Rationalization of Tax Rate

Introduction

India is a federal, richly populated, poor country. Taxation laws and reforms play a major role in any country’s development. Tax reforms went through many changes in the last two decades and various developments have been undertaken due to the reforms but it is still far behind the ideal taxation system. India still faces many problems like Tax evasion, Black Money, Reliance on indirect Taxes, which shows the power of our legislation. It is because of the size of our country that if it works on its fiscal framework and reforms by removing the institutional constraints, Indian tax reform could be an example and a role model to many other developing countries.

Evolution of Indian Tax System

The main feature of tax assignment is for the separation of power between the central and the state government. The Central Government in India has the power to levy major broad based taxes which include taxes on non agricultural incomes and wealth, corporate income taxes, customs duties, and excise duties on manufactured products.

The major tax powers assigned to the states include taxes on agricultural incomes and wealth, sales taxes, exercises on alcoholic products, taxes on motor vehicles and on transport of passengers and goods, stamp duties and registration fees on transfers of property, and taxes and duties on electricity. States also have powers to levy taxes on entertainment and on income earned by engaging in a profession, trade or employment; some states have retained these powers for themselves, while others have assigned them to local bodies. The major taxes for the central government  are personal income and corporate taxes and excise duties, customs duties, and corporate taxes. In the case of state government, the major intuitive is when there was an introduction of VAT.

Direct Tax

It is the tax laid on the income of an individual on different tax slabs of Income level. The burden of payment cannot be shifted. Direct tax includes income tax, wealth tax, gift tax, capital gains tax etc. Direct Taxes in India were governed by two major legislations, Income Tax Act, 1961 and Wealth Tax Act, 1957. A new legislation, Direct Taxes Code (DTC), was proposed to replace the two acts. However, the Wealth Tax Act was repealed in 2015 and the idea of DTC was dropped.

Indirect Tax

It is the tax that is indirectly laid on the public through goods and services. Indirect Taxes include Value Added Tax (VAT), Octroi Tax, Service Tax, Customs Duty etc.

Constitutionally established scheme of Taxation

Article 246 of the Indian Constitution

It distributes legislative powers including taxation, between the Parliament of India and the State Legislature. There are separate heads of taxation given in the Union and the State list but not in the Concurrent list. There are totally thirteen union heads and nine state heads.

Advantages of Indirect Tax

1.     Convenient

Indirect taxes are imposed on the sellers and manufacturers, the burden to pay lies on the customers. 

2.     Difficult to Evade

In many products, the selling price is inclusive of the taxes, hence it becomes very much difficult to evade.

3.     Control by Government

As the government can impose taxes required to be paid in each stage or at the final stage, it imposes a pattern of production and has a control over it.

4.     Elastic

Indirect Taxes in certain cases are elastic. So whenever the Government feels like increasing its revenue, it can raise the Indirect Tax.

5.     Universality

People irrespective of their economic status are bound to pay this tax.

Disadvantages of Indirect Tax

1.     Uneconomical

The consumers are the final users of the product so while buying the product; they are made to pay more money, which is uneconomical to many poor people.

2.     Inflation

The Government may raise the Tax Rate if it wants revenue and this might increase the prices of a commodity. This might create an inflationary pressure.

3.     Non-Awareness

There is absolute non awareness among the taxpayers regarding the amount of tax and the reason it is paid and nobody knows he is paying the tax that is included in the price.

4.     Evasion

There is a high possibility of tax evasion. The manufacturers might get a huge amount of tax from the consumers and pay it at a lesser cost to the government.

5.     Unemployment

When there is a rise in price, the demand for the product reduces as a result, it might discourage the industries for production which leads to a rise in unemployment.

Advantages of Direct Tax

1.     Equitable

The burden of proof cannot be shifted. It is progressive and equitable in nature.

2.     Certain

The amount of tax to be paid is certain as they know their income and the tax are equitably distributed.

3.     Productive

As the income of a person grows, the community also grows in prosperity and hence the returns from those taxes also grow.

Disadvantages of Direct Tax

1.     Social Conflict

It might stimulate conflict as not all the members of the society  pay direct tax.

2.     Inconvenient

If it is not comfortable for the payer to pay that amount of tax, nobody could help and it just pinches the taxpayer.

