Describe the main characteristics of good taxes system. How for these characteristics found in Indian taxes structure.
Describe the main characteristics of good taxes system. How for these characteristics found in Indian taxes structure.
Ans.
Qualities or Characteristics of a Good Taxation System
An ideal taxation system is that which includes all types of taxes according to need. From Adam Smith to modern economists much has been explained about the theories of taxation that gives us a good base for the formation of qualities of a good taxation system. In this context Lutz says that “neither a tax is completely good and nor completely bad.” Practically no taxation system can be without defects. The famous Philosopher Edmund Burke rightly says that, “It is difficult to tax and to please as it is love and to be wise.” A taxation system may be good and very suitable at a particular time but with the change in time and conditions it may be unsuitable or inappropriate.
According to Mrs. Ursala Hicks a taxation should possess the following qualities: (i) The taxes which are levied on the people, should be according to their paying ability. This ability to pay a tax depends on their income and family conditions; (ii) The objective of tax should be to provide public services; (iii) The taxation system should be based on universality. According to Prof. Musgrave, principal qualities of a good taxation system are as follows-
(1) Equitable: Distribution of the burden of taxes should be equitable to all people. Taxation system should be such that every individual is able to contribute a fair share to it.
(2) Minimum Interference: The government should impose such taxes as cause minimum interference in the economic decisions of people. Excess burden of taxes should be minimized.
(3) Check on the Inefficiency of Private Sector : Selection of taxes should be such that they serve as a check on the inefficiency of the private sector. In this context it may be said that the private sector try to evade the tax. Thus the taxation system should be designed such that the private sector may not utilise it to serve his selfish motive and thus deceive the tax authority.
(4) Achievement of Growth Objective: Taxation system should be compatible with the objectives of fiscal policy, i.e. stabilisation, economic development, etc.
(5) Simple and Clear : Taxation system should be simple and clear so that the tax payers may follow it easily. Its management should also not involve complicated procedures. It should be easy and its rate, etc., should be fixed.
(6) Less Expensive : A good taxation system is one which does not involve much expenses on collection of taxes. If more expenses are incurred on the collection of a tax then the very purpose of the taxation is defeated.
(7) Maximum Social Benefit: In a good taxation system taxes should be used to provide public utility services. In other words, the taxation should not be treated as an instrument of raising revenue only but an instrument for attaining certain social objectives also such redistribution of wealth and thereby reducing inequalities of income. Taxation may be used to finance pubic services. It can also be used to control and regulate consumption e.g., restriction of alcoholic liquors by means of heavy excise duties. All the measures will increase social welfare of the society. Thus, a good tax system should increase social welfare of the society and ensure maximum social benefit to the society and should not be regarded only as a means of securing revenues.
(8) Based on Canons of Taxation : A good taxation system is one that embodies maximum canons of taxation, like, equity, convenience, certainty, economy, productivity, flexibility, simplicity, etc.
(9) Built in Flexibility: A good taxation system has built-in-flexibility. It implies that taxes are increased or decreased as required. The rates of taxes are modified as per need in such a way that without adversely affecting the economic system revenue requirements are fulfilled.
(10) Balanced: A good taxation system should be balanced one. It means that taxation system should have a balanced mix of all types of taxes. It should not only contain progressive and proportional taxes but the same should have a balanced mixing.
Characteristics found in Indian taxes structure
1. The Scientific Division of Tax Powers: India being a federation, there is the existence of a multi-level finance system.
The constitution of India forms the basis of division of powers into- (a) Union, (b) State, and (c) Concurrent.
Based on this the constitution has also made a provision for division of tax powers between the centre and the states. The area and sphere of taxation of centre and state is clearly demarcated as per constitutional provision. Taxes which are in the purview of central government accounted for 50 percent of its revenue. Some taxes are again levied by the Central government and the proceeds of such taxes are divided between the centre and the state governments.
2. Multiplicity of Tax Structure: India is having a broad based and extensive tax structure. Its main feature is the existence of multiplicity of taxes. There are both union government taxes and state government taxes. The tax structure includes both dried and indirect taxes.
In the case of states indirect taxes play a dominant role, in the composition of tax revenue. Among the direct taxes imposed in India, the most important is income tax. Other prominent taxes are wealth tax, capital gains tax, gift tax etc.
The indirect taxes in India Consists of excise duties., customs duties, etc. The important taxes levied by the union government are income tax, corporation tax, central excise duties, wealth tax, gift tax, custom duties etc. The state governments main taxes are land revenue, sale tax, state excise duties entertainment tax, stamp and registration duties etc. The gross tax revenue of the Central Government grew by 17.6 percent and 19.9 percent in 2003-04 and 2004-05, respectively.
3. Larger share of Indirect Faxes: In India in the total tax revenue there is the domination of indirect taxes over direct taxes. Indirect taxes shared 63% in 1950-51 where it increased to 77% in 2001-02. If shows that because of the undeveloped character of the economy and glaring inequality in income, the scope of direct taxes is limited.
4. Insufficient Tax Revenue : In-spite of rising trend in tax revenue, the total revenue remained small when compared to developed countries. The tax GDP ratio generally remained in the ranee of 8 percent to 9 percent in India (E. Survey 2005-06) where as it is very high in countries like Sweden. France, West Germany, UK, USA, etc, where the share ranges between 30 to 40 percent.
5. Greater Importance to State Government in Federal Fiscal System : In Indian fiscal federalism much importance is assigned to state governments. The field within which tax revenue, are raised and spend regularly is very wide in India when compared to many federal governments.
This reflects the importance of state government in our federal system. This is because of the growing responsibilities of the state government in the discharge of developmental activities.
