The tax structure of India is quite well developed. It dictates clear boundaries for State and Central Governments as well as the local bodies. Over the last few years, the Indian taxation system has undergone a few changes. Some tax laws have been simplified to aid compliance and better enforcement. Tax rates have been rationalized as well. Nonetheless, there are many drawbacks in the current Income Tax System and it is call for tax reforms.
Some of the flaws or drawbacks of the current Income Tax System include multiplicity of taxes that makes it a real mess for a tax payer to contact different authorities as well as maintain various records separately. Dominance of indirect taxes burdens poor while the bias in incidence of taxes tend to result in urban tax payers paying much more than the rural rich population. The complex income tax structure offer sufficient scope for corruption also. Lack of organization, coordination and planning along with administrative inefficiency further complicates the system. The Indian Income Tax System also lacks flexibility.
As per the taxation system in India, an assessee whose total salary is more than the maximum exemption limit is chargeable to income tax according to the rate(s) mentioned in the Finance Act. An assessee can be either an individual, Association of persons, Hindu Undivided Family, Body of Individuals, firm, company, local authority or any artificial judicial person not belonging to any of these categories.According to the data of 2011-12, there are a total of 3.10 crore individual assesses, 12.29 lacs firms, 4.96 companies, 1.19 lacs trusts, 7.61 lacs Hindu Undivided Family assesses and 95.84 other assesses. Roughly 89% of the tax payers belong to the INR 0 to 5 lacs slab, nearly 5.5% of them belong to the INR 5 to 10 lacs slab and about 1.3% of the tax payers are from the slab of above INR 20 lacs. Also, as per the recent records, only 5% people, who are mostly salaried, pay their income tax.
It is astonishing to see that people are not paying their taxes dutifully. A reason behind this is the complex and corrupt tax system that needs to be changed. Another loophole or drawback of the present Income Tax System is that the commercial tax system is applicable only to the big retail stores. Also, the Value Added Tax or VAT is different for the different states of India. VAT is essentially a multi stage tax applicable on goods. This tax is levied at different phases of production as well as supply. When the VAT was introduced at the state level, it came forward as quite a significant tax reform. Implementation of VAT has had an enormous effect on the indirect tax system in India.
One solution or alternative can be GST or transaction based Tax System. The Empowered Committee of State Finance Ministers were handed down the responsibility of creating a roadmap to introduce national level services and goods tax that came into effect from 1st April, 2007. This task was initiated in order to bring about the reduction of CST to about 2% in the year 2008, nearly 1% by the year 2009 and zero in the year 2010 so that a path gets laid for the GST system. In order to bring about this change in the current tax system of the country, there are a few prerequisites. First prerequisite to be met is the CENVAT. It is essential to integrate service tax with CENVAT. Also, the CENVAT must also be extended to the post-manufacturing phase. Reforms in the VAT system is also required. CST should be phased out as well. Another vital things to be decided before the complete and effective implementation of the GST system is to determine the rate of GST that will be applied.
The core of the Indian tax system lies in its policy making. Only effective policies can bring about desired changes and reforms. It is also the key to the future of transaction based tax system. Since we are an open economy, the more efficient and simple our taxation system will be, the more we will benefit.