3.     Evadable

A taxpayer may submit false returns and he might just evade the payment. The dishonest people know the loophole to escape easily. It is the honest people who suffer.

Central Tax Reforms

The systematic evolution of tax reforms happened in 1953 by the report given by the taxation committee. Later there was an ideological orientation of the second five year plan. Nicolas Kaldor, a professor from the Cambridge University was invited to make changes in the tax reform. He insisted in introducing expenditure tax to curb consumption. Since it did not generate expected revenue, this was removed. 

The Direct Taxes Enquiry Commission in the year 1971 recommended a reduction of the marginal tax rates. The Tax Reforms Committee (TRC) laid down reforms for making reforms in the Indian taxation system in 1991. This recommendation of the TRC also fell short and by 2005, all the reforms in the centre were simplified and rationalized.

State Level Tax Reforms

Tax reforms of the state were not in coordination with the central. Hence various committees were appointed and still there was no progress till 1991. In certain states even when the committee raised certain suggestions they were not properly implemented. Sales tax was implemented 1999, and Value Added Tax (VAT) came into play from 2005. It was not surprising that this reform would lead to confusion.

The first issue was that in the ad hoc in which it was introduced there could also be lack of preparedness in the state. Education and awareness started becoming inadequate. The second issue involves three shortcomings in the design of the tax itself. The third important issue is the decision to apply the VAT on the maximum retail price (MRP) at the first point on pharmaceuticals and drugs. This was possibly done to accommodate the existing trade practices organized through commissions; once MRP is taken as the base, there cannot be more value added at later stages. This goes against the principle of VAT—of collecting the tax at different stages of value added with credit given for the tax paid at the previous stage.

Landmark Judgements in 2019

M/s Achal Industries vs. State of Karnataka

A two judge bench comprising A.M.Khaniwar and Ajay Rastogi, explained that Section 6B of the  talks about total turnover and not “turnover” as defined in Section 2(v) of the Karnataka Sales Tax Act (KST) is the same.

The excerpts from the judgement says that;

The expression “total turnover” + “turnover” which has been used under Section 6B has the same meaning as defined under Section 2(1)(u) and 2(v) of the Act. It may be further noticed that under Section 6B, reference is made on ‘total turnover’ and not the ‘turnover’ as defined under Section 2(v) of the KST Act and taking note of the exemption provided under first proviso clause(iii), exclusion has been made in reference to use of sale or purchase of goods in the course of interstate trade or commerce. It clearly indicates that the expression ‘total turnover’ which has been incorporated as referred to under Section 6B(1) is for the purpose of identification of the dealers and for prescribing different rates/slabs. The first proviso to Section 6B(1) provides an exhaustive list of deductions which are to be made in computation of such turnover with a further stipulation as referred to in second proviso that except for the manner provided for in Section 6B(1), no other deduction shall be made from the total turnover of a dealer. 

The case was decided to be unsustainable and was rejected.

The Peerless General Finance and Investment Company Ltd vs. Commissioner of Income Tax   

It was decided by the Hon’ble bench in the supreme comprising Justice R F Nariman and Justice Sanjiv Khanna that deposits collected by the finance company were not revenue receipt but qualify as a capital receipt. It also added that, it is the department that is liable to prove that a certain receipt is liable to be charged.

M/s TVS Motor Company Ltd vs. The State of Tamil Nadu and Others

The Supreme Court upheld the decision of the High Court of Madras on the case filed on the constitutional Validity of the Tamil Nadu value added Tax act 2006. It explicitly said that in cases where the dealer makes exclusive sale to other state governments, the benefit of ITC will be allowed without insisting. The dealers who ever are dealing with making sales exclusively to other states, the said states are deemed to be registered as dealers for availing the benefit under ITC.

Conclusion

The taxpayers are unhappy and are harassed due to the multiple tax system by the local, state and the central governments. The report given on black money ensures that a parallel economy exists along with the same amount of GDP. GST implemented is a good step forward towards a better tomorrow and it must be revised frequently preventing it from becoming obsolete. Government should focus on more structural reforms than policy reforms.

References

Questions

  1. What is direct tax and Indirect tax explain with examples. 
  2. What are the advantages and disadvantages of direct tax?
  3. Who insisted on introducing expenditure tax?

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