Open Access Research Article
CHALLENGES IN THE CURRENT INDIAN TAX REGIME
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CHALLENGES IN THE CURRENT INDIAN TAX REGIME
AUTHORED BY - KALYANI ROY &
VIJAYA GUPTA
INTRODUCTION
The concept of tax is not new. It has
existed since time immemorial in different forms and nature and has evolved
slowly to match the socio-economic needs of the people and the societies. We
see the presence of taxes across various jurisprudences across different time
periods. The presence of tax can be evident in various civilizations that have
existed, such as the Mesopotamia and the Egypt civilization to Athens and Rome
where the taxes in were not in the form of monetary or fiscal manner, but
rather in the form of goods and services, example crops, labor, animals, etc.
that were given to the King who would use these form of taxes for the
betterment of the people and his kingdom and in return would provide
protection, employment, etc.
Nowadays, we can see a drastic change
in the way this generation perceives the meaning of taxes. In India and most
other countries, Tax is a form of compulsory extraction of fee or charge, only
in the form of money, levied on the individual or rather the residents of the
country. This extraction of money that is charged by the government based on
various factors and criteria is in the end used for the welfare and benefit of
the people themselves. This tax levied by the government aids in the
development of the nation, upliftment of the society, etc.
As we know that post-Independence,
India adopted the ideology of a Welfare State, which means a State whose
functions could not be curbed to mere sovereign functions of the government,
such as defense, administration of justice, etc. but was expanded to include a
wide range and categories of other functions, i.e., non-sovereign functions
also, such as better infrastructure, healthcare, education, etc. Thus, with the
increase in the functions of the State, the Government of India needed more
funds and capital to carry on and discharge efficiently the duties and
obligations of the State. Just like the banks charge interest on the loans
given to the customer, in a similar way here we can say that the taxes are also
levied by the government on the people against the facilities that are being
provided to them, e.g., better roads, better healthcare infrastructure, better
welfare schemes, etc.
Thus, the money collected in the form
of taxes aids in resource allocation, income redistribution, increasing
economic stability, and decreasing inequality in the society by collecting it
from people eligible to pay taxes and then redeploying the capital and the
resources in more efficient places, which is the need of the hour specially in
resource constraint nations such as India. Hence, due to these reasons, the
nature of tax which has developed over a long jurisprudence can be narrowed
down to a compulsory extraction of money which may or may not be quid pro quo,
as has was held finally in the case of Jalkal Vibhag Nagar Nigam v.
Pradeshiya Industrial and Investment Corporation.[1]
Thus, the monetary nature of tax
which may create a burden on the people makes the interpretation of the tax
legislatures very strict in nature and in favor of the taxpayer, who cannot be
taxed without the presence of a law passed by the Parliament.
Therefore, in simpler terms, we can
say that every economy owes its development, stability, and sustainability to
the money of the taxpayers in the form of tax. Hence, as the Tax is a crucial
part of any economy, the nations must persistently work on improving the tax
regime and tax structure in their country, thus for the same reason, the
researchers in this paper have tried to analyze and highlight the various
challenges or lacunas that is present in the current tax regime in India and
have also suggested some ways in which such loopholes or lacunas can be filled.
In order to do the same, the
researchers would be dealing with two research questions which would be
followed by a conclusion and suggestions for the following problems.
Chapter 1- The current tax regime
presents in India
Chapter 2- The challenges in the
current tax regime
CHAPTER 1
Taxes under the Indian tax regime can
be broadly classified into two categories i.e., Direct Tax and Indirect Tax.
The theories that could be involved and form the basis of this classification are
first, pinching the taxpayer, and secondly, the incident and impact theory.
Direct tax When an individual directly pays
taxes to the government, it is known as direct taxes. Under the direct tax, the
burden of tax levied on an individual cannot be shifted, who pays such taxes
proportional to the income he earns, thus making direct taxes progressive in
nature, i.e., higher taxes levied on higher income. Therefore, as the burden to
pay the tax cannot be shifted into direct tax, thus the incidence and impact fall
on the same person.
