CHAPTER – V

REFORMS IN PERSONAL AND CORPORATE

INCOME TAXATION IN INDIA

5.1 Introduction

5.2 Five Phases of Tax Reforms in India

5.3 Reasons for Reform of the Tax System in India

5.4 Approaches to Tax Reforms

5.5 Objectives of Tax Reforms

5.6 Objectives of Direct Tax Reforms in India since 1991

5.7 Reforms in personal income tax in India since 1991.

5.8 Initiatives for Personal Income Tax Reforms

5.9 Corporate Income Tax Reforms in India since 1991.

1
 CHAPTER – V

REFORMS IN PERSONAL AND CORPORATE

INCOME TAXATION IN INDIA

5.1 Introduction:

Tax reforms is a process of changing taxation in which different

taxes are levied, collected and managed by the government. It is
usually under taken to improve tax administration or to provide social
and Economic benefits. Tax reforms include increases or decreases in
level of taxation (in tax rates), tax brackets or exemption, changes in
the tax basis, introduction of new taxes and abolitation of old taxes
etc. Briefly, tax reform is a process of changes in tax system or tax
law (Business Dictionary, 1997). The goal of tax reforms is more
fairness/ progressive in taxation and making the tax system more
suitable, understable and accountable (Rao, 2014).

Tax reforms since 1991 was initiated as part of the structural

process, following the economic crisis of 1991. In keeping with the
best practice approaches, the TRC adopted an approach of combining
economic principle with conventional economic principles with
conventional wisdom in recommending comprehensive tax system
reform (Bird, 1989).

Tax reforms has received a new incentives since 1991 as an

important companent of economic reforms. The post 1991 period has
witnessed a major departure in the approach to taxation in India.
 The purpose of this chapter is to highlight the reforms measures
introduced since 1991 in the area of direct taxation (personal and
corporate income tax) and to analyse their significance
(Sreekantaradhya, 2011 p. 169).

Taxation plays a critical and pivotal role in the process of

advancement and growth of any country objectives of the tax policy
of any country are akin to its general economic policy. Taxes
constitue major sources of revenue for the government. Taxes are
levied so that investment is made in the resources to enable a country
to develop, grow and make progress. A sound tax system is vital for
development of the public finances of any country the main objectives
of the policy can be said to be allocative, distributional and
stablizational (Musgrave, 1973, p. 6-21). Due to the importance of
taxation in fiscal policy it is often said that economic history of a
country is determined by its fiscal history (Schumpter, 1954, p. 7).

 Common characteristics of tax reforms in the developed

countries:

We discuss below some common characteristics, particularly

for the developed countries:

i) An important feature of tax reforms has been reduction in the

top rates of income tax.
ii) Associated with the reduction in tax rates and an increase in the
exemption limit was a reduction in the number of slabs in the
income tax scale. In the UK the income tax had ten steps in
1976 which came down to three in 1992. and In New Zealand
 had nineteen slabs in 1980s which came down in ten years to
just two.
iii) The third major characterstic of recent tax reforms has been a
broadening of the income tax base. This has included
reductions and streamlining of different concessions, loopholes,
and possible tax shelters. For example, Fring Benefit Tax
(FBT).
iv) Tax reforms package has been the change in tax mix.
v) The broadening of the base of the corporate tax was
accompanied by a reduction in the rates.
vi) Finally, tax reforms were always accompanied by considerable
toning up of tax administration (Jha, 2010).

5.2 FIVE PHASES OF INDIAN TAX REFORMS:

Indian Tax reforms have passed through five phases since

independence. The first phase witnessed tax reforms based on the
recommendations of the Taxation Enquiry Commission of 1954. The
second phase was guided by Nicholas kaldors recommendations of
1957. The third phase was ushered in by the recommendations of the
Direct Taxes Enqiry Committee of 1971, (Wanchoo Committee). The
fourth phase started with the new economic policy of V.P. Singh
through the Union Budget for 1985-86, and the most important phase
of the tax reforms was introduced during the 1990s based on the
recommendations of the Tax Reforms Committee, 1991-93 (Chelliah
committee).
First Phase:

Immediately after independence, the national government in

India opted for government sponsored economic planning for
increasing in the place of socio-economic development. This called
for mobilization of huge financial resources for investment in the
public sector. Accordingly the Government of India appointed the
Taxation Enquiry Commission (TEC) in 1953, to suggest tax reform
measures to raise more revenue. The TEC was guided by the need to
promote the old philosophy of justice in taxation. The TEC
recommended increasing the degree of progressivity of direct taxes,
supplemented by measures to ensure effective enforcement of
collection to reduce in equality of income. The TEC emphasized the
need for raising more resources through taxation for investment in the
public sector with minimum disincentive for the private sector. The
TEC tried to achieve this objective by recommending taxation of
consumption of all classes to direct increased income from going to
conspicuous consumption to public saving. The TEC assigned greater
role to indirect taxes to achieve this objective Even in the sphere of
direct taxes, the TEC recommended for the reduction of exemption
limit from Rs. 4200 to Rs. 3000; clubbing of in comes and enlarging
the number of incomes brackets to inject graduated progressivity.

