RATIONALIZATION OF TAX POLICIES AND RATES IN INDIA

Introduction and History of Tax System in India

“The strength or weakness of an economy depends on the tax system. When a correct tax system
is applied, it leads to economic growth, stimulates industrial activity, and ensures consistent
income. With an efficient tax system, an economy can be forced to grow and GDP will grow
faster. Taxes are an important and important source of income for the state. Taxes are levied
because the investment can be made for development activities. The fiscal policy of an economy
can be considered a sound policy if it fulfills a function of allocation, distribution, and
stabilization of the economy1.”

“India has implemented a three-tier tax system. It includes union governments, state
governments, and local urban/rural communities. Following the provisions of the Constitution of
India, the authority to collect taxes is shared between the union government and the state
government. The state government can also delegate other powers to local authorities. In India,
different types of taxes are levied by central and state governments. The power to levy
agricultural taxes rests with the state government. The Indian tax system is the most complicated
in the world. The tax system includes the collection of direct and indirect taxes. Direct taxes are
taxes whose impact and incidence are the same and these taxes are a direct burden for the
common man. These taxes are non-transferable. These taxes include income tax, corporate tax,
wealth tax, gift tax, etc. An indirect tax, on the other hand, is a tax whose impact and incidence
occur at different times and these taxes can be shifted forward or backward. The burden of this
tax lies indirectly with the consumer/customer. The main types of indirect taxes are sales tax,
sales tax, excise, customs duties, etc.”

“The general public wants the government to increase basic exemption levels, and companies are
urging the government to cut taxes. The government processes these requests following the
needs of the economy. Over the years, the Indian government has continued to reform the tax
system. This research focuses on the tax reforms that took place in India after 1991. The research
attempts to analyze the effects of the reforms on the Indian economy.”

1
Musgrave, R., A., (1973), “Public Finance in Theory and Practice, McGraw Kogakusha Ltd., P., 778
“Tax – The Concept:”

“The concept of tax has been in place in India since ancient times. Manu, the former legislator,
urged merchants and artisans to pay a fifth of their profits in gold and silver. The peasants had to
pay a sixth, an eighth, or a tenth, depending on the situation. The concept of tax is also found in
Shrimad Bhagvat. Chanakya also has mention of the tax in his Artha Shashtra. Chanakya called
the helm Kosh Moolo Dand. The tax system of ancient India was productive, and the
combination of direct and indirect taxes helped keep the tax system flexible.”

The term tax can be defined as follows:

According to Professor Seligman, "a tax is a mandatory contribution made by the individual to
the government to cover expenses incurred in the public interest of all, without reference to the
benefits granted".

“Characteristics of Tax:”

“A tax is levied by the government. It has the following important properties:

- Is required:

Since the tax is levied by the government, payment is required. The government collects taxes
following the law and it becomes the duty of every citizen to pay the tax. Refusing to pay or
objecting to the tax could result in a fine. The element of coercion in paying taxes is in the
purchase of certain goods or services.

- This is a message:

The tax is a contribution of a contribution to the growth and development of the nation. The
government provides some infrastructure, defense, public order, etc. To provide all these
facilities, the government has to spend money. Citizens do their part by paying taxes.”

- It is an amount of money:

“Taxes are payments made by citizens in the form of money. Tax is payment from the income of
the individual or business or payment in the form of money paid when buying or selling a
product or service.
- It is for public purposes:

Taxes are collected for the common good of society, regardless of certain benefits to the
individual. The government uses tax revenues to benefit citizens during times of natural disasters
such as floods and famines or to maintain law and order.

- Is paid on income or assets:

Tax is the payment of the income or wealth that the individual generates. If the individual makes
the income, he has to pay the share to the government. Likewise, a company that makes a profit
must pay the tax.

- It is for economic growth and well-being:

The government collects the tax to provide social benefits to the citizens of the country. The tax
revenue is used for investments in infrastructure, industrial development, etc. For example, the
government uses tax revenue for economic growth.”