The different types of direct taxes
are:
Income Tax: This tax is levied on the income of
an individual and HUF and is regulated by the Income Tax Act, 1961. An
individual has to pay the tax as per the slabs stated by the Central Government
every year in the annual budget.
Capital Gains Tax: An individual has to pay capital
gains tax when he is incurring profits from the sale of a capital asset. There
are two types of capital gains tax long-term capital gain and short-term capital
gain which are levied on the capital assets held for more than 36 months and on
capital assets that are held for less than 36 months respectively.
Corporation Tax: This tax is also a kind of income tax
because it is levied on the income of the companies and corporations, either
registered in foreign or in India. Corporations have to pay taxes as per the
tax slabs stated by the Government. This tax is also known aa s surcharge.[2]
Indirect- Taxes which are levied on the goods
and services This tax is originally levied on the sellers or manufacturers but
is shifted on the consumers who would be indirectly burdened to pay the taxes.
Indirect tax is regressive in nature because it is not levied in proportion to
the income of the individual.
The Indirect taxes currently
includes:
Goods and Service Taxes (GST): Before GST there were various
indirect taxes such as VAT, Service Tax, Entertainment tax, etc. which have now
been replaced by one tax i.e., GST. This tax is levied on the manufacture, sale
and consumption of goods and services. There are three types of GST currently
levied in India SGST and IGST.
Custom Duty: This tax is imposed when any good is
exported or imported into India.
CHAPTER 2
On one hand, though every nation
wants to become a developed nation with the greatest standards of living, best
facilities, and best infrastructures, on the other, the government should make
sure that the scheme or strategy deployed by them in order to achieve this goal
must not become burdensome on the innocent taxpayers. Therefore, through a
close analysis of the current tax regime, we can still find various loopholes
that are present in the tax structure, and which need to be improved in order
to make the tax structure, efficient, effective, and most importantly taxpayer-friendly.
Some of the loopholes or lacunas in
the current tax regime are as follows-
1. According to the current tax
structure, the taxpayer's base of direct taxes is very small. In addition to
this, the government has kept the tax slabs and tax rates very high, which in
turn results in disincentivizing the people from paying taxes. Thus, as a
result of this, even when the tax rates are huge which should allow the
government to collect huge taxes, in reality, this is not the case as high tax
rates lead to a greater number of tax evasion by people, hence resulting in low
yield of revenue.[3]
2. Further, these huge tax rates act as
a huge disincentive for the people to pay the taxes, who thus resort to unfair
means of not paying taxes by tax evasion, which is a crime. Thus, these huge
tax rates lead to higher tax evasion. Also, the tax evaded ultimately results in
black money, which makes the country more corrupt and bad in the eyes of other
nations.[4]
3. Because the revenue or capital
yielded in the form of taxes is low, which may not be enough for the government
to carry on the essential functions of the State, as a result of this the
country may become a victim of under-development, poverty, unemployment, poor
healthcare, and educational infrastructure, etc. further, the government may as
a result of the low and insufficient funds collected in the form of taxes
further increase the tax rates, resulting into a further increased burden of
the innocent taxpayers.
4. India is an agricultural country,
which means that the maximum population of India are in the Agriculture sector,
yet one of the major drawback or loopholes in the tax laws in India is that
even though the maximum income generated in India is in the form of
agricultural income, yet at the same time the agricultural income in India is
not subject to taxes. This is a major drawback because this automatically
removes more than half of the population from paying the taxes. In addition to
this, this exemption which saves the agricultural income from being subjected
to the taxes is also discriminatory in nature. The reason for this is that many
rich owners of agricultural land are excluded from paying taxes as compared to
the other working-class or middle-class people who become the victims of high
taxes. [5]
5. A detailed analysis shows that it is
the indirect tax in India that forms the greater part of the revenue generated
by the government in the form of taxes. Although the problem of multiplicity of
indirect taxes has been to a huge extent done away with by the introduction of
GST, still the problem of ambiguity continues as a result of the various rates
of tax present and the huge number of classifications that exist.
