The subject of taxation in India is such that the very mention of the word is sufficient to bring up a really mixed bag of opinions. The other notable thing being, how wildly these opinions will oscillate between the well informed and the ill-informed. But yes, you just cannot escape the fact that everyone will have their own opinion on this somewhat complicated and often misunderstood subject.
Taxation in India has long been under scrutiny and a subject of debate and analysis of economists and finance professionals. This is due to the complexities of a large population as well as the nature and size of the businesses who are chosen to be brought under the ambit of taxation. The tax paying community too has been coping with and adjusting to the changing Indian tax structure, due to the progressively changing tax laws that successive governments have been introducing and implementing across the board.
The Indian tax structure is divided into two clear cut categories direct and indirect taxes. In direct taxation, the onus of complying with the tax laws and paying appropriate taxes is directly on the taxpayer for instance, income tax. In indirect taxation, the burden is levied indirectly on the taxpayer for istance, entertainment tax. To understand the taxation in India and connect with excerpts from the industry by subscribing to CoffeeMug.
The taxation powers are vested in and are levied by the central government and the state government. Local governing authorities such as the municipality and the local governments also levy a few minor taxes for instance, property tax.
Major central taxes are composed of:
- Income Tax
- Central Goods & Services Tax (CGST)
- Customs Duty
- Integrated Goods & Services Tax (IGST)
Major state taxes are composed of:
- State Goods & Services Tax (SGST)
- Stamp Duty & Registration
When simplified, the main features of the Indian tax system can be broken down to its two main components: income from goods and services tax (GST) and income tax. Both forms constitute nearly 90% of the government’s total tax collection. The 2021-22 Budget estimated the government’s gross tax revenue to be Rs. 22, 17,029 crore. However, it is not as cut and dried as it seems on the surface. We need to probe a little more to understand what are the challenges to the taxation system in India.
1. Lack of agricultural income tax
In spite of agriculture being the foremost sector of the Indian economy there is no tax on agricultural income. Agriculture tax falls under the purview of the state and not the central government, which has made it nearly impossible to table any agricultural tax system. Another factor to contend with is taxpayers who falsely claim exemption under the head of agricultural income. Farmers constitute a valuable vote bank for political parties so no one wants to upset the status quo.
2. A parallel black money economy
Tax evasion is one of the major challenges for the taxation system in India. The amount of money evaded generates an illegal hoard which is called black money. Assessees submit false claims stating lesser profits or turnover. Expenses, receipts, sales figures and books are manipulated. Tax refunds are claimed by making false representations before tax authorities. All this is very hard to track. But it is equally true that the prevention and control of black money is a priority for transitioning towards a fair and transparent economy.
3. Tax burden skewed more towards corporate sector
It is the corporate sector that is bearing the brunt of taxation both the direct and indirect taxes. When this happens, corporations then tend to shift this tax burden onto shareholders and customers who actually can constitute a very small group. This does not bode well for a fair economy. Also with corporations, there are chances of large scale tax evasions happening which could result in loss of tax revenue.
4. Excessive dependence on indirect taxes
Indirect taxes collection has seen a spike. However this implies that the government kitty has taken a hit in terms of revenue as direct tax is the main source of enhancing revenue flow to the government coffers.
5. Low percentage of people outside agriculture registered for IT
A finance ministry report pegged the total number of taxpayers for AY 2020-21 to be 8,22,83,407. Compare this to the projected population of the country as on March 1, 2021 was 136.30 crore and the yawning gap comes to the fore. The challenge here is to bring in more non-filers into the tax ambit by devising region-specific or industry and sector specific tax strategies.
Conclusion
The last few years, however, have witnessed the central and a host of state governments push for various initiatives, policy reforms and drive automation to make things simple and easy. To learn more about taxation, the concerned ministries and the various initiatives being made by the government to ease the hassles of both filing and collection of taxes please log on to CoffeeMug.
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FAQs
Q. What are the problems in Indian tax system?
A. Direct taxes have a high rate but a low yield in India as in other LDCs. Direct taxes have a high rate but a low proportion to total tax income.
Q. What are the features of Indian tax system?
A. Income and property taxes are direct taxes, whereas commodities and service taxes are indirect taxes. Income tax, corporate tax and wealth tax are all important direct taxes. VAT, service tax, excise duties, import duties and other indirect taxes are examples.
Q. What are the causes of black money in India?
A. Unrealistic tax laws and tax frauds, quota system, illegal real estate transaction, inflation and different rates of excise duty are some of the causes of black money in India.
Q. What are limitations of tax planning?
A. The main disadvantages are that it is more complicated than the cash basis and that income taxes may be due on revenue before it is collected. Companies with limited receivables and substantial current obligations, on the other hand, may benefit from the accrual method.