Tax objectives:

“After checking the control gun, the investigator has now provided insight into the control
objectives. The basic objectives of taxation in any economy can be listed as follows:

- Generate income:

- Redistribution of income and assets:

- Provide social protection:

- Reduce social problems:

- Acceleration of economic growth:

- Maintaining economic stability:”

Tax classification:
“To classify taxes, there can be different considerations for the classification. In this research
paper, the researcher classified the load according to who bears the ultimate load of the load.
From this point of view, there are two main types of taxes: direct taxes and indirect taxes.”

Direct tax:

“Direct taxes are also known as personal taxes. With this load, the impact and the incidence are
in the same place. These taxes are not transferable. Direct taxes are progressive and respect the
principle of fairness”

Direct taxes offer the following benefits:

“Direct taxes are progressive and therefore follow the principle of equity. The sacrifice depends
on the income. The tax rate increases with increasing income.

Direct taxes are elastic because the government can generate more revenue in an emergency.

Direct taxes also follow the safety principle. There is certainty on both sides. On the taxpayer
side, there is a certainty because there is certainty about the amount of tax, the tax rate, when and
how the tax will be paid. The government is certain of the revenues from these taxes.

Direct taxes are useful for reducing inequalities in society. The rich pay higher taxes and lower
taxes or none of the poor.

Direct taxes are useful as a monetary policy tool. In the case of inflation, these taxes are
increased and in a recession, these taxes are lowered.”

These are the drawbacks of direct taxation:

“These taxes are taxes on people's honesty. Those who are honest and disclose their exact
income are required to pay taxes, and those who hide their income are not required to pay taxes.”

These taxes may be bypassed if someone fakes the bill.

These taxes are not popular because people charge a lump sum on their entire income. It
becomes painful for people to give such a large amount.
“Direct taxes provide little incentive to earn and save. If the person earns more income, he will
have to pay more tax. That is why people are prevented from earning more.”

Direct taxes are levied based on creditworthiness, but it is very difficult to measure people's
creditworthiness.

- Indirect tax:

“Indirect taxes are also known as consumption taxes. With this type of load, the impact and
impact are in different places. These loads can be moved forward or backward. These taxes
affect the price of the product or service. These taxes are applied to people regardless of whether
they are rich or poor. These taxes may vary in kind or be collected ad valorem.”

“These are the advantages of indirect taxation:”

“These taxes are useful for generating more revenue for the government. Taxes are applied to
both necessities and luxury goods.These taxes are included in the price of goods and services, so
there is less room for fraud.It is very convenient to collect these taxes because these taxes are
included in the price of the goods or services.These taxes are economical in terms of collection
costs because collection costs are low.The coverage of these taxes is very broad, as almost all
commodities, i. H. Primary needs, luxury products, harmful products, etc. They are covered by
indirect taxes.”

“The disadvantages of indirect taxes are:”

“Indirect taxes sometimes become regressive. In some cases, the government imposes a higher
tax on essential goods and a lower tax on luxury goods.The yield of this tax is uncertain. This tax
is levied when the product is bought and sold and it is not certain when people will spend their
income.This tax discourages savings as these taxes are included in the price. Public spending
increases.Since these taxes are included in the price, they stimulate inflation.”

Indian Tax System:

The Indian Tax System can be classified as direct taxes and indirect taxes. Various forms of
direct taxes and indirect taxes are as discussed below:
Direct Taxes:

Income tax:

“Income tax is levied on the income of natural, legal, and legal persons. Income tax is collected
in India by the central government and controlled by the Central Direct Taxes Board of the
Department of the Treasury. Income tax is levied under the Income Tax Act of 1961. Income
generated during the year is subject to tax at the rates established for that year. Income tax is an
annual income tax. Under Section 14 of the Income Tax Act, the calculation of a person's income
takes into account all income, such as wages, homeownership, profits, and capital gains, capital
gains, and income from other sources.”