Hence, in reality, the
GST laws which were introduced to do away which the multiplicity and complexity
in the indirect tax regime have actually failed to accomplish this objective in
furtherance of increasing the cost of compliance for the same.
6. The nature of Indirect tax is
regressive in nature and actually acts against the interest of the poor as they
have to pay a huge part of their small portions of earnings as a form of
indirect tax on the purchase of even every day and essential goods and services.
Thus, this increases the burden on the poorer and disadvantaged sections of the
society who have to pay taxes even in order to consume the most basic and
essential goods or services which per se results in inequality. This is because
this indirect type of tax, which is regressive in nature results in charging
the same tax to everyone, irrespective of their income, and without creating
reasonable classifications amongst the taxpayers, hence can be said to be
violative of Art.14 of the Constitution.[6]
7. The indirect tax which forms the
major source of revenue in India has a huge disadvantage attached to it. The
issue with such indirect tax is the cascading effect it causes. This means that
every stage that the product passes, like the stage of production,
transportation, etc. results in the addition in the cost of the product, which
in the end is passed to the end consumer, who bears the burden of it in the
form of indirect tax on the goods or services consumed.
8. The high tax rates act as a great
disincentive from doing business in India, which in turn results in various
other socio-economic problems such as increased unemployment, decrease in
investment by creditors, and other businesses who do not have enough reason to
invest in such corporations due to the fewer profits incurred as a result of
the high corporate taxes.
9. The poor financial education in the
people, especially the poor and the disadvantaged group further results in
increasing the inequality and disparity between the rich and the poor. This is
because, the rich and the educated lot are using and exploiting the loopholes
present in the current tax laws in their interest by paying lesser taxes, i.e.,
tax avoidance. While on the other hand, the poor and the uneducated lot are
becoming victims of the high tax rates levied by the government.
CONCLUSION
An ideal tax regime system should
treat its taxpayers with fairness, justice, and equity. Though the current tax
laws in India offer various benefits to the taxpayers yet to some extent it
creates a burden on them. Thus, it becomes absolutely necessary to build a tax
structure that not only looks after its taxpayers and preserves their interest
but also creates a system in which tax paying is morality rather than a choice.
In order to build such a system, there is a need to primarily fill up the
lacunas that are present in the current Indian tax regime and has also been
highlighted by the researchers in this research paper.
Thus, the various measures that could
be adopted in the current tax regime to make it more transparent, smoother,
efficient, effective, and at the same time burden-free and taxpayer-friendly
could be-
1.
India
which currently releases barely on property tax should start relying more on
property tax. The reason for the same is that this would help the government to
increase the revenue that is being generated from the direct taxes. Further,
the property tax would be more economic friendly and progressive in nature
because the property being immovable, is difficult to hide, unlike income,
therefore making it difficult to evade property taxes.[7]
2.
Government
should make persistent efforts to decrease the income tax rates to a large
extent. This would help India in generating more yields in the form of capital
as the lower tax rates would not act as a disincentive on the people who would
therefore resort less to unfair means like tax evasion.
3.
The
legislation dealing with tax should be amended to form a more robust tax
framework with much higher and stricter penalties for tax evasion, so as to
deter the people from resorting to such illegal means. More comprehensive tax
laws should be formulated to remove ambiguity from the current tax laws,
increase uniformity, increase compliance, and decrease litigation. Therefore, the
formation of stricter as well as taxpayer-friendly laws would in turn result in
higher revenue for the government in the form of taxes, even at lower tax
rates.[8]
4.
The
absence of products such as petroleum, tobacco, etc. in the current GST system
creates ambiguity in the tax rates as different States can charge different
prices for the same. Hence, these products which are so high in consumption
must be brought within the ambit of uniform GST so as to deter the creation of an
illegal market for them and to increase accountability.[9]
5.
As
mentioned earlier, the GST was formulated in order to ease the complexity of
multiple taxes and to provide clarity for the same but the current GST system
with a high number of classifications and different rates fails to accomplish
the objective of it. Thus, GST laws need to be reframed in order to simplify
the rules regarding the same and to bring uniformity.[10]
6.
