|Name Of The Model
||Tax imposed by Central government with provision for sharing revenue with states
||Australia & China
||Tax imposed by States
|Non - Concurrent Dual GST
||GST on goods imposed by State & on services imposed by Central goovernment
|Concurrent Dual GST
||Tax imposed by Central and State governments on both the goods and services.
||Brazil, Canada and India
||Seperate taxation system for tax collection, administration and enforcements by provinces.
List of GST Rates Applicable In Various Countries -
|Name of Country
||0%, 5%, 12%, 18% and 28%
|Australia, Brazil, Indonesia, Korea
Impact of GST on the Indian Economy: Advantages and Challenges of GST Implementation -
(1) Impact of GST on the Indian Economy:
GST will impact the overall taxation system of the Indian economy. It will improvise the country's GDP ratio and also control inflation to a certain extent. However, the reform will mainly be advantageous to the manufacturing industry but will make some things challenging for the service sector industry.
GST is expected to raise the GDP growth from 1% to 2%, but these figures can only be analyzed after successful implementation. Some countries have faced a mixed response in growth like New Zealand saw a higher GDP as compared to countries like China, Thailand, Australia, and Canada (Shokeen, Banwari, & Singh, 2017).
The GST rate is implemented in various slabs like 5%, 12%, 18%, and 28%, which will automatically provide great tax increments to the government and the manufacturing sector will face immense growth with a reduction in the tax rate. There is definitely something good for everyone. Various unorganized sectors enjoy the cost advantage equal to the tax rate which will be brought under GST. This will make various sectors like Hardware, Paint, Electronics etc. under the tax slab. GST requires everything to be planned meticulously for the organized rate of taxation. There are still lots of sectors that are to be discussed under GST and this requires proper planning. For the common man and different companies, the collection of Central and State taxes will be done at the point of time when sales originate, both components will be charged on manufacturing costs and price of the product will downgrade and consumption will thereby increase.
(2) Impact of GST on Various Sectors:
Goods and Services Tax will unite the Indian economy into one common market under a single umbrella of taxation rates, leading to the easiness of starting and doing businesses, leading to an increase in savings and cost reduction among various sectors. Some industries will be empowered by GST because of the reduction in tax rates, while some will lose because of a higher rate of GST interests.
(3) In this section, we discuss various sectors and elaborate on the impact of GST on them:
(i) IT Companies: GST will allow more implementation of digital systems and services. GST will increase the rate of tax from 14 -15% to 18%, which will increase the cost of electronic products like mobile phones, laptops, etc.
(ii) FMCG Industry: GST will have a significant impact on the FMCG sector. Some food items are exempted under GST like grains and cereals, milk, meat, fish, fruits and vegetables, candy etc. Before GST, FMCG companies paid 24-25% tax including Excise Duty etc. With GST, the rate of return would be 17-19% leading to a strong impact on production and consumption.
(iii) Online Shopping: With the introduction of GST, various Ecommerce companies will face much burden of work at the rate of filling taxes and costs will be increased.
(iv) Telecom Sector: With the current VAT charges of 15% being replaced by18% GST rate, the price of mobile calls, SMS, and broadband services would be impacted. This will have a negative impact on big telecom giants.
(v) Automobiles: GST will provide a reduction on the on-road price of vehicles to the max by 8% as per the latest report. Lower prices mean various automobile companies can boost up volumes and sales and have tremendous opportunities for expansion in India.
(vi) Small Scale Enterprises: There are three categories:
(a) below the threshold, need not register for GST,
(b) between threshold and composition turnovers will have the option to pay a turnover based tax or opt to join the GST regime,
(c) above the threshold level, will be within the GST framework. Manufacturers and traders will pay less tax after GST Implementation.
(vii) Entertainment: With GST, taxes can do down by 2 - 4%, but the rate of tax for cinema lovers will be increased. GST will soon comprehend with demands and bring the best for boosting up the film industry's business.
