Tax Reforms in India
Prior to the liberalization of Economy, India’s tax regime suffered numerous problems. These problems which were in vogue in 1960s and 1970s were as follows:
- There was a high degree of progressiveness (rich needed to pay exorbitant taxes). On the other hand, tax collection efficiency was very low (rich were smart enough to evade tax).
- There was large number of exemptions, which eroded the already narrow tax base in the country.
- In terms of corporation tax, there were numerous discriminations between different kinds of the companies that discouraged the investments. Double taxation of dividends was also common in those days.
- In terms of Indirect taxes, the high rates of custom / excise duties were prevalent. There was no VAT; there was no service sector within the purview of tax.
The efforts to reform India’s tax system began in mid 1980s when the government announced a Long Term Fiscal Policy, 1985. This policy recognized that the fiscal position of the country is going downhill and there was a need to make changes in the taxation system. In that decade, a technical group to review and rationalize the central excise duties was established and this led to introduction of Modified System of Value-Added Tax (MODVAT) in 1986. To rationalize the custom duties, the harmonized system (HS) of the classification of goods was introduced.
- Key Direct Tax Reforms
- Indirect Tax Reforms
Raja Chelliah Committee
The Government appointed a Tax Reforms Committee under Prof Raja Chelliah to lay out agenda for reforming India’s tax system. This TRC came up with three reports in 1991, 1992 and 1993 with several measures, which can be summarized in these points:
- Reforming the personal taxation system by reducing the marginal tax rates.
- Reduction in the corporate tax rates.
- Reducing the cost of imported inputs
- by lowering the customs duties.
- Reduction in the number of Customs tariff rates and its rationalization.
- Simplifying the excise duties and its integration with a Value-Added Tax (VAT) system.
- Bringing the services sector in the tax net within a VAT system.
- Broadening of the tax base.
- Building a tax information and computerization.
- Improving the quality of tax administration.
The tax reforms that began with the Chelliah Committee recommendations are still going on. Later on, government appointed the Vijay Kelkar Committee in 2002 which further provided direction to the tax reforms in the country.
Vijay Kelkar Committee
The latest Impetus to direct tax reforms in India came with the recommendations of the Task Force on Direct & Indirect Taxes under the chairmanship of Vijay Kelkar in 2002. The main recommendations of this task force related to the direct taxes related to increasing the income tax exemption limit, rationalization of exemptions, abolition of long term capital gains tax, abolition of wealth tax etc. Its key recommendations were as follows:
Administration of Direct Tax
- The taxpayer services should be extended both in quality and quantity and taxpayers should get easy access through internet and email.
- PAN (Permanent Account Number) should be expanded and it should cover all citizens.
- Block assessment of search and seizure cases should be abolished.
- To clear the backlog, the department should outsource the data entry work.
- All returns and issue of refunds should be completed in a four month period. Dispatch of refunds should be outsourced.
- Government should establish a Tax Information Network to modernize, simplify and rationalize tax collection, particular TDS and TCS.
- Abolish the requirement of Tax Clearance Certificate on leaving the country.
- Empower CBDT with appropriate administrative and financial powers.
Personal income tax
- Increase in exemption limit to Rs.1 lakh for the general categories of taxpayers and further exemption for senior citizens and widows.
- Rationalize income tax slabs, eliminate surcharge on personal income tax.
- Incentivise home loans by providing interest subsidy on home loans @2%.
- Increase deduction under Section 80CCC for contribution to pension funds.
- Reduce the Corporate tax to 30% for domestic companies and 35% for foreign companies.
- The listed companies should be exempted from tax on dividends and capital gains.
- Increase rate of depreciation for plant and machinery.
- Abolish Minimum Alternate Tax.
- Abolition of wealth tax.
The above recommendations were made 13 years ago. Today, we see that many of them have been implemented. The DTC and GST have been so far biggest reforms initiated by the Government in direct and indirect tax regime respectively. However, DTC has never arrived and government does not seem to go seriously after it because most of its provisions are already incorporated in the Income Tax Act. GST is now coming into force from July 1, 2017.