Corporation tax:

“A corporation means any artificial legal entity that has an independent existence. A company's
income is calculated separately in the hands of the company. The amount of profit distributed to
shareholders in the form of dividends is determined in the hands of the shareholders. Such
distribution of dividends is not treated as an expense but as a profit distribution. The tax
collected by the company is based on the legal residence of the company. Corporations of Indian
origin are taxed in India, while international corporations levy income tax on their activities in
India. Various types of income are considered as royalties, interest, profits from the sale of
capital goods in India, dividends from Indian companies, and fees for technical services.
Companies based in India are taxed on the income generated by doing business in India or other
countries. A company is considered a resident in India if it is incorporated in India or if the
management and administration are entirely in India.”

Real estate tax:

“The wealth tax was enacted in India under the Wealth Tax Act of 1957. It applies to all citizens
of the country. It is paid from the benefits of the property. It took effect on April 1, 1957. Wealth
tax is levied annually on each person, HUF, and company at a rate of 1% of the total assets if the
assets exceed 15,000.00. Health tax legislation is an important part of direct tax legislation. The
tax on the property itself is due year after year based on its market value. As long as the person
retains ownership of the property, the tax must be paid. Even if the property does not file a
return, the tax must be paid.”

Donation tax:

“A gift tax is a tax levied on one person who gives value to another. It is defined as the tax
charged on the value of the endowment. So it is a tax on donations of money to other people. The
tax on gifts in India is governed by the Gift Tax Act of 1958. Under this law, all gifts over Rs.
25,000 in cash, checks, drafts, or any other form received by the person unrelated to the Canon
of Economic Growth”

Excise:

“Excise duties in India are administered under the Central Excise Act of 1944 and the Central
Excise Tariff Act of 1985. Excise duties are levied on the manufacture of goods. The term
manufacturing here means creating a new item with a clear name, font, use, and marketing and
also includes packaging, labeling, etc. There are different rates of excise duty such as 8%, 16%,
etc. In some cases, 2% is levied on the total consumption tax. Excise duties are applied on an ad
valorem basis and in some cases based on the maximum sale price. The obligation to pay excise
duties arises once the product has been manufactured.”

”VAT:

“Sales tax is levied by the government on the sale or purchase of the product in the country.
There are two forms of sales tax, namely central sales tax (CST) and state sales tax (SST). All
states in India have their VAT laws and taxes accordingly. In addition to sales tax, states can also
apply employment contract tax, sales tax, purchase tax, and so on. Sales tax is a form of indirect
tax where the tax burden is borne by the buyer of the product, but the seller receives the tax from
the buyer. Typically, the sales tax is higher for luxury goods and lower for necessities. Central
sales tax is paid by the central government. It is levied on international transactions. However, as
of April 1, 2005, the national sales tax will be replaced by value-added tax (VAT). Value Added
Tax is a multi-level sales tax that is levied at each stage of value creation.”
Service tax:

The service tax was introduced in India in 1994-95 by Finance Minister Manmohan Singh. The
person or company providing services is a person valued for tax purposes. The service charge is
applied to all services except a negative service list.

Constitutional Provisions About Taxes

“This chapter explains the complexities of the constitutional arrangements related to the tax
powers of the different levels of government in India. The constitution contains extensive and
complex agreements on the division of taxes between the Union and the states, the power to
borrow, and the granting of subsidies by the Union to the states. The philosophy behind these
agreements is to provide both levels of government with sufficient financial resources to enable
them to fulfill their respective constitutional responsibilities. India - a federal government The
Constitution of India, adopted on November 26, 1949, came into effect on January 26, 1950. It
provides for two levels of government, one at the central level and one at the state level.”

“Following Article 246 in conjunction with Annex 7 to the Constitution, these powers are
determined by detailed entries in the three lists of the prospectus. Therefore, the Center has the
exclusive authority to legislate on matters included in List I (Union List), such as defense,
foreign affairs, citizenship, railways, postal and telegraph, telephone, broadcasting, aviation,
banking, money, and money. Points 82 to 92B on this list relate to tax powers. States also have
the authority to enact laws on matters listed in List II (list of states), such as B. Public policy,
police, health, local government, agriculture, and fisheries. Points 45 to 63 of this list relate to
the fiscal powers of states. Parliamentary and national legislators also have the power to legislate
on all matters in List III (concurrent list). The architects of the constitution recognized that there
was a category of subjects of common interest that could not be attributed exclusively to the
Union or the states. Some of the items included in the concurrent list are marriage and divorce,
forests, economic and social planning, population control and family planning, legal, medical,
and other professionals. This list does not include a tax director, which means that the center and
the states do not have concurrent tax powers. The other legislative powers, including taxes,
belong to the Center under item 97 of List I. The above-mentioned three-fold classification of
legislative matters is based on the fact that matters of national importance are included in the list
of trade unions and state or local affairs.”

