India has a well developed taxation structure. The tax system in India is mainly a three tier system which is based between the Central, State Governments and the local government organizations. In most cases, these local bodies include the local councils and the municipalities.
According to the Constitution of India, the government has the right to levy taxes on individuals and organizations. However, the constitution states that no one has the right to levy or charge taxes except the authority of law. Whatever tax is being charged has to be backed by the law passed by the legislature or the parliament. Article 246 (SEVENTH SCHEDULE) of the Indian Constitution, distributes legislative powers including taxation, between the Parliament and the State Legislature. Schedule VII enumerates these subject matters with the use of three lists;
• List – I entailing the areas on which only the parliament is competent to makes laws, Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid labour).
• List – II entailing the areas on which only the state legislature can make laws, and
• List – III listing the areas on which both the Parliament and the State Legislature can make laws upon concurrently.
Direct Taxes: They are imposed on a person’s income, wealth, expenditure, etc. Direct Taxes charge is on person concern and burden is borne by person on whom it is imposed. Example- Income Tax.
Indirect Taxes: They are imposed on goods/ services. The Immediate liability to pay is of the manufacturer/ service provider/ seller but its burden is transferred to the ultimate consumers of such goods/ services. The burden is
transferred not in form of taxes, but, as a part of the price of goods/ services. Example- Excise Duty, Customs Duty, Service Tax, Value-Added Tax (VAT), Central Sales Tax (CST).
Progressive tax is a tax in which the tax rate increases as the taxable amount increases. The term “progressive” refers to the way the tax rate progresses from low to high, with the result that a taxpayer’s average tax rate is less than the person’s marginal tax rate.
Proportional tax is a tax imposed so that the tax rate is fixed, with no change as the taxable base amount increases or decreases. The amount of the tax is in proportion to the amount subject to taxation.
Public expenditure is spending made by the government of a country on collective needs and wants such as pension, provision, infrastructure, etc. Until the 19th century, public expenditure was limited as laissez faire philosophies believed that money left in private hands could bring better returns.
In democracy, public expenditure is an expression of people’s will, managed through political parties and institutions. At the same time, public expenditure is characterised by a high degree of inertia and law-dependency, which tempers the will of the current majority.
Main objective of Public expenditure is to reduce the inequality of income. Expenditure on old age pensions, unemployment relief, free education, free mid-day meals etc. benefits the poorer classes of the community at the expense of the rich.Other objectives are:-
1. Provide social goods
2. Remove unemployment
3. Increase Production
4. Exploitation and Development of Mineral Resources
5. Promote Price Stability
6. Promote Balanced Growth
7. Reduce Inequality of Income
Wagnar’s law or “The Law of Increasing State Activity” states that “as the economy develops over time, the activities and functions of the government increase”.
According to Adolph Wagner, “Comprehensive comparisons of different countries and different times show that among progressive peoples (societies), with which alone we are concerned; an increase regularly takes place in the activity of both the central government and local governments constantly undertake new functions, while they perform both old and new functions more efficiently and more completely. In this way economic needs of the people to an increasing extent and in a more satisfactory fashion, are satisfied by the central and local Governments.”
Wagner explained his theory based on following bases:-
- During industrialization process, public sector activity will replace private sector activity. State functions like administrative and protective functions will increase.
- Governments needed to provide cultural and welfare services like education, public health, old age pension or retirement insurance, food subsidy, natural disaster aid, environmental protection programs and other welfare functions.
- Increased industrialization will bring out technological change and large firms that tend to monopolize. Governments will have to offset these effects by providing social and merit goods through budgetary means.
Colin-Clark forwarded his view through “Public Finance and changes in the value of Money” about the growth of public-expenditure. According to them the share of government sector exceed 25% of the total economic activity in the economy, inflation occurs even in the balanced budget. In this connection his opinions are;
“When the government’s share of the aggregate economic activities reaches the critical limit of 25% the community behavior pattern changes and people produces less since incentive are harmed by the fact that increasing proportions of additional income must be paid in taxes under progressive tax system.”
Dalton’s Principle of Maximum Social Advantage – maximum satisfaction should be yield by striking a balance between public revenue and expenditure by the government. Economic welfare is achieved when marginal utility of expenditure = marginal disutility of taxation. He explains this principle with reference to
- Maximum Social Benefit (MSB)
- Maximum Social Sacrifice (MSS)
Peacock and Wiseman analyze the process of growth of public expenditure in terms of three different but related concepts; displacement, inspection and concentration effects. By the empirical analysis of the data of Britain on public expenditure, they were able to establish the relative growth of public sector expenditure in that country occurred on “step-like” pattern rather than on “continuous growth” pattern.
Musgrave and Rostow’s Development Model suggested that the growth of public expenditure might be related to the pattern of economic growth and development in societies. Three stages in the development process could be distinguished:
(a) The early development stage where considerable expenditure is required on education and on the infrastructure of the economy (also known as social overhead capital) and where private saving is inadequate to finance this necessary expenditure (in this stage, government expenditure must thus be a high proportion of total output);
(b) The phase of rapid growth in which there are large increases in private saving and public investment falls proportionately; and
(c) High income societies with increased demand for private goods which need complementary public investment (e.g. the motor car and urbanisation).
In recent years government expenditure is increasing faster than their ability to raise resources, because now their activities are not so restricted as only to maintain law and order and protect the country against external aggression. Therefore, when expenditure exceeds revenue, a deficit arises in the budget of the government. This deficit can be bridged by raising the revenue from taxation (by increasing the existing rates or by imposing new taxes) or by borrowing from the public. Both in developed and developing countries there are certain limits beyond which the taxation rates cannot be raised without adverse effects on the investment level or production and consequently on the rate of economic growth. Further, it taxes the rich and the poor alike which is not desirable for the welfare of any community.
Sience 1990 ie the liberalization of Indian economy saw the beginning of Taxation reforms in the nation. The taxation system in the nation has been subjected to consistent and comprehensive reform. Following factors arise the need for tax reforms in India:-
- Tax resources must be maximized for increased social sector investment in the economy.
- International competitiveness must be imparted to Indian economy in the globalized world.
- Transaction costs are high which must be reduced.
- Investment flow should be maximized.
- Equity should be improved
- The high cost nature of Indian economy should be changed.
- Compliance should be increased.
Direct tax reforms undertaken by the government are as follows:-
- Reduction and rationalization of tax rates, India now has three rates of income tax with the highest being at 30%.
- Simplification of process, through e-filling and simplifying the tax return forms.
- Strengthening of administration to check the leakage and increasing the tax base.
- Widening of tax base to include more tax payers in the tax net.
- Withdrawal of tax exceptions gradually.
- Minimum Alternate Tax (MAT) was introduced for the ‘Zero Tax’ companies.
- The direct tax code of 2010 replace the outdated tax code of 1961.
Indirect tax reforms undertaken by the government are as follows:-
- Reduction in the peak tariff rates.
- reduction in the number of slabs
- Progressive change from specific duty to ad valor-em tax.
- VAT is introduced.
- GST has been planned to be introduced.
- Negative list of services since 2012.
| Direct & Indirect Taxes | |||||
| Direct Tax | Indirect Tax | ||||
| Corporation Tax | Excise Duties | ||||
| Income Tax | Service Tax | ||||
| Interest Tax | Central Value Added Tax (Vat) | ||||
| Expenditure Tax | Sales Tax | ||||
| Wealth Tax | Property Tax | ||||
| Gift Tax | Octroi | ||||
| Estate Duty | Customs Duties | ||||
| Land Revenue | Stamp Duties | ||||
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