Second Phase :

But the Government of India was not satisfied with these

recommendations. They needed much more radical tax measures to
achieve the goal of socialistic pattern of society. So the Government
of invited Nicholas Kaldor to recommend further tax reforms. On his
advice the government of India introduced set of 'integrated direct
taxes' which included expenditure tax, wealth tax and gifts tax in
addition to the allready existing income tax, capital gains tax and
estate duty. The government of India tried to convince the masses that
the rich people were bearing a very high tax burden and therefore, the
masses should also contribute to whatever extent possible through
indirect taxes for the development efforts of the country. This
philosophy led to frequent revision of rates and coverage of indirect
taxes.

Third Phase :

By 1970, the Government of India realized the futility of

levying very high rates of direct taxes and appointed the Direct Taxes
Enquiry Committee (wanchoo) (1971) to exmine the issue and
suggests modifications. Then the Union Finance Minister Mr. C.
Subramanyam observed in his Budget speech for the year 1974-75
that:

"The committee has expressed the view that prevalence of high

rates is the first and foremost reason for the tax evasion because this is
what makes the evasion in spite of attendant risks profitable and
attractive. The committee has accordingly recommended that the
maximum marginal rate of income tax including surcharge should be
brought down from its present level of 97.7 percent to 75 percent.
Simultaneously, there should be a reduction in tax rates at the middle
and lower levels. This recommendation of the committee has been
accepted by the Government with minor modifications (1974)."
 The positive effect of this tax reform policy was acknowledged
by the subsequent Union Finance Minister in his budget speech for the
year 1976-77 in the following way:

As honourable members will recall. The rates of income tax on

personal incomes were reduced in 1974 on the basis of a
recommendation of the Direct Taxes Enquiry Committee. While
presenting the budget for 1974-75, my distinguished predecessor had
expressed the hope that the reduction in rates would lead to better tax
compliance. This expectation has been fulfilled and is reflected in the
striking increase in income tax collections during the last two years.
While some other factors including the relentless drive against tax
evaders and other economic offenders, have played a part in
improving collections, it is also obvious that the reduction in tax rates
has played a major role promoting for better tax compliance (1975).

Thus the tax reform measures introduced in the first two phases
failed to achieve the intended objectives mainly because they were
based on wrong assumptions, namely, that high nominal tax rates
would reduce inequalities of income and wealth and that all forms
direct taxes levied simultaneously would reduce thax evasion.

Fourth Phase:

The tax reforms measures introduced in 1985-86 by then Union

Finance Minister V.P. Singh included raising of exemption limit for
PIT, reducing the number of slabs from 6 to 4, reducing marginal rate
of income tax from 67 percent to 50 percent, abolishing compulsory
deposit scheme and surcharge on income tax. Besides these, There
were many other tax-relief measures such as removing the 20 percent
ceiling on business expenditure incurred on sales promotion. He also
announced a long Term Fiscal Policy outlining the possible reduction
in corporate tax and rationalization of other taxes in the post reform
years.

Fifth Phase:

The foreign exchange crisis of 1991 paved the way for

comprehensive economic reforms. Manmohan Singh, who become the
Union Finance Minister continued the tax rate reduction policy and
subsequently he accepted and implemented the comprehensive tax
reforms measures recommended by the Tax Reforms Committee of
1991-93 (Chelliah Committee). The committee identified its approach
in the the following words." As is well-known our general approach is
that the best results in terms of compliance (and therefore revenue),
efficiency and equity are obtained through a system in corporating
moderate rates on a broad base. (Government of India)" 1992 b, part I,
P. 11.

In other words the broad approach of the committee in

formulating its recommendations relating to tax reforms was that the
rates of tax should be moderate and the tax base should be widened so
that tax reform measures were not only revenue neutral in the short
run but would also be elastic in the long run. The most important
recommendations of the committee may be grouped under the
following measures:

I) Tax-rate cut measures incompassing almost all taxes;

II) Measures for widening the tax base, particularly the tax base
of PIT:
 III) Modernization of indirect taxes by gradually replacing both
central excise and states sales tax by a two-tier VAT and
IV) Simplifying assessment and compliance procedures so as to
reduce the cost of compliance.

Most of the suggested measures relating to rationalization of tax

rates have been accepted and implemented by successive Union
Finance Minsiters. As a matter of fact, the marginal rate of PIT was
reduced to 30 percent in 1997 to 1998 which was only a destination
rate for Chelliah Committee, surcharge was brought back during
1999-2000, as a temporary measure to make up the short fall in
revenue buoyancy. However the rates of import duties have not been
streamlined on the lines suggested by the Chelliah Committee because
of fears expressed by the domestic industry lobby (Rao, 2002).

In short, Tax reforms are undertaken by governments to

mobilize more revenue in the long run period. During the first two
phases through the government of India experienced a sudden
increase in the revenue from both direct and indirect taxes, after a few
years the revenue yield from direct taxes started losing its buoyancy.
So the third phase of tax reforms was intended to increase the revenue
buoyancy by reducing the marginal tax-rates of direct taxes. This
started showing positive results. The fourth phase did not show
consistently positive results and last fifth phase of tax reforms are also
not showing consistently encouraging results in terms of their revenue
impact.
5.3 Reasons for Reform of the Tax System in India

There are several reasons for tax reforms in India first: The
current system is to complex. The present tax code has envolved over
many years creating thousands conflicting definitions and exemptions.
It requires, Numerous complex froms that take and enormous amount
of time and money to complete. It has also led to difficulty in
enforcement and collection, and created hundreds of loopholes that
are used to reduce or evade taxes.

