Complete information on the salient features of India’s Taxation Policy

In India, the authorities have been of the view that tax policy is a powerful tool by which the economy can be effectively regulated and by which effective economic incentives and disincentives can be created. As a result, our tax system has come to acquire the following salient features.

(a) The system has become extremely complicated with rapidly changing provisions and rates. Frequently, these provisions have been contradictory to each other and self-defeating in nature.

(b) The system is laced with a plethora of exemptions, rebates, concessions, penalties and other provisions. In addition, there are notifications, clarifications, procedural details and the like. All this has made the system a highly complex one, and according to one opinion, counter productive.

(c) The authorities have always recognized the need to simplify the tax system but steps taken to this effect have only added to its complexities.

(d) The tax-base of our country is a narrow one. Taxpayers are practicing large-scale tax evasion and avoidance. They are helped in this task by highly complicated tax provisions and procedures, as also by the vast discretionary powers enjoyed by the tax officials.

(e) Frequent voluntary disclosure schemes under which tax evaders are provided an opportunity to pay tax (often on concessional basis) on concealed income and wealth, etc. have also contributed to the phenomenon of tax evasion.

(f) Indirect taxes comprise a major portion of our tax revenue. Compared with direct taxes, they feed inflationary forces. They are more burdensome and cause widespread distortions in the allocation of resources. They are known to be highly regressive in their nature. Selective exemption of items from indirect taxes has not been able to reduce their regressive nature because of widespread evasion.

(g) The authorities have used, on a systematic and selective basis, tax holidays and other concessions;

I. for promoting certain industries considered essential for the overall balanced growth of the economy;

II. for promoting and helping small-scale industries and self-employment activities so as to reduce unemployment and encourage labor-intensive techniques;

III. for encouraging investment in backward areas with the objective of reducing inter-regional economic disparities.

However, a umber of concessions are related to the size of capital investment and not the number of persons employed. This has tended to encourage capital-intensive techniques.

(h) Critics claim that the tax provisions relating to depreciation are based upon the cost of acquiring assets and not the cost of their replacement. This, therefore, discourages capital formation.

(i) Authorities have tried to encourage exports by

I. levying customs duties on imports;

II. Providing income tax and other forms of relief on income from exports.

(j) Over the years, the government has made a systematic effort to reform indirect taxes by converting the base of excise duties from specific to value added, and by replacing excise duties with VAT.

(k) Efforts are also being made to bring about a uniformity of indirect tax system throughout the country in the form of a unified VAT. Meanwhile, various intermediate steps are being taken so as to eventually achieve this goal.

(I) the existence of octroi duty is considered a great hurdle in the development of the domestic market. It is known to cause delays in transport of goods and increase cost of production and marketing activities. Some States have taken steps towards abolishing octroi or replacing it with some other form of indirect taxation, but on the whole not much has been achieved. The problem is that local governments are starved of funds and the States are not in position to give them additional grants or loans. The Centre also finds it difficult to come to their help because funding of local governments comes under the purview of the States.

(m) It is a common complaint that the States do not exploit their revenue potential to the full. In this context, we should remember that there is a widespread difference of opinion regarding the taxation of agriculture. While one section of thinkers believes that there is a case for taxing agriculture (such as, in the form of tax on agricultural incomes and land revenue) more heavily, others hold the view that agriculture is already being taxed to the extent it can bear its burden.

(n) The States are in a peculiar situation in so far as taxing alcohol for human consumption is concerned. The States levy excise duty on this item and it is one of their major sources of revenue. At the same time, the Constitution directs the States to pursue a policy of prohibition. However, prohibition policy is highly resource expensive for the State concerned since it not only loses revenue from this item, it has also to incur additional expenditure in enforcing the prohibition.

(o) The government, both at the Centre and States, has not been able to check the rapid growth in its expenditure. Though, over time, tax revenue of the government has increased very rapidly, public expenditure has increased faster than that. Moreover, public sector undertakings, which should have been a source of additional non-tax revenue, have turned out to be a net drain. Consequently, government budgets of our country are characterized by hefty deficits and cumulative increase in public debt. This phenomenon, in turn, has led to the following results:

I. a heavy increase in the cost of servicing public debt; and

II. a crowding out of private sector from the capital market, that is, making it difficult for the private sector to raise resources from the market;

(p) The States enjoy a poorer financial health than the Centre. They are heavily dependent upon transfer of resources from the latter, a part of which takes place in the form of loans. Consequently, their indebtedness to the Centre has grown rapidly.