Challenges of GST Implementation:
The following are some of the major challenges for GST implementation in India:
(i) Nature of Taxes: In India, there are various taxes like Central Excise, VAT, CESS, and other state-level taxes which will all be removed and come under one tax, that is, GST, but still lots of states and union territories have other taxes out from GST which has to be worked upon.
(ii) Types of GST: As GST would be of two types: Central GST and State GST and further division is required on the basis of utmost necessity and property-based like need, location, geography, and resources which has to be worked upon.
(iii) Rates of Tax: Still the tax rate is not fully finalized and lots more have to be worked upon considering the standard of living of people, etc.
(iv) Tax Management and Technology Infrastructure: It is of utmost necessity that proper management of tax and infrastructure is required to implement proper policies and plans.
International comparison of tax-GDP ratios indicates that India does not fare so well, compared to ratios of OECD countries or BRICS countries or even similarly placed economies.
If we compare Indian figures with similarly placed global economies, we find that Canada and the UK have a tax-GDP ratio of about 37 per cent, while USA and Japan have a ratio of about 29 per cent, while Malaysia and Korea have a tax-GDP ratio of about 18 per cent, which is similar to that of India. Region-wise also, it can be seen that the OECD countries have a much higher tax-GDP ratio of about 31 per cent, while Europe and Central Asia have a ratio of about 27 per cent. At the same time, the ratio of the South Asian region, which includes India, and the African countries have a much lower ratio of about 17 per cent, indicating poor tax systems and insufficient penetration and that it requires a lot of catching up.
Therefore, it can be concluded that India is still a long way to go in reaching close to the ratio of developed countries. There is tremendous scope for improvement in India. Tax reforms in policy and efficient tax administration can help to increase tax penetration in India. Even among BRICS countries, India has the lowest tax-GDP ratio. India still relies on Indirect taxes. Income Tax forms a major component of tax in developed countries whereas in India revenue from Income Tax is still low.
It is believed that the success of a tax administration depends upon broadening and deepening the tax base so that the incidence of tax is spread over a large population. However, in developing countries like India, it is always a challenge to broaden and deepen the tax base, especially because about 60 per cent of our population lives in villages that firstly depend on agriculture, income from which is not taxable and secondly have a very small income and therefore do not pay taxes. Also, even people living in urban areas have a large chunk of below taxable limit income. Besides, every large population is below 18 years of age and therefore is not eligible to file tax returns. There is also a section of the populace who should be filing but do not file as they feel that they may not be caught.
Any tax administration needs to identify the potential taxpayers, persuade them to register and bring them under the tax net. Of course, it will require a lot of effort in terms of gathering data from various agencies and third parties, regarding transactions and income and identifying potential taxpayers, educating and helping them to meet their tax obligations. At the same time, habitual tax evaders will have to be dealt with strictly and suitable penalties and prosecution mechanisms will have to be evolved.
"The new government was in strong favour of the implementation of GST in India by seeing many positive implications as discussed above in the paper. All sectors in India - manufacturing, service, telecom, automobile and small SMEs will bear the impact of GST."
Primarily, the concept of GST was introduced and proposed in India a few years back, but implementation has been done by the current BJP government under the able leadership of Prime Minister Shri Narendra Modi on July 1, 2017. The new government was in strong favour of the implementation of GST in India by seeing many positive implications as discussed above in the paper. All sectors in India - manufacturing, service, telecom, automobile and small SMEs will bear the impact of GST.
One of the biggest taxation reforms- GST will bind the entire nation under a single taxation system rate. As forecasted by experts, GST will improvise tax collections and boost up India's economic development and break all tax barriers between Central and State Governments. No doubt, GST will give India a clear and transparent taxation system, but it is also surrounded by various challenges as discussed.
Tax collection in India is dependent on indirect taxes. Corporation tax is the major contributor in direct tax revenue collection. General sales tax is the major contributor to indirect tax revenue collection.
The contribution of indirect tax in GDP is more than that of direct tax. Government should try to increase the share of direct tax in total tax revenue collection and for that structural reforms should be brought by the government. There is a high need to consolidate and simplify the tax laws.