Second:

It is too easily exploited for political reasons. Tax rates,

incentives, and exemptions are altered continuously for political
reasons. There is ongoing political pressure to alter tax laws to benefit
or exclude special interest groups.

Third:

It creates a poor economics impact the current tax code is often

altered to provide economic stimulus for various business segments,
with dubious results. It neglects the over all health of the company. It
often discourages economic growth by creating a negative incentive to
work and to earn more. An ideal system would tax spending to creat a
positive incentive to earn and invest more.

Forth:

It is a bureaucracy out of control. The IRS requires a huge

operating budet and near about 114000 employees to manage this
huge bureaucracy. This is non-productive labor that does not
contribute directly to the economy. In fact it is a measurable drain on
the economy both in the direct and indirect costs, estimated at over
and 600 billion annually. These educated and talented people could
contribute greatly in productive jobs in the private sector.

Fifth:

It reqires a large number of professionals in the private sector,

like tax accountants, lawyers, and even entire corporate departments,
to advise, interpret and prepare tax returns. This process wastes
valuable rebources on non-productive labour that could otherwise be
used to build businesses and strengthen and the economy.

Sixth :

In forces business managers to make decision based on tax

implications rather than good business. For example, a company
decides not to build a new assembly plant because of negative capital
investment tax policies, and thereby depreives a community from new
job and the company from growth.

Seventh :

It is inefficient in just costs too much to called taxes this way. If

we are ever going to reduce the national deficit without breaking the
back of the tax pager, this is the first place to reduce waste. (Jha,
2010).

5.4 Approaches to Tax Reform :

The philosophy of tax reform has undergone significant

changes over the years in keeping with the changing perception of the
role of the state. With the change in the development strategy in
favour of market determined resource allocation, the traditional
approach of raising revenues to finance a large public sector without
much regard to economic effects has been given up. The recent
approaches to reform lay emphasis on minimizing distortions in tax
policy to keep the economy competitive. Minizing distortions implies
reducing the marginal rates of both direct and indirect taxes. This also
calls for reducing differentiation in tax rates to reduce unintended
distortions in relative prices to achieve this, the approach suggests
broadening of the tax bases. Thus, over the years, emphasis has
shifted from vertical equity in witch both direct and indirect taxes are
subject to high marginal rates with minute differentiation in rates, to
horizontal equity in witch, the taxes are broad based, simple and
transparent, and subject to low and less differentiated rates. Equity in
general, is taken to mean improving the living conditions of the poor.
This has to be achieved mainly through expenditure policy and human
resource development rather than reducing the incomes of the rich as
was envisaged in the 1950s and 1960s.

Conventional wisdom on tax referms provides us with at least

three different model of tax reforms the optimal tax (OT) model
(Ahmad and Stern, 1991) is satisfactory in terms of its theoretical
soundness, but has been found to be impractical in its applications.
Besides the trade off between efficiency and equity in tax policy, the
information and administrative coast of designing an optimal tax
model have been found to be prohibitive and, therefore, as a practical
guide to tax policy this has not been useful.

The Harberger tax model (HT) like the OT model is well

grounded in theory. It, however, draws much more on practical
experience. According to this, while efficiency (and distribution
weights) is clearly desirable in the design of tax policy, administrative
capability is equally, if not more important. The principal concern,
according to this approach, is not to design a system that will be
optional, but emphasise the system that will minimize tax induced
distortions and at the same time be administravely feasible and
politically acceptable. In fact, harberger suggests that tax reformers
should pay less attention to the economic methodology and more to
best practice experiences. The basic HT reforms package for
developing countries that are price takers in the international market
consists of inter alia, a uniforms tariff and a broad based value added
tax (VAT).

The third is the supply-side tax model (SST). This model

emphasizes the need to reduce the rule of the state. Reduction in the
valume of public expenditures has to be achieved by cutting the tax
rates. Particularly the direct tax rates to minimize disincentives on
work. saving and investment. The proponents of this model emphasise
the need to broaden the base with minimal exemptions and
preferences and to have low marginal tax rates. Again emphasis is on
minimizing distortions in relative prices and, therefore, the approach
emphasizes less rate differentiation.

The recent reforms approaches combine elements of all three

models sketched above, this incorporates both theory and post-
reforms experiences and takes into account administrative, political
and information constratins in designing and implementing reforms,
the thrust of this approach is to enhance the revenue productivity of
the tax system while minimizing relative price distortions. The best
practice approach has attempted to make the tax systems
comprehensive, simple and transparent. As mentioned earlier, the
general pattern to these reforms has been to broaden the base of taxes,
reduce the tax rates and lower the rate diffentiation both in direct and
indirect taxes. A broader base requires lower rates to be levie to gerate
a given amount of revenues. Lower marginal rates not only reduce
disincentives to work, save and invest but also help to improve tax
compliance more importantly, broadening to the tax base helps to
ensure horizontal equity, is desirable from the political economy point
of view as it reduces the influence of special intrest groups on tax
policy, and reduces administrative costs (Rao, 2002).

