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 India’s Tax Structure

 India’s Tax Structure

The salient features of India’s tax structure are as follows:-

  • Progressive, which means that as income goes up, the rate of tax goes up so that the rich are taxed at a higher rate than the poor so as to reduce inequalities.
  • Prone to evasion which implies that there are too many loopholes and exemptions / rebates which leave enough scope for evasion and avoidance of taxes.
  • Complex structure implying that not only tax rates may be high but also with many slabs giving room for evasion.
  • Excludes tax on Agriculture.                                     India’s Tax Structure

Tax reforms introduced in the last two decades have induced structural shift in the composition of tax revenue, marked by a progressive increase in the share of direct taxes in total taxation revenue and a corresponding decline in the share of indirect taxes.

The share of direct taxes in the gross tax revenue has progressively increased from 19.1 percent in 1990-91 to 55 percent in 2013-14.

  • India’s complex tax system suffers from problems in both structures and administration. The tax regime is used for industrial policy where the state gives exemptions and rebates to certain economic activity.
  • Uneven and high tax rates and uneven tax treatment of similar economic activities have induced distortions in the behaviour of firms and households.
  • In addition, the manner of functioning of tax administration is imposing legal risk and substantial compliance costs upon households and firms.                               India’s Tax Structure
  • Tax reform in India can improve the ease of doing business and promote efficiency and productivity growth.
  • The tax/GDP ratio of the government must be obtained through a burden —sharing mechanism where low rates apply on a broad swathe of the population, through effective enforcement mechanisms.
  • Taxes clarified as ‘bad’ in public finance theory like cesses, surcharges, the dividend distribution tax, need to eventually go.
  • Reducing tax-related distortions can increase efficiency and fuel GDP growth. There is consensus that the GST will be a major milestone for indirect tax reform in India.
  • Replacing all existing indirect taxes by the GST will create a national market, eliminate cascading taxes, and align taxation of imports and exports correctly.                             India’s Tax Structure

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