“Supremacy of the Union legislator: Article 246, paragraphs 2 and 3, and Article 254, paragraph
1, establish the predominance of the Union legislator. Consequently, in the event of a conflict or
irreconcilable overlap of a question between the three lists of the Seventh Annex, the legislature
of the States must give way to that of the Union. In this way, the non-intrusive provisions of
Article 246, paragraph 1, number 2. are interpreted in this state concerning matters relating to the
competing list is null and void the degree of reluctance.”

“Union control over State law: Articles 200 and 201 define the control of the executive over
State law. Article 200 states that a bill passed by a state legislator must be submitted to the
governor, who may accept it, reject it or send it back for consideration by the legislator.
However, if it is re-approved by the state parliament with or without amendments, it should not
withhold its approval. The governor can also reserve the bill for consideration by the president
(effectively the Union Council of Ministers), who in turn can sign, decline or return his
agreement for consideration. Unlike the governor's position, however, the president is not
required to give his approval if such a bill is returned after further consideration by the state
parliament with or without amendments (Article 201).”

“Urgent provisions: Articles 352 and 360 contain some urgent provisions. Article 352 obliges the
President to declare a state of serious emergency in which the security of India is threatened by
wars, external aggressions, or armed uprisings. When such a proclamation is in force, the Union
may assume all the legislative and executive powers of the States on behalf of its organs. A
declaration of emergency results in the conversion of the list of states to a simultaneous list, and
then, when Parliament passes laws on any subject on the list of states, the list of states, the laws
of the states to disgust. . the law approved by parliament will prevail. Section 360 deals with
another type of emergency, the financial emergency.”

“Tax systems around the world have evolved significantly over the past 20 years as many
countries with different ideological positions and levels of development have implemented
reforms. The wave of worldwide tax reforms that began within the mid-1980s has accelerated
since then, driven by a variety of things. Unlike most developing countries, which have led
multilateral agencies in their tax reforms, India's tax reform efforts have largely a national note.
They are calibrated in response to changes in development strategy over time while remaining
consistent with the country's institutional arrangements. Thus, even when the government asked
for support for multilateral financial institutions, the recommendations of these institutions were
not directly translated into a tax reform program. Nevertheless, tax system reforms were largely
in line with international trends and with advice from expert groups and international best
practices.”

“Inevitably, fiscal policy in the country has evolved in response to changes in development
strategy over the years. In the early years, fiscal policy was determined by various government
requirements. They can be summed up as the need to increase the level of savings and
investment in the economy, thereby stimulating growth and ensuring a fair distribution of
income. It was an attempt to increase taxes for those who could pay without regard to the impact
on the effectiveness of the instruments chosen for that purpose.”

“The experience of tax reforms in India can provide useful lessons for many countries due to the
size of the country with a layered tax framework, the uniqueness of the reform experience, and
the difficulty of tailoring reforms due to institutional constraints. In themselves, these are
sufficiently important reasons for a detailed analysis of the tax system in India. Unfortunately,
unlike many developed countries where major tax reform initiatives have been followed by a
detailed analysis of their impact, there is no serious study of the economic impact of tax reforms
in India.”