5.5 Objectives of Tax Reforms :

Broadly speaking the following are the objectives of tax

reforms in India (Sreekantaradhya, 2011).

a) Revenue augmentation ;
b) Enhancing the income elasticity of tax revenue
c) Minimising the efficiency cost or excess burden
d) Designing an appropriate policy of tax incentives,
e) Enusuring equity , i.e. justice or fairness in taxation
f) Making the tax system as simple as possible,
g) Ensuring a combination of flexibility and stability.
h) Improving the tax administration.
5.6 Objectives of direct tax reforms in India since 1991.

In 1980s the taxation system in India faced problems of

inadequate tax revenue and regressive tax structure as it leaned too
heavily upon indirect taxes. Further, tax evasion crippled revenue
yield. High marginal rate of taxation was eroding the capacity and
sapped the incentive to save and invest. There was lack of horizontal
equity as well as vertical equity. Recognizing that tax policy is an
important determinant of the efficiency, equity and quantity of
available public resources, debates on Indian tax policy have sought
to grapple with three major issues (a) adequacy of the tax base and
efforts (b) the effeiciecny of the tax structure and (c) the incentive
and equity effect of the tax policy (Rathin, 1978). Tax reforms
initiated in India after 1991, like any country, aim at meeting
multifarious objectives.

First and foremost, as has been discussed before, tax reforms

attempt to boost the collection of tax revenues with the purpose of
meeting growing expenditure and bringing down the fiscal deficit.

Second, reforms process underlines the philosophy that there

should not be too frequent discretionary changes in tax rates and that
objective of higher tax GDP ratio must be achieved without raising
the tax rates as such. The policy of tax reforms pursued since 1991
aim at lowering the tax rates and broadening the tax base with the idea
that bettor compliance would lead to higher revenue realization.

Third, the reforms alsoc onsider that in appropriate tax system

may cause distrartions leading to inefficiency. If the tax were less
discretionary, then it would be possible to minimize the efficiency
cost. welfare of a taxpayer may be reduced due to the loss of income
as a result of heavy tax leading to what is called a "substitution
effect". (Sreekantaradhya, 2000). Thus, the reforms aim at minimizing
the efficiency cost of taxation.

Fourth, tax reforms aim at evolving a tax system with an

appropriate policy of tax incentives. Although steps have been taken
toward rationalization of incentives, there is a necessity of reviewing
the incentives from time to time to re-justify their continucence. It is
required that those incentives witch have outlived their utility must be
phased out.

Equity has been taken as an important objective of recent tax

reforms the connotation of this is that direct tax system should be
designed in such a way that the burden to the taxpayers is related to
their ability to pay further there is justice or fairness in teaxtion, which
can be ensured through harizonatal and vertical equity.

Sixth, objectives of the tax reforms is also to make the tax

system as simple as possible. Tax laws are by their very nature, very
comple and the taxpayers are unable to comprehend them. The
procedures to be followed in meeting the tax liability are also quite
often very complex and it si very difficult for the taxpayer to comply
with the requirements. This gives room for litigation and harassment.
Thus, tax system must be very simple.

Seventh, reforms also take into account the fact that if the
economy of a counting is to be integrated with the rest of the world
and if foreign inuestment is to be attracted, tax level and structure will
have to be more or less similar to what is prevailing in other countries.
 Success of any attempt to reforms the tax system depends upon
the efficiency of the system of tax administration and therefore, tax
reforms also aim at improving the tax administration. It is empirically
proved that no amount of reforms can serve the purpose unless they
are accompanied by efficient administration.

5.7 Reforms in Personal Income tax In India Since 1991.

5.7.1. Rationale for taxation on income and its features in India:

Personal income tax is based on the principle of ability to pay.

It is considered as fair (equity) basis of taxation in developed as well
as developing economies. Tax on personal income is also related to
nations's economic performance. Receipts from personal income tax
tend to rise more steeply in economic booms and drop more sharply in
recessions. Fourthmore, tax on personal income tax in most of the
cases is regulated by a progressive rate structure. Result of
progressive rate structure is that a rise in personal income in creats
additional income taxable at a higher rate. Conversely, a drop in
personal income causes some taxpayers to be taxed at a lower rate.
Due to these reasons, tax on personal income has greater appeal.
Personal income tax in India has scheduler features as it makes
distinction between different sources of income e.g. income from,
salaries, properly investments, business and profession income from
other sources etc.

5.7.2 Defect in income tax system in India :

Indian PIT system was plagued by a number of deficiencies

which necessitated reforms. It mainly sufford from low tax yield
extremely limiter tax coverage and low compliance and high
compliance cost. If the contribution of personal income tax in total tax
revenues in India is compared with that of advanced countries, it is
found that it is very low.

5.8 Initiatives for Personal income tax reforms.

To overcome these deficiencies and to attain objectives like

revenue productivity, horizontal and vertical equity, appropriate
reforms were considred necessary. Policy of tax reforms evolved
around the assumptions that lowering of tax base, broadening of the
tax base, adminstrtion and rationalization of the incentives are the
ways to overcome the deficiencies in personal income tax reforms
since 1991 are mainly focoussed in these directions.

5.8.1 Personal Income Tax Rates:

An important and pertinent task before tax administration is the

design a personal income tax rate schedule that is equitable and
efficient. High rates of taxes induce tax evasion thereby undermining
the effective impact on equity. The report of Task Force on Direct
Taxes (2002). The report of the Advisory group on Tax policy and tax
administration for the tenth plan enumerated following principles for
desigining the rate schedule.