Key Direct Tax Reforms
Tax Information Network (TIN)
On behalf of the Income Tax Department, the National Securities Depository Limited (NSDL) established Tax Information Network (TIN). This is a source of the countrywide tax related data. The basic idea behind establishing TIN was to modernise collection, processing, monitoring and accounting of direct taxes using information technology. TIN has three subsystems viz. ERACS, OLTAS and CPLGS.
Electronic Return Acceptance And Consolidation System (ERACS)
ERACS consists of a system for interface with the taxpayers (TIN Facilitation Centres that is TIN-FC) and an internet supported system for upload of electronic returns of Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) and Annual Information Return (AIR) to the central system of TIN.
Online Tax Accounting System (OLTAS)
OLTAS is used for upload to the central system the details of tax deposited in numerous tax collecting branches across the country every day.
Central PAN Ledger Generation System (CPLGS)
It is the central system that merges the details of TDS/TCS and advance tax into the PAN.
e-TDS & e-TCS
TDS refers to Tax Deduction at Source. The third parties deduct tax at source and then deposits it at pre-determined bank branches. Since 2004–2005, it has been made mandatory to file TDS returns electronically for both the operators, the Government as well as corporate sector. Further, the Income Tax Act, 1961 states that when tax is collected at source by the seller from the buyer, it is named TCS (Tax Collected at Source). Under the scheme named ‘Electronic Filing of Returns of Tax Collected at Source Scheme, 2005’, the corporate and Government deductors have to pay electronically or physically to NSDL.
Other Initiatives in Direct Taxation
eSahyog initiative : Paperless Assessments
Information Technology has made the life of tax payers easy as they don’t need physically go to banks to deposit bank challans and present the case and documents to assessing officers. To make further simple, the CBDT recently came up with a proposal paperless income tax assessment over emails. This would save the taxpayer to pay a visit to IT office, particularly in case of small amounts. Pilot projects in this direction have been launched in Mumbai, Delhi, Chennai, Bengaluru and Ahmedabad.
Sevottam: Efficient grievance redressal
To bring new life to the sluggish grievance redressal system, the department is using ‘Sevottam’ platform that connects all income tax offices in the country. The idea is to address the queries and grievances in real time.
The IT department is working towards processing and sending tax refunds within 10 working days. The initiative to verify Income Tax Return (ITR) by Aadhaar or bank database has been taken.
Pre-filled ITR forms
Despite of online forms, many people still use offline downloaded forms for tax purpose. The Department is now taking an initiative to offer pre-filled forms which automatically populated with user / taxpayer data and are downloaded with most information filled already.
To increase coverage of the PAN, the government has been conducting PAN camps across India. There is also a proposals to launch Income Tax Business Application-Permanent Account Number (ITBA-PAN) portal, through which anyone can apply for PAN online and get it within 48 hours.
Indirect Tax Reforms
First Indirect Tax Reform occurred in India when the Modified Value Added Tax (MODVAT) was introduced for selected commodities in 1986 to replace the Central Excise Duty. It was gradually extended to all commodities through Central Value Added Tax (CENVAT). The states also followed the suit and enacted the VAT acts to replace the sales tax with Value Added Tax. Following are the key indirect tax reforms done.
Reduction In Custom Duties
In 1990, the custom duty on non-agricultural products was around 128%. It was brought down gradually. Currently, the average custom duties are 11-12%, however, they range from 0 to 150%.
Central Excise duties were first replaced with MODVAT and now CENVAT is applicable. The number of different types of duties was cut down.
Service tax was first introduced on some limited services in 1994-95 at 7%. The rate was gradually increased and so was the number of taxable services. Currently, we pay 14% service tax on around 100 services.
Goods And Services Tax
The Goods and Services Tax (GST) is so far the biggest tax reform in the country. At present, the GST-Bills have been passed and it is expected to come into force from July 1, 2017.