Taxation Po1icy:

“Taxation is a central instrument of fiscal policy. In a developing economy like India, fiscal
policy plays a vital role in the overall political regime. The tax falls due to its significant
contribution to the treasury, which ultimately affects the overall development of various
economic sectors such as defense, infrastructure, education, health, and food. Security, etc. The
main functions that an effective tax system should perform are to provide collective savings for
public investment purposes while providing incentives to encourage private investment. Taxation
is seen as the most important means of ensuring social justice, both to share the development
burden fairly and to reduce income inequality. The main tax policy objectives in a developing
country like India should be:2”

1. Raising funds for productive investment in the public sector;

2. Stimulating growth in the private sector;

3. Maintaining sufficient stability by controlling inflationary pressures in the country; is

4. Reduce extreme inequalities in the distribution of income and wealth.

“Simp1ified Tax Po1icy:”

“Streamlining and simplifying direct and indirect tax laws and adapting them to the current needs
of a liberalized and competitive global economy is an urgent, albeit difficult, task, especially
given the attitudes of tax administration actors at different levels. Consequently, the liberal
budget will continue to focus on the following principles of tax reform:3”

1. “An increase in tax revenue would not be achieved through an increase in tax rates, but rather
through an increase in the tax base, which would be achieved on the one hand through a humane,
equitable, efficient, transparent, and accountable tax administration and rationalization. and
adequate simplification of tax revenue on the other side of tax legislation;”

2. “Tax reforms would be achieved by creating an atmosphere in the tax administration that
would lead to voluntary compliance by taxpayers with tax laws.

3. Tax reforms would require the introduction of a simplified tax policy with rational and
globally competitive tax rates.

4. Tax reforms should also aim at providing a fair, rapid, and efficient mechanism for resolving
actual disputes relating to the interpretation and application of tax laws.

5. Tax reforms should also aim at providing a quick and efficient mechanism to severely punish
ordinary scammers and corrupt officials on the one hand, and on the other hand to make a fair
offer to taxpayers, who are sometimes victims of tax laws. they are difficult to implement and to
2
Om Parkash and A S Sidhu (zOEE) - Direct Tax Reforms in India: A Comparative Study of Pre-and Post
Liberalization Periods - The IUP Journal of Public Finance
3
Reforms in Tax Policy and Tax Administration - http://UUU.liberalsiudia.com
simplify even taking into account their fundamental nature. Likewise, such a mechanism should
allow direct officials to reach a fair deal should they fall victim to the current tax administration
system.”

6. Tax policy should aim at reducing the burden on earned income relative to earned income by
adjusting the tax structure and rates appropriately and appropriately.

7. Tax reforms should also aim at a minimum number of personal / HUF tax rates by introducing
no more than two tax rates, regulating the level at which the second tax rate should be applied.

8. Tax reforms aim to attenuate taxpayer compliance

Revenue Implications of Reforms

“The 1991 depression led to a big fall in income. While the tax reforms were intended to be a
revenue-neutral measure, the natural consequence of a big reduction in tax rates was a discount
in revenue. Since the assets weren't increased proportionally, revenues naturally showed a
downward trend. The rate, which was over 16% in 1990-91, fell sharply to below 14% in 1993-
94. Although there are some improvements since then, it remains below 15 percent and remains
a priority (India, 1994). Thus, reforms within the Indian context have resulted in an
instantaneous loss of income, although they're expected to succeed in pre-reform levels within
the coming years. Interestingly, despite significant reductions in personal and company tax rates,
incomes increased significantly. The share of tax revenues has increased significantly about GDP
and total tax revenues. The contribution from tax revenue, which was but 14% in 1990-91,
increased dramatically to 24% in 1997-98. However, it's unclear to what extent the rise in
income productivity is thanks to the rise publicly sector wages as a result of the implementation
of the Wages Committee recommendations, to what extent this is often thanks to better
compliance thanks to marginal tax rates and the way this is largely thanks to administrative
costs.”