1. The basic exemption limit must be at a modrate level.

2. There must be an appropriate balance between the tax liability
at the lowest levels, administrative cost of collection and
compliance burden of the smallest taxpayers.
3. The number of tax slabs should be few and their ranges fairly
large to minimize distortions arinsing out of bracket creep.
 4. The maximum marginal rate of tax should be modrate so that
the distortions in the economic behavior of taxpayers and
incentives to evade tax payments are minimized.

Personal income tax rates were quite high in earlier times. At its
peak in 1973-74, with the exemption limit. At Rs. 5000 the minimum
rate of tax was to and maximum rate of tax was as high as 85 percent.
In 1973-74, the personal income tax had eleven tax slabs. When the
surcharge of 15 percent was taken into account, the highest marginal
rate of personas above Rs. 0.2 million income was 97.5 percent. This
shows that the progressivity of the tax system was very high. The
large number of tax slabs also distorted the progressivity of the tax
system due to bracket creep. Keeping in view the recommendation of
the Wanchoo committee (1971). Marginal tax rates were reduced to
75% in 1974-75, 50%, in 1985-86, 40% in 1992-93 and 30% in 1997-
98. The three rates were brought down further 10, 20 and 30 percent
respectively.

The rates of personal income tax have remained stable since

1997-98. Thus the three rates of personal income tax at 10, 20 and 30
percent have continued till date with some changes in the associated
tax brackets. The surcharge at the rate of 5 percent of the payable
imposed in the wake of kargil war in 2002-03 on all income tax
assesses was discontinued in 2003-04, but a sepe rate surcharge of 10
percent of the tax payable was imposed on all tax payers having
taxable income above Rs. 0.85 million, which was raised to Rs. 1
million in the budget of 2005-06. Further all taxes are topped up by 2
percent. Education cess from 2004-05 onwards. The 2004-05 budget
did not raise the exemption limit 100000. But the budget for 2005-06
raised the exemption limit itself to Rs. 100000, abolished standard
deduction and made marginal changes in tax brackets. In India gender
budgeting appears from 2005-06. and from this budge 2005-06
women and senior citizens are taken in to account for exemption limit
in personal income Since budget 2005-06 the exemption limit for
men, women and senior citizens were increased Rs. 100, 000 Rs. 135,
000 and Rs. 185000 from the year 2005-06 and to Rs. 250000, 25000
and 300000 sequently 2015-16. In order to super senior citizens in the
year 2011-12, include a new category called 'very or super senior
citizens' has been added for people above 80 years. This is new
change of tax slab in India (Rao and Rao 2005).

5.8.2 Widening the personal income tax base.

Taxation in developing countries seems to assume, as it were,

that unto each a base (or bases) is given." If the tax base I indeed
"given' then the only policy issue to be addressed is how it can be best
exploited for example, by reducing exemption and by bringing non-
paers into the tax net (Rao and Rakshit, 2011).
 Table No. 5.1

Number of Effective Income tax Assessees in India (figures in

lakh)

Year Company Individual H.U.F. Firm Trust Others Total

1995-96 18.71 87.98 4.06 11.92 0.42 0.37 106.64
1996-97 2.27 97.61 4.12 11.58 0.49 0.34 116.43
1997-98 2.74 111.94 4.37 11.72 0.51 0.36 131.67
1998-99 2.95 151.35 4.69 12.28 0.83 0.41 172.54
1999-00 3.09 176.53 5.07 12.72 0.87 0.46 198.77
2000-01 3.34 206.62 5.53 13.36 0.63 0.51 230.02
2001-02 3.49 237.34 6.07 13.78 0.97 0.58 262.25
2002-03 3.65 259.35 6.44 13.45 1.17 0.57 284.64
2003-04 3.72 266.24 6.54 13.38 1.54 0.57 292.02
2004-05 3.73 247.92 6.20 12.35 0.71 0.65 271.58
2005-06 3.82 273.70 6.42 12.34 0.74 0.58 297.62
2006-07 3.98 293.55 7.61 12.41 0.75 0.71 319.03
2007-08 4.98 308.68 7.80 13.68 0.74 0.73 336.62
2008-09 3.27 301.01 7.68 13.10 0.71 0.70 326.62
2009-10 3.67 313.84 8.06 13.54 0.76 0.95 340.50
2010-11 4.96 310.35 7.61 12.29 1.19 0.95 337.39
2011-12 5.84 331.89 7.66 15.59 1.43 1.01 363.45
Source: CBDT and Administrative Handbook, Income Tax
Deparment Government of India 2012.
 Table no. 5.01 shows the number of effective income tax
asseessees during the period 1995-96 to 2011-12. Above the table
looking at a trend of number of assesses in the decade of 1990s it is
seen that in the year 1995-96, the number of total effective assessees
was 106.64 lakh. By the year 2003-.04, it grew up to 292.02 lakh.
Thus, there has been increase in number of assessees over last eight
years. In the year, 2011-12 however, the number of assessees again
increased to 363.45 lakh.

