Defects
The characteristics of current taxation system in India can be described as follows:
- Narrow base and limited coverage of direct taxation.
- Reliance on Indirect Taxes
- Inequitable and hence regressive
- Non-Productive & irrational nature.
- Uncertain
- Inelastic
- Uneconomical
- Complex nature of taxes
- Tax laws open for interpretation
1. Narrow Base and Limited Coverage
Taxes are divided into direct taxes and indirect taxes. Direct taxes are those, which are borne by those who pay them to the government in the first instance. Indirect taxes are paid by one but later recovered from others. We can say that taxes on income and wealth are direct taxes while those on commodities and services are indirect taxes. There are many direct taxes levied in India. But the Union taxes remain restricted to non-agriculturists and non-agricultural income, wealth, inheritance or capital gains. As the States also do not levy any significant taxes on agricultural incomes, direct taxes are restricted to a few non-agriculturists.
In India, the need for more revenue was met by levying more and more taxes on commodities rather than on income and wealth. Taxing commodities of all types - raw materials, semi-finished goods, spare parts, components and finished goods resulted in a high cost of production and subsequent high prices. The process was no doubt helped by inflationary trends caused by increase in money supply, but indirect taxes of high order were mainly responsible for soaring prices. The table below gives examples of the impact of high indirect taxation on sales price.
Direct taxes contributed 29% of all the tax revenue of Union and State governments in 1960-61. By 1990-91 the proportion had fallen to 16%. The new economic policy led to rise in this proportion to 28% in the budget for 2003-2004 & 40% in 2007-08.
3. Inequitable hence Regressive.
A regressive tax system is one, where the proportion of tax amount to income decreases with rise in income. In India, commodity taxes on essential goods used by the poor make the system regressive.
4. Non-Productive & irrational nature
Due to the complex nature of the tax system, checking the correctness of the information furnished by the taxpayers becomes a difficult job. Attempts to increase the number of taxpayers are hampered as assessment gets delayed due to increased workload on the staff. To solve the problem, detailed scrutiny is restricted to a small proportion of assesses. The result is, understatement of income or non-filing of tax returns.
Frequent changes in taxes result in inconsistency. A new tax might be introduced without studying whether it is consistent with the existing tax system. For example, a tax on bonus issues was levied to supplement the tax on dividends. It continued after the latter tax was abolished. The gift tax was supplementary to Estate Duty, but continued after the Estate Duty was abolished. It is now withdrawn. Tax concessions are given to encourage savings, but wealth accumulated out of savings is taxed.
Concessions for savings result more in diverting savings from one form to another rather than increasing total savings. When investment in National Savings Certificates was made eligible for tax concessions, bank deposits of same maturity and paying equal or even less interest were not considered for tax concessions. Further, concessions for savings benefited more, the richer persons subjected to higher rates of taxes; until the government introduced tax rebate in place of deduction for tax purposes.
Every budget adds some provisions and deletes some. Tax rates are frequently changed. New concessions are added and existing concessions are withdrawn. New taxes are levied and existing taxes are abolished. Long term planning becomes impossible under such conditions.
Elasticity refers to the change in tax revenue with change in income. In India, due to predominance of commodity taxes, which were until recently, mostly specific taxes, the tax revenue did not change much with change in incomes. Tax rates had to be raised to collect additional revenue.
7. Multiplicity of Taxes, hence Uneconomical
Due to the division of tax powers and due to the need to collect taxes from as many persons as possible, a number of taxes are being levied in India. A person earning income from more than one source may be subjected to Union Personal Income Tax, State Agricultural Income Tax and Profession Tax. If he holds property, he may be subjected to Union Wealth Tax, State Agricultural Wealth Tax, Land Revenue and Local Property Tax. The goods, which we buy, may have reached us after paying Customs Duty, Excise Duty, Sales Tax and Octroi. It is doubtful, whether, even a tax consultant will be able to tell us the NUMBER of taxes levied in India, let alone naming them all.
After the government has levied a tax, changes become necessary to plug loopholes or to create desirable incentives or disincentives. For example, Income has to be defined unambiguously for tax purpose. Exemptions, deductions and rebates are to be prescribed, and surcharges are to be introduced for specific purposes. A schedule of tax rates is to be prescribed. Because of all this, it becomes difficult to know how much tax a person is supposed to pay.
9. Tax laws open for interpretation
The complex nature of tax laws gives more powers to the tax authorities. They can issue orders interpreting the tax laws differently in different cases. This leads to litigation and delays in collecting taxes. The taxpayer is treated with suspicion and honest taxpayers suffer. Even if the orders of tax authorities prove wrong, they (authorities), lose nothing. The taxpayer loses time and money in litigation.