India
should start imposing inheritance tax like other nations such as the USA, and
the UK, which can be a sure shot method to collect revenue in the form of taxes
from the riches without burdening the poorer.
7.
Post
Covid it is absolutely necessary that the government reforms its taxing
policies and structure in order to provide a fair chance to the taxpayers to
bounce back from the increased burden created due to the pandemic and the
lockdown. Thus, there is a need for the government to fix its tax structure to
achieve social and economic justice in society.[11]
Therefore, as earlier stated, every
nation should make persistent efforts to become a holistic State, with a greater
standard of living, good healthcare and educational infrastructure, better
welfare scheme, etc., but the same can only be done when the government has
enough funds. Hence, for the development of the nation, it is necessary for the
government to collect taxes from the people. Hence, what the government needs
to ensure in this process is that such collection should not be done at the
absolute disadvantage of the people. The government and the legislature need to
imbibe the perspective that the development of the nation is owed to the money
of the taxpayer. Hence, tax laws and regulations should be formed and amended
in order to equally look after the interest of these innocent taxpayers.
[1] Jalkal Vibhag Nagar Nigam v.
Pradeshiya Industrial and Investment Corporation, 2021 SCC OnLine SC 960.
[2] Aashika Jain, Taxation in India:
Direct Taxes You Need To Know About, Forbes Advisor, (Dec 18, 2020, 7:17 AM),
available at https://www.forbes.com/advisor/in/tax/direct-taxes-you-need-to-know-about/ , (last visited on May 7, 2022).
[3] 8 Major Defects in the Tax
Structure of India, Economics Discussion, available at https://www.economicsdiscussion.net/taxes/defects/8-major-defects-in-the-tax-structure-of-india/12917,
(last visited on May
7, 2022).
[4] Vaisakhi Muddana, What are the
Problems in Tax Structure and Administration In India, iPleaders Blog,
(December 30, 2016), available at https://blog.ipleaders.in/problems-in-tax-structure-and-administration-india/, (last visited on May 7, 2022).
[5] Shruti Rajagopalan, Rethinking
India’s Tax System, Livemint, (Dec 26, 2017, 04:58 AM), available at https://www.livemint.com/Opinion/z2DURCdrbtLjCPnutKs3gJ/Rethinking-Indias-tax-system.html,
(last visited on May
7, 2022).
[7] Supra Note 5.
[8] ET Bureau, Complex Tax System Big
Reason for Indian Startups’ Exodus, The Economic Times, (Dec 13, 2021, 05:49
PM), available at https://economictimes.indiatimes.com/tech/startups/complex-tax-system-big-reason-for-indian-startups-exodus-report/articleshow/88246259.cms?from=mdr, (last visited on May 7, 2022).
[9] Shantanu Nandan and Suman Layak, ET
Bureau, GST: The Challenges Before India’s Largest Indirect Tax Reform, (Sep
29, 2019, 11:18 AM) available at https://economictimes.indiatimes.com/news/economy/policy/gst-the-challenges-before-indias-largest-indirect-tax-reform/articleshow/71353710.cms?from=mdr, (last visited on May 7, 2022).
[10]
Pravas Rajan Mishra, GST has increased India’s Reliance on Indirect Taxes,
Hurting The Poor, (Jul 14, 2021), available at https://thewire.in/economy/gst-india-indirected-taxes-inequality ,
(last visited on May 7, 2022).
[11]
Christophe Jaffrelot, Ustav Shah, Centre’s reliance on Indirect Tax Revenue, Pro-rich
policy, Has Deprived Govt Resources During COVID Crisis, The Indian Express,
(August 11, 2020, 11:56 AM) available at https://indianexpress.com/article/opinion/columns/india-taxation-policy-fiscal-deficit-covid-impact-on-economy-indirect-tax-revenue-6549290/,
(last visited on May 7, 2022).
Article Information
CHALLENGES IN THE CURRENT INDIAN TAX REGIME
Authors: KALYANI ROY, VIJAYA GUPTA
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/08/12
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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