Banking Awareness All about Indian Tax System for Upcoming Bank Tests

Banking Awareness All about Indian Tax System

Indian Tax System:

Benjamin Franklin once said, "Nothing is certain except death and taxes." We are familiar with how the moneylenders made sure that the taxes due to them were collected, by hook or crook. But unlike moneylenders, the tax system in a country is designed to produced desired impact on economic and social fabric through progressive taxation. However, a highly progressive tax structure may actually become regressive if taxes levied on the rich are not collected.

     A sound tax system should be based on equality, economic efficiency and administrative ease. Equity requires that taxes match the ability to pay. In other words, taxpayers with equal ability must be taxed equally. Economic efficiency requires that the tax system should not distort economic decisions, needlessly alter choices, or escalate cost of production. Purposive and selective interference by the state in resource allocation would be justified in the social interest. however, such interference should be minimal, otherwise there will be political pressure for further intervention.

     Administrative ease requires simple and transparent economic system. It can be achieved by lesser number of tax slabs and fewer tax rates. Moreover, tax department should be technically well equipped with modern information and communication systems.

India's Tax Structure Present and Past:

     The present tax structure in India is defective in many ways. Successive Budgets have focussed on four elements of tax reforms.

1. Growth in Revenue
2. Simplification of Process
3. Rationalisation of the Tax regime
4. Effective Tax compliance.

The emphasis of the direct tax proposals in budget is to continue with the policy of stability in tax rates, widening the tax-base, simplification of tax law, incentives for infrastructure development and promotion of capital market in particular. New measures to curb tax avoidance by transfer pricing was introduced in the budget of 2001-02. One-by-six scheme for identifying the potential tax-payers has now been extended to all urban areas in the country as defined by the 1991 census.

     In the case of indirect taxes, reforms have remained focussed on gradual rate reduction in custom and excise duty, rationalisation of tax structure, simplification of procedures and promotion of information technology and communication in tax-administration. The peak level of custom duty has been scaled down to 30% with the abolition of 10% surcharge. By 2004-05 there would only be two basic rates of 10%, covering generally raw materials, intermediates and components and 20% covering generally final products. The excise duty structure is rationalised to a single rate of 16%. The coverage of service tax at the rate of 5% has been further expanded to include the services of insurance sector, fashion designer, event managers etc.,

     In the area of sales tax, there has been consensus to implement uniform floor rates of sales tax in the entire country. It has also been decided to phase out sales-tax based incentive schemes for industries, reform the Central Sales Tax System and simplify the tax system by the introduction of Value Added Tax (VAT). Present situation with VAT implementation on January 16, 2002, Union and State governments decided to defer for the second time, the introduction of the VAT for another year till April 1, 2005. As many as 16 states were ready to move over to this progressive form of taxation from April, 2002, as scheduled, but the Centre's inability to enact relevant legislations, concerning the Central Sales Tax Act and the Additional Excise Duty Act forced the postponement. So, at present there is only CENVAT at the manufacturing stage. Prerequisites for VAT implementation Before the implementation of VAT, the governments should ensure adequate economic, financial and technical infrastructure. It should meet the following conditions

1. Enactment of VAT legislation and framing of rules and regulations
2. Computerisation of dealers falling within the ambit of VAT
3. Training of Tax officials, traders and consumer associations
4. Publicity for consumers
5. Assigning VAT identification number to taxpayers
6. Implementing transitional measures for introduction of VAT.

Conclusion:

     There have been sustained efforts towards tax reform since 1991. It will get a further boost with the recommendations of the Kelkar Committee Report. But there is still a long way to go before achieving equity and buoyancy in the tax system, given the relations of the Indian situation, as mass poverty, illiteracy, a federal structure, an informal economy and the like.

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