The growth in effective assessees since 1995-96 reflects the

fact- that the reduction in rates has yielded positive results in
broadening the tax base. However, the very fact that with a population
1.10+ billion, India has a tax base of less than 3 % personal income
tax assessces (Report of Ministry of Finance GOI, 2011-12)
necessitates the requirement of bradening of the tax base so that it
yields more coverage and more revenue. Bringinging hard to tax
groups under the tax net is one solution of this proplem and one way
of bringing hard to tax groups to tax cover is presumptive taxation.

5.8.3 Presumptive Taxation:

Presumptive taxation is on of the important measure to widen

income tax base. Indian government realized that unless the tax base
of income tax is increased, many other measures might not bear fruit.
These measure compariese:

i) Presumptive shceme of compution of income for persons

engaged in retail trade , etc,

ii) Enlarging the scope of deduction of tax source,

iii) Providing for penalty for non-filing of returning of income

iv) Compulsory quoting of Permant Account Number (PAN) in

certain cateogeories of transaction

v) Compulsory mention of Bank Account Number (BAN) in

Income tax returen.

Presumptive taxation is in vogue (fashion) in a number of

countries. France, Isreal, Chile, Costa Rica, Mexico, Ghana, Paraguay,
Uruguay, Nigeria, Mali, Marocco, Goban are some countries which
have applied presumptive schemes for small business and
professionals. Attention must be paid to how a particular presumptive
method will work in India. Tax reforms committee in 1991 looked in
to the feasibility of presumptive taxation in India and on the
recommendations of the TRC, Budget 1992-93 made provisions for
presumptive taxation for Individuals and Hindu Unidivided family
engaged in retail trading having an annual turnover of Rs. 500000 or
more. They were given the option to pay a lumpsum of Rs. 1400 per
annuam without going through the trouble of filing a return the
scheme was abolished in the year 1997-98 (Pandey, 2006)

There is a need to extend the application of presumptive

taxation in ther areas also to broaden the tax base. In Zambia
presumptive taxation has been implemented on mini buses, buses and
taxi operators. Similar system can be introduced in India for small taxi
oprators bus and mini bus operators.

While presumptive taxation is one of the means to overcome

weakness in tax administration of a country it also leads to efficiency
and equity. It is used mostly as a proxy for an income tax on small
businesses. While small business is the major engine of employment
creation and growth it is as well as major challenge in terms of
compliance management (Pashev, 2005). If used judiciously,
presumptive taxation may broaden the tax base by increasing tax
payers and their tax payments, and it may reduce tax evasion all at the
relatively low cost. Further, it may have substantial spillover benefits
in facilitating the movemet of small tax payers from the informal to
formal sector and as a source of information to reduce evasion
(Bulutoglu, 1992).

5.8.4 Tax Administration Reforms in India

5.8.4.1 The Costs of Taxes:

There are two types of costs one is

i) Administrative costs and

ii) Compliance costs.

i) Adminsitrative Costs:

To begin with it obviously costs something to collect taxes. The

actual cost of collecting taxes in developed countries (very) roughly
one percent of tax revenues. In developing countries, the costs of tax
collection may be substantially higher Gallagher (2004) reports
administrative costs ranging from 0.9 to 3.9 percent for six developing
countries; Warlters and Auriol (2005) report results for an additional
nine countries (developing) in the range of 1.1 to 3.6 percent.
ii) Compliance Costs:

Taxpayers also incur compliance cost, over and above the

actual payment of tax. Third parties also incur compliance costs. One
of the few reported studies of compliance costs in developing
countries (by Chattopadhyay and Das Gupta, 2002) for the Indian
personal income tax) found compliance costs to be more than ten
times higher than in developed countries. Similarly, Shekidele (1999)
found that compliance costs for excise duty in Tanzania to be more
than 15 times higher than similar costs in more developed countries.
Cost of paying taxes are generally considerably higher in poor
developing than rich developed countries for several reasons.

One reason for this is the complete complexity of their tax

structures and the cumbersome administrative methods employed.

Second, reason is because compliance costs are sensitive to the

stability of tax legislation as well as to such change in the external
environment as inflation and such factors are more prominent in
developing countries (Rao and Rakshit, 2011).

The most important reform in recent years is in tax

administration.

5.8.4.2 Tax Deduction at source (TDS)

Another important administrative device for widening the tax

base is tax deduction at source TDS. TDS is an important measure for
bringing those incomes to tax, which go unreported for tax purposes.
Expantion of the scope of tax deduction at source (TDS) is on of the
significance measures to reach the hard to tax groups. Further, every
individual living in large cities covered under any one of the six
conditions (owner shits of house, cars, membership of club, ownership
of credit card, foreign travel, and subscriber of a telephone
connection) is necessailly required to file a tax return. Tax reforms
initiated after 1991 intrdouced a number of provisions for deducting
tax at source. The Income Act, 1961 a present provides for deduction
of tax at source for a number of incomes. The list of TDS as per the
provisions of Income tax Act, 1961 includes.

i) Payment of salaries (sec. 192)

ii) Payment on securities (sec 193).

ii) Dividend
iii) Winning in lotteries and races sec. (194B, 194BB).
iv) Interest (sec 194 A)
v) Payment to Contractors.
vi) Insurance Comm.
vii) Payment to non- resident and others.
 Table No. 5.2