6. Incidence of Taxation : In India the incidence of taxation is much higher in urban areas than in rural areas this is because of the predominance of agriculture in rural area and low income of rural households. The urban population depends more on service and business sector and enjoys comparatively higher income and tax paying capacity.
7. Progressiveness in Tax Structure: Indian tax structure is framed in such a way that all indices of ability to pay is taxed. The direct tax is framed in such a way that as tax base increases, tax rate also rises sharply. Excise duties are levied and collected discriminately, depending on the type of commodity and the class of consumers.
8. Narrow Base: Fiscal experts opine that the tax base is very narrow in India in the case of both direct and indirect taxes. A planning commission estimate shows that only one percent of working population comes under the preview of direct tax.
In 2000-01 total income tax on the corporate income was only 2.6 percent GDP. Out of a population of more than 100 crores, around 10 million are coming under the Income tax belt. The indirect tax to GDP ratio is only 5.4 percent in 2003-04. The service sector, though contributing the largest share in GDP was not subject to tax till 1993-94.
Service tax was introduced in the year 1994-95. Service sector, even though accounts for more than 50 percent, of GDP, contributed Rs. 14200/- Crores as tax in 2004-05. This is a small share when compared to the vast potential from this sector.
9. Complexity of Indian Tax Laws: With the intension of broad based tax system, a plethora of changes have been introduced in the tax structure.
However both direct and Indirect tax laws are highly complex, with a lot of loopholes which enable the people to avoid as well as to evade taxes. In this context Prof. Kaldore observes “there are definitional defects in India’s tax system, which gives elaborate power to tax uthorities to interpret tax laws according to their whims and fancies. This has generated wide spread corruption in tax departments”.
10. Integration between Centre and Sate Revenue : After independence concrete efforts were made to organize the lax structure scientifically in tune with the requirements of a federal set of government. At present there is well-organized machinery for the collection distribution and expenditure of the revenue. Now the tax system is well structured to general sufficient revenue to meet the requirements of development objectives.
However we can point out a number of short comings in Indian tax structure. It is usually argued that Indian tax system is unscientific because it doesn’t provide any stimulation for production investment and saving activities of the government. Many tax laws are stringent and rigid which punishes prudence and virtue, but rewards corruption and evasion. This unscientific base of tax system is pin pointed as a factor responsible for generating black money and encouraging tax evasion. Compared to developed countries like Japan. Australia USA etc.
Where 70-80 percent of revenue is generated by direct taxes; in India. major portion of revenue is flowing from indirect taxes. This is not a healthy sign of developed tax structure. The main objective of taxation is to reduce glaring inequality in income distribution.
But in-spite of having, a multiplicity of taxes covering different income source base, the tax machinery failed to reduce the income inequality considerably. This is a serious short comings of our tax system.
The accumulated tax arrears, the parallel economy nourished by black money shows the flows in our tax system. The un-coordinated inefficient and corrupt tax machinery pin-point to the deficiency in our tax system.
To overcome these defects the government of India over time appointed different taxation commissions. These commissions were appointed to detect and analyses the defects and to suggest suitable recommendations.
The Taxation Enquiry commission Report (1953). Prof Kaldors proposal for tax reforms (1956), The Mahavir Tyagi Committee Report (1958), Wanchoo Committee Report (1970) Raj Committee Report on Agricultural taxation (1972), Indirect lax Enquiry Committee Report (1976), Chokshi Direct Taxation Committee Report (1977) are some important measures adopted by the central government to rationalize and revitalize the Indian tax structure.
After 1990, in lieu with the economic reforms and structural adjustment programmes, the central government initiated concrete efforts to rationalize the tax structure. The appointment of Dr. Raja J. Chelliah committee, popularly called the Tax Reform Committee, was a bold step to reform the Indian Tax structure in tune with the changing economic scenario.
Evaluation of Indian tax system can be made with along the following four criteria, which are necessary to sub-serve the objectives of planned economic development:
(i) Adequacy and productivity: Contrary to the earlier phase, tax system has exhibited a good deal of buoyancy in recent years. The tax revenue has been continuously increasing along with an increase in national income. However, the increase in tax revenue has not been adequate enough to meet the growing requirements of the developing economy.
(ii) Efficiency: Indian tax system falls short of the criterion of efficiency. On account of complicated laws and rapid changes in their provisions, the lax system has lost the qualities of simplicity and certainty. As a result, on the one hand, this has led to massive tax evasion and avoidance. This has generated massive black money, which, in turn, has given rise to serious distortions in the economic and sociopolitical Set-up. On the other, the taxpayers have to incur high costs in paying up taxes.
(iii) Equity: Our tax system also falls short of the criterion of equity. Although our direct taxes are highly progressive, undue reliance on indirect taxes has more than counterbalanced that effect. Leaving agricultural income out of the tax net has been a source of additional inequity. Likewise, the proliferating unorganised industrial sector is providing, complete, tax haven.
(iv) Certainty: The scheme of taxes in India has been considerably fluctuating, resulting in frequent tampering with tax exemptions, incentives and concessions leading to uncertainty. Even the goals of taxation have been changing. For instance, at one time the goal was to have a large number of taxes, so as to widen the tax base, whereas currently, the goal is to reduce the multiplicity of taxes and duplicity of the laws.
A more fundamental change in the tax perspective is the emphasis in the recent years on thrift, productivity and wealth accumulation as compared to the almost single most important coal of ‘avoidance of concentration of income and wealth’ pursued in earlier years.
Adhocism pervades the sector of corporate taxation also. Although the reasons behind the changes are quite often laudable, the policy of frequent and sudden changes in taxes ought to give way to certainty so as to have stability in the tax administration system.
In short, many provisions in the tax laws have become redundant and need to be in tandem with the liberalised economic policies. In the current scenario, India’s tax structure should be based on three cardinal principles the tax system should be simple, moderate and fair.
