Changing Scenario of Taxation in India


By

Satish Kumar Matta
M.Com, PGDBM (Finance), MBA (Finance), M.Phil, Phd. (Pursuing)
Asst. Professor
Department of Management
Lloyd Business School
Gr. Noida (U.P)
 


Abstract

In India changes in direct taxes were warranted. The recent announcement by the Finance Minister about the Direct Tax Code and its application from 2011 is a matter of great concern for all related.

The competitiveness of our economy in general and industry in particular hinges on a system of taxation which, through its progressive approach, optimizes revenue consistent with stimulating industrial activity and consequently growth in our economy. The tax system should be fairly efficient while effecting revenue mobilization in response to growth. And the tax system is efficient if it is income elastic so that revenue grows slightly faster than GDP. India has a well developed tax structure with a three-tier federal structure as described in figure-1, comprising the Union Government, the State Governments and the Local Bodies (Municipal Corporations/Development Authorities).

The tax authorities' definition of 'high income' has remained out of touch with India's post-reforms economic realities in terms of the middle class's changing face, transformed income levels and cost of living. Recognizing this, a new direct tax code had been planned and drafted to ensure substantially reduction in individual and corporate income tax liability. The promise of a modern direct tax code is that lower taxes and simpler rules ensure compliance and more revenue. Its provisions should avoid complicated clauses, sub-clauses and caveats. Tax rates should factor in earning profiles. Also, successful tax rationalization involves weeding out unnecessary exemptions.  The new direct tax code is having an impact on all from a normal common man to the big corporate organizations, it is changing the whole scenario how the business was being done, and even while one is funding new things on various related businesses, everything is changing, we all needed this change and it was due for a very long time. Present article is an attempt to throw some light on the impact of new tax code regarding Personal income on salaried class.

Introduction

The competitiveness of our economy in general and industry in particular hinges on a system of taxation which, through its progressive approach, optimizes revenue consistent with stimulating industrial activity and consequently growth in our economy. The tax system should be fairly efficient while effecting revenue mobilization in response to growth. And the tax system is efficient if it is income elastic so that revenue grows slightly faster than GDP.

Tax Structure in India (Figure-1)


India has a well developed tax structure with a three-tier federal structure as described in figure-1, comprising the Union Government, the State Governments and the Local Bodies. The power to levy taxes and duties is distributed among the three tiers of Governments, in accordance with the provisions of the Indian Constitution. The main taxes/duties that the Union Government is empowered to levy are Income Tax (except tax on agricultural income, which the State Governments can levy), Customs duties, Central Excise and Sales Tax and Service Tax. The principal taxes levied by the State Governments are Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment and Tax on Professions & Callings. The Local Bodies are empowered to levy tax on properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc.

New Direct Tax Code

The tax authorities' definition of 'high income' has remained out of touch with India's post-reforms economic realities in terms of the middle class's changing face, transformed income levels and cost of living. Recognizing this, a new direct tax code had been planned and drafted to ensure substantially reduction in individual and corporate income tax liability. The promise of a modern direct tax code is that lower taxes and simpler rules ensure compliance and more revenue. Its provisions should avoid complicated clauses, sub-clauses and caveats. Tax rates should factor in earning profiles. Also, successful tax rationalization involves weeding out unnecessary exemptions

The new direct tax code is having an impact on all from a normal common man to the big corporate organizations, it is changing the whole scenario how the business was being done, and even while one is funding new things on various related businesses, everything is changing, we all needed this change and it was due for a very long time. The new tax code is expected to be effective from April 2011.  The significant thrust of the Code is to widen the tax base and have a simplified and moderate tax regime. The aims of new direct tax are to put an end to unstable tax regime paving way for a long-term taxation plan. Effectively, this means an end of the era of annual finance Bill, presented in the Budget session of the Parliament. Now on, any changes in the tax structure will henceforth be made not by the annual finance Bill presented at the time of Budget but only by way of an amendment Bill to be passed by the Parliament. The previous tax regimes provided shelter to foreign investors, often discriminating against domestic investors, the new code aims at providing a level playing field to one and all. Currently, FIIs enjoy tax exemptions coming via the Mauritius route. This benefit will no longer be available under the proposed code. Now the capital gains earned will attract a straight tax of 30 per cent.
 

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Source: E-mail November 22, 2010

          

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