Tax Reforms in India


By

Stuti Gupta
Asst. Professor
Gyan Institute of Management and Technology
Lucknow
 


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Implementation of reforms since 1991

The government accepted the recommendations of the TRC and has implemented them in phases. As regards the personal income taxes, the most drastic and visible changes have been seen in the reduction in personal and corporate income tax rates. In the case of personal income taxes, besides exemption, the number of tax rates has been reduced to three and the tax rates were drastically reduced to 10, 20 and 30 per cent. At the same time, the exemption limit was raised up to 1, 00,000. In addition, saving incentives were given by exempting investment in small savings and provident funds up to a specified limit. Attempts have also been made to bring in the self-employed income earners into the tax net. Every individual living in large cities covered under any of the specified conditions (ownership of house, cars, membership of a club, ownership of credit card, foreign travel) is necessarily required to file a tax return. Empirical evidence shows that this drastic reduction in the marginal tax rates has improved the compliance index significantly. Thus, revenues from personal and corporate income taxes have shown appreciable increases after the reforms were initiated in spite of the fact that the rates of tax have been reduced significantly.

In the case of corporate income taxes, the rates were progressively reduced on both domestic and foreign companies. The dividend tax at the individual income tax level has been abolished. However, very little has been done in terms of broadening the base of corporation tax. In fact, besides depreciation allowances and exemptions for exporters, generous tax holidays and preferences are given for investment in various activities (housing, medical equipment, tourism, infrastructure, oil refining, free trade zones, software development, telecommunication, sports etc.). Consequently, the tax base has not grown in proportion to the growth of corporate profits. As many corporate entities took generous advantage of all these tax preferences, there were a number of "zero-tax" companies. To ensure minimum tax payments by them, a Minimum Alternative Tax (MAT) was introduced in 1997-98.

Another important change that has been brought about since 1991 is the introduction of a selective tax on services. The constitution does not assign this tax base specifically either to the centre or the states. However, the central government by invoking residuary powers has introduced a tax on services since 1994-95. Beginning with three services (telephones, non-life insurance and stock brokerage), the base of the tax has been broadened to cover a large number of services such as transporters, car rentals, air travel agents, architects, interior designers, management consultants, chartered accountants, cost accountants, company secretaries, credit rating agencies, market research agencies, underwriters, private security/detectives, real estate agencies and mechanized slaughter houses.

Revenue implications of reforms

The economic crisis of 1991 resulted in a significant decline in revenues. Although the tax reforms were intended to be a revenue neutral exercise, the natural consequence of a significant decline in tax rates was to reduce revenues. As there was no commensurate increase in the tax base, the revenue naturally showed a declining trend.

Interestingly, in spite of significant reductions in the rates of both individual and corporate income taxes, the revenues have shown a significant increase. The share of revenue from direct taxes showed a significant increase as a proportion of GDP as well as total tax revenue.

The decline in the tax-GDP ratio since the reforms were initiated has to be attributed to lower yield of indirect taxes. Naturally, some reduction in customs revenue was only to be expected as the prevailing tariffs were extremely high and had to be drastically reduced. For the same reason, the reforms in excise duties were to be calibrated to compensate revenue loss from import duties. This, however, did not happen and in fact, the revenue from union excise duties showed a drastic decline. Significant improvements in the tax ratio, therefore, have to come from improvement in the revenue productivity of domestic indirect taxes.

CONCLUSION

The proposed tax reform simplified the language of legislation by converting the income tax and wealth tax by one single legislation. The Indian tax reforms have laid down various implications for the economy that ensures the development of the economy. The lower tax to GDP ratio indicates a positive growth of the other sectors of the economy as well as their contribution to the Indian GDP, therefore the lower Tax GDP ratio up till date shows a positive impact of almost all the taxation reforms in Indian economy.

REFERENCES

www.taxreform.in/

www.economist.com/node/15127568

www.livemint.com/.../A7B37DCA-62D0-420C-9144-95CAF5CEC986ArtVPF

www.ncaer.org/downloads/Journals/ipf0506-paper2.pd

Taxation Laws by Taxmann
 

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Source: E-mail May 25, 2011

          

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