Understanding the Indian Tax Structure
Introduction:
Taxes – a word that often makes people cringe but plays an integral role in shaping a nation’s economy. In India, the tax structure is a complex web that we all have to navigate. Let’s embark on a journey to demystify the Indian tax system and understand how it influences our lives.
Table of Contents
Direct Taxes: Unveiling the Income Tax Mystery
At the heart of the Indian tax structure lies the Income Tax. This direct tax is levied on the income of individuals and businesses. As an employee or a self-employed individual, a significant portion of your income is subject to taxation. The tax slabs determine how much you contribute to the national exchequer.
The Income Tax Act is a dense document, but the basic concept is simple – the more you earn, the more you contribute. However, various exemptions and deductions exist, like HRA (House Rent Allowance) and 80C deductions, allowing taxpayers to optimize their tax liability.
Indirect Taxes: The Silent Contributors
While direct taxes are visible, indirect taxes operate behind the scenes. The Goods and Services Tax (GST) is a prime example, combining multiple taxes like VAT, excise duty, and service tax into a unified system. From the toothpaste you use in the morning to the smartphone you check before bedtime, GST casts its shadow on a wide range of goods and services.
Understanding the GST slabs is essential. It classifies items into categories like 5%, 12%, 18%, and 28%, each affecting your pocket differently. This indirect tax has simplified the earlier complex tax structure, promoting transparency and reducing tax cascading.
Corporate Taxes: Nurturing Business Growth
For businesses, corporate taxes play a pivotal role. The corporate tax rate is applicable to the profits earned by companies. A lower tax rate incentivizes investment and growth, fostering a conducive environment for businesses to thrive.
The government periodically revisits corporate tax rates to stimulate economic activity. Understanding these changes is crucial for entrepreneurs and investors, as they directly impact the profitability of businesses.
Customs Duties: Balancing Trade Dynamics
On the international stage, customs duties come into play. These are taxes imposed on goods imported or exported. The idea is to regulate trade, protect domestic industries, and generate revenue for the government.
Customs duties can influence the prices of imported goods, affecting consumer choices and impacting various sectors. Keeping an eye on these duties is crucial for businesses involved in international trade and consumers who enjoy products from across the borders.
Wealth Tax: A Bygone Era
Once part of the Indian tax structure, wealth tax is now a thing of the past. It was a tax on an individual’s net wealth, including properties and assets. However, its abolition simplified the tax regime, eliminating a layer of complexity for taxpayers.
Challenges and Reforms: The Ever-Evolving Landscape
The Indian tax structure has witnessed constant evolution, responding to economic challenges and global dynamics. Tax reforms, like demonetization and the introduction of the Goods and Services Tax, aim to streamline the system and curb black money circulation.
However, challenges persist. Tax evasion and the informal economy pose hurdles in effective revenue collection. Striking the right balance between taxation and fostering economic growth remains a delicate task for policymakers.
Digitalization: Transforming Tax Compliance
In recent years, digitalization has revolutionized tax compliance. The introduction of online filing systems and e-assessments has made the process more convenient for taxpayers. It’s a testament to the government’s commitment to embrace technology for efficient governance.
Conclusion:
Navigating the Indian tax structure may seem daunting, but understanding its nuances empowers individuals and businesses. Taxes, after all, are the lifeblood of a nation, funding essential services and infrastructure. As we strive for economic growth, staying informed about the ever-changing tax landscape is not just a responsibility but a key to financial well-being.
Tax Burden in India
The easiest way to know the tax burden is to find out tax-GDP ratio. When the process of economic planning began in India in 1950-51, the tax-GDP ratio was as low as 6.3 per cent. It has risen over the years but continues to be abysmally low. For instance, it was only 15.9 per cent in 2016-17(this includes both Central and State tax revenues).
Total tax receipts for financial year 2022-23 were ₹48.4 trillion, comprising central tax revenue of 30.4 trillion (based on revised estimates) and states’ own tax revenue of ₹18 trillion (based on budget estimates). With a nominal GDP of ₹273 trillion, India’s tax-GDP ratio is 17.7%.
In the 25-year period from 1965 to 1990, India’s tax-GDP ratio increased steadily from 10 per cent to 16 per cent while India’s GDP increased 2.8 fold. In the subsequent 26-year period from 1991 to 2016, India’s tax-GDP ratio stayed roughly constant between 16 per cent and 17 per cent, while GDP increased 4.5 fold. It is puzzling to note that “ just as India broke away from its clinched Hindu rate of growth post the 1991 economic reforms to grow much more rapidly, its tax-GDP ratio stayed constant, belying those who would have predicted an increase”.
The total tax revenue of the Central government in 1970-71 was ₹ 2,451 crore.
Of this, the share of direct taxes was ₹ 511 crore (20.8 per cent) while the share of indirect taxes was ₹ 1,940 crore (79.2 per cent). This shows that only one- fifth of the tax revenue was contributed by direct taxes. The share of direct taxes fell further to 16.1 per cent in 1990-91. However, on account of recent tax reforms, the share of direct taxes in total tax revenue has increased –it was 36.3 per cent in 2000-01 and 59.5 per cent in 2009-10. In 2016-17, direct taxes contributed ₹ 5,26,153 crore which was 48.3 per cent of the total tax revenue of ₹ 10,88,793 crore.
Direct and Indirect Taxes of Central Government
The share of personal income tax in total direct tax revenue was 22.3 per cent in 1970-71 (₹ 114 crore out of ₹ 511 crore). It fell to 18.1 per cent in 1990-91 but rose to as high as 46.3 per cent in 2001-02. In 2016-17, the share of personal income tax in total direct tax revenue was 40.9 per cent (₹ 2,15,016 crore out of ₹ 5,26,153 crore). The share of corporation tax in total direct tax revenue was 72.6 per cent in 1970-71 (₹ 371 crore out of ₹ 511 crore) and 59.1 per cent in 2016-17 (₹ 3,11,131 crore out of ₹ 5,26,153 crore).
The principal tax revenue sources of the State governments over the years have been the share of the State in the Central taxes and duties, commercial taxes, land revenue, stamp duties and registration fees, and the State excise duties on alcohol and other narcotics. Of all commercial taxes, sales tax has been the most important. However, this tax was later replaced by Value Added Tax (VAT). Taxes on motor spirit and vehicles, entertainment tax and duties on electricity were other commercial taxes.
In 2015-16, State excise duties accounted for 7.6 per cent of the total tax revenue of the States. Reliance of the States on sales tax had considerably increased over the years. In 2015-16, this tax had accounted for 40.0 per cent of the State governments’ tax revenue (₹ 5,61,701 crore out of ₹ 14,07,779 crore). The share of States in Central taxes in 2015-16 was ₹ 5,16,766 crore (which was 36.7 per cent of the total tax revenue of the State). In other words, sales tax and share of States in Central taxes together accounted for 76.7 per cent (more than three-fourths) of the total tax revenue of the States in 2015-16.