Contribution of TDS to Revenue, Personal Income Tax

Year Tax Advance Gross Refunds TDS

Deduction Tax (%) collection (Rs. (GDP)
at source (Rs. crore) crore) (%)
(%)
1990-91 41.75 36.00 6188.37 827.74 0.45
1991-92 48.22 33.29 7523.97 794.79 0.55
1992-93 42.91 33.45 9060.79 1165.44 0.52
1993-94 19.65 51.77 14106.25 4045.96 0.32
1994-95 22.18 56.87 17178.72 3357.76 0.37
1995-96 22.21 50.01 22949.61 6462.48 0.42
1996-97 50.87 27.30 20042.48 1808.49 0.75
1997-98 50.87 24.10 19270.19 2169.60 0.64
1998-99 52.44 23.59 22411.98 2171.83 0.67
1999-00 53.69 24.58 28684.29 3029.79 0.80
2000-01 63.22 20.89 35162.61 3398.63 1.06
2001-02 67.10 19.23 35358.00 3354.00 1.04
2002-03 65.55 20.26 42119.00 5253.00 1.12
2003-04 64.03 20.04 48554.00 7067.00 1.12

Source: Report of the Comptroller and Auditor General (Direct

Taxes ) Government of India (Various years)
 The table 5.2 shows that the contribution of TDS to personal
income tax revenue during 1990-91 to 2003-04. Table shows that the
main reason for the increase in revenues PIT is the administrative
arrangement extending the scope of tax deduction at source. The
proportion of tax deducted at source TDS to total revenue collections
actually declined from 42 percent in 1990-91 to 22 percent in 1994-
95. It increased to 50 percent following the expansion in the scope of
TDS in 1996-97 and further to 67 percent in 2001-02 before declining
marginally to 64 percent in 2003-04. As proproting of GDP, the ratio
of collections from Tds increased by 0.67 percentage points over the
period considered. when compared with the increase of 0.56
percentage points increase in ratio of personal income tax collections
to GDP, this suggest that the improved compliance is largely if not
only woing to improved, coverage or greater effectiveness of TDS as
a tool for collecting taxes. (Rao and Rao, 2005).

Permanent account numbers (PAN) is another important

administrative device for widening tax bse the issue of permanent
account numbers (PAN) has been simplified by out sourcing it to the
Unit trust of India (UTI) investors services ltd. the work on Tax
Information Networking (TIN) has been outsourced to the National
Ssaecurities Deposititory Ltd., (NSDL). Strengthing the information
system through the (TIN), alongwith processing and matching the
information from Various sources an a selective basis is an important
intiative that is likely to improve tax compliance.
5.9 Corporate Income Tax Reforms in India since 1991.

Corporate income tax is important revenue source of the union

government. It is levied on profits of companies. Corporate income
tax is fair and justified on several grounds first it is provides an
important tax base for mobilization of resources for the country.
Second most of the companes enjoy monopoly position and make
huge profits. Thuse, corporate income tax acts in part as a tax on
monopoly rent or pure profits (Ahemed and Stern, 1991). Third if tax
on companies is not levied, then foreign owners who are not subject to
personal income tax will completely escape tax. Fourth, in all
instences in which multinational firms reap location specific rents"
source countries can impose tax on such profits whitout affecting
investment. (Bird, 1996).
5.9.1 Some Major Issues in Corporate Income tax Reforms:
5.9.1.1 Classical system of taxation :
Classical system is one of the major issues in corporate income
taxation. This policy was similar in case of company taxation. The
classical system of taxation involved taxation of the profits in the
hands of the company and dividends in the hands of the share holders.
A distinction was made for widely held companies and different types
of closely held companies and the tax rate varied from the base rate of
45 percent to 65 percent in the case of some widely held companies.
Although nominal rates were high the effective rates were substantial
lower owing to generous provision for depreciation allowance and
investment allowance. In fact, some companies were able to make use
of generous tax preferences such that they did not pay any corporate
tax year after year.
5.1.2 Rate structure of corporate income tax :

Till tax reforms were initiated in India in 1990, corporate

income tax rate were quite high. The rate structure was also
complicated because of the distinction exesting between the widely
held companies and closely held companies. In 1984-85 rates on
widely held companies and closely held companies were as high as
57.75% and 68.25% respectively. In 1991 the rates applicable were as
follows:

Companies Tax Rate (%)

Widely- held companies 40%
Closely- held companies 50%
Domestic companies 45%
Foreign companies 65%
In 1994-95 distinction between widely-held and closely held
companies was removed and a uniform rate of 40% was fixed for all
domestic companies. In the case of foreign companies, rate was
reduced to 55 percent.

In the case of corporate income taxeses to the tax structure has

remained stable since, 1997-98. When the rate was brought down 35
percent. In 1997-98, the 10 percent dividend tax was shifted from
individuals to companies. As mentioned above, there was lack of
consistency in the treatment of tax on dividends. In budget 2005-06,
corporate income tax was reduced from 35 to 30 percent on domestic
companies. A surcharge of 10 percent is also chargable. The
depreciation rate, however, hs been reduced to 15 percent in the in the
case of general plant and machinery, but initial depreciation is set at
20 percent thereby reducing the overall benefit of reduction in
corporate income tax rates (Rao and Rao, 2005, p. 20).

In 2015-16 corporate income tax reduced to both domestic and

foreign company'es 30-40 percent respectively.

5.9.1.3 Erosion of Tax Base:

It is important point measure of corporate income tax reform in

India. In the period 1980s and early 1990s a large number of
companies were not paying taxes even if they earned huge profits. The
companies, which earned hugh profits but not pay companies.
Government in order to bring them under tax net introduced minimum
alternate tax (MAT) in the Budget for 1996-97. Under the scheme of
MAT, where the total income of a company after availing of all
deductions is less than 30 percent of the book profit, it will be
presumed that its income is 30 percent of book profits and will be
taxed accordingly. MAT has served the purpose of bringinging Zero
Tax Companies under tax net. MAT must be eliminated from the
statute only when all the exemptions and deductions are phased out
and statutory, effective tax rates are aligned completely. However, till
the exemption-raj exist MAT needs to be retained. Experts like
Bagchi (1995) and Rajaraman 1995) have advocated levy of asset
bsed MAT. It has been estimated by Bagchi that introduction of a 2
percent asset based. MAT on the 350 companies will lead to 75
percent increase in corporate tax collections.

In Argentina asset based MAT is levied. Simple asset based

MAT as in case of Argentina may be a better solution instead of the
exesting provisions of MAT in India.
 Table No. 5.3
Minimum Alternate Tax Rate in India in (%)
Year MAT rate (%)
2006-07 11.2
2007-08 11.3
2008-09 11.3
2009-10 17.0
2010-11 19.9
2011-12 20.0
2016-17 18.05
Source: Union Budget documents (Various years).

Figure No. 5.1

Minimum Alternate Tax Rate in India in (%)

11.2
18.05
2006-07
11.3 2007-08
2008-09
2009-10
2010-11
20 11.3 2011-12
2016-17

17
19.9

Table no. 5.3 shows the minimum alternate tax rates in India
during 2006-07 to 2011-12 minimum alternate tax was increased from
11.2 percent in 2006-07 to 20.0 percent in 2011-12.
5.9.1.4 Corporate Income Tax Incentives.

The various tax concessions and exemptions given by the union

Government reduces the revenue collection and adversely affects the
resources accruing to both union and state government's tax
expenditure statement (TES) or the statement of revenue foregone
introduced for the first time in the Uion Budget 2006-07. Revenue
foregone as estimated by the Union Government reached a peak of 8.1
percent of GDP in 2008-09 and as percent of Gross tax revenues, it
was the highest (77.3 percent) in 2009-10.

Since 2004-05, revenue foregone has always been in excess of

5 percent of GDP. In normal terms, the estimated revenue foregone
for 2013-14 (RE). Stands at Rs. 5,72923 crore.

On the direct tax side the magnitude of revenue is

comparatively lower but compare to proporation of share is high and
is due to thirty five categories of tax incentives. The revenue foregone
in individual income tax is primarily from deductions allowed on
certain tax saving investments and payment. According to the 2014-15
Budget, in case of direct tax (personal and corporate) income tax. The
proportion of revenue foregone is the highest for exemptions on
corporate income tax (CIT) 13.3 percent followed by ersonal income
tax (7 percent) (Reports on Fourteen Financeth) Commission 2013).

As for corporate income tax, there has been a huge gap between
the statutory tax rate (STR) and effective tax rate (ETR) which brings
out the magnitude of tax saving that accrue to a firm from various
investment releted and other tax incentives.
 Table no. 5.4

Effective and statutory Tax Rate of Corporate Income Tax in

India.
Fiscal year Statutory Tax Rate (%) Effective Tax Rate (%)
2007-08 33.99 22.44
2008-09 33.99 22.78
2009-10 33.99 23.53
2010-11 33.21 24.10
2011-12 32.45 22.85
2012-13 32.45 22.44
Sources : For Corporate Inncome Tax revenue foregone under the
central tax system, Union Budget, Various issues.

Figure No. 5.2

Effective and statutory Tax Rate of Corporate Income Tax in

India.

40
35 33.99 33.99 33.99 33.21 32.45 32.45
30
25
Percentage

20
15 23.53 24.1 22.85
22.44 22.78 22.44
10
5
0

2007-082008-09 2009-10 2010-11 2011-12 2012-13

Year

Statutory Tax Rate (%) Effective Tax Rate (%)

 Table no. 5.4 shows effective and statutory tax rate of corporate
income tax in India during 2007-08 to 2012-13. Above table shows
statutory tax rate remained at 33.99 %, ETR was rising from 22.44%
to 24.10 % between 2007-08 and 2010-11. When the former was
reduced to 32.45%, the letter slid to 22.44% in 2012-13. Provision of
investment allowance in 2013-14 and its extension in the budget to
cover investments of small size will reduce ETR and the reby
contribute to more foregone revenue, through it may help to revive
investment (Rajkumar and Vaidya, 2014).

In concluding part of chapter, the corporate income tax has

developed into a complex system over the years as result of ad hoc
changes made frome time to time. Corporate income tax reforms are
essential, first from the point of view of revenue and equity and
second from the point of view of creating a suitable environment for
the growth of both domestic and foreign investment. A major area of
concern in this regard is wide-rangig special incentives causing
erosion of tax base revenue forgone and low yield.

It is necessary that government takes immediate steps to

eliminate the existing deductions exemptions so that there is
unequivocal alignment between effective tax rate and statutory tax
rate and any further revenue loss is avoideds.
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*****