“The decrease within the rate since the beginning of the reforms is thanks to the decrease in tax
returns. Of course, some reduction in tariff revenues was to be expected, because the applicable
tariffs were extremely high and had to be reduced significantly. For an equivalent reason, the
excise reforms had to be calibrated to form up for the loss of revenue thanks to import duties.
However, this didn't happen and actually, tax revenues from the union's excise duties fell
dramatically. The analysis shows that the share important duties in GDP decreased by 1.3
percentage points from 3.9% in 1990-91 to 2.6% in 1997-98. However, the decline in excise duty
income was 1.5 percentage points faster within the same period, from 4.6% to 3.1%. As a result,
the part of the drug dans les recettes has achieved an overall environmental reduction of seven
points (28-21 percent) against 6 points (24-18 points one hundred). Therefore, substantial
improvements within the fiscal relationship must be achieved by improving the productivity of
internal tax revenues.108 The continued and heavy reliance on import tariffs as a source of
revenue instead of a guarantee is a problem to be explored. noted that the central government has
no incentive to get income from taxes shared with states. Under the present inter-state legal
system, the central government is predicted to share 87.5% of internet tax income on income and
47.5% of the Union's gross tax income with states. this can have created an ethical hazard and
therefore the central government is claimed to be targeting undivided taxes. As a result, the share
of tax income shared with states has declined, but revenue from non-shared sources has steadily
increased. So Joshi and tiny say, "For others, there's little question that this senseless growth of
the legal system has harmed the event of the whole economy."4”

Shortcomings and Challenges

“After numerous years of tax reform, as noted above, some worrying features of the legal system
remain. Improving the productivity of the legal system remains a serious challenge in India. The
rate has not yet reached the pre-reform levels. Although tax coverage has improved significantly,
there's still an extended thanks to attending reach hard-to-tax groups. Especially, the interior tax
on companies was further reduced, which significantly limited the reduction of the rates
necessary to realize the efficiency allocated. The tariff structure itself should be revised to make
sure lower tariffs and low dispersion and to make sure that the particular protection tariffs are
needless to say. Tax reforms on goods and services haven't yet achieved the taxation of
conscience. Much remains to be done to simplify and rationalize excise duties and taxes on
services at local and national levels. A concerted effort is required to place in situ a strong
management data system and to automate tax returns. Above all, tax reforms must become

4
Joshi Vijay and Ian Little, 96 (India’s Economic Reforms) (2001)
systematic, an ongoing process to stay the economy competitive, instead of sporadic and crisis-
driven.5”

“Also for corporate tax, the assets should be broadened by minimizing tax advantages and
preferences. instead of belittling them, recent coalition governments have increased tax
incentives to complicate the legal system and make an outsized wedge between nominal and
effective corporate tax rates. When businesses started enforcing income rules, the govt imposed a
minimal alternative tax (MAT). So we tried to repair one imperfection with another. This has
further complicated the system. As already mentioned, an entire overhaul of the tariff structure is
important. The TRC's recommendation to use seven rate categories with different tax rates
counting on the extent of production would cause a good spread of the effective protection rate.
the appliance of lower tariffs on staple foods and better tariffs on consumer and luxury goods
significantly increases the protection of those products. it's important to scale back the highest
duty to 15-20% and there should be no quite three categories of rates. Otherwise, the Indian
manufacturing industry wouldn't be ready to achieve international competitiveness within the
medium term. the most challenge within the restructuring of the legal system within the country
is that the development of a coordinated excise system. Although the distribution of taxes among
the various levels of state follows the principle of separation, as these separate taxes are levied
by the middle (excise duties), by the states (sales taxes, state taxes, taxes on automobiles, freight,
and passengers)) and governments (subsidies) on equivalent assets, we are confused with taxes
on taxes and tax surcharges. This not only results in gradual and relative price distortions but
also in an opaque legal system. GST development; A milestone tax on downtown manufacturing
and a tax on state retail sales is an answer that ought to be phased in. However, neither the
middle nor the states have made significant progress during this regard. To the present end,
within the case of the middle, consumption taxes should be collected fully within the sort of ad
Val levies. The rates should be tightened to a maximum of two and therefore the decrease should
be granted systematically. For this, it's necessary to develop an adequate data system. At the state
level, the conversion of state taxes to GST must be calibrated even more carefully. Rationalize
rates, systematically grant a decrease for intermediate and intermediate consumption, eliminate

5
Monsingh, “The Structure and Reference in Direct Taxation”, 212 (Ashish Publishing House), 2010
competitive tax incentives and concessions, lower the tax on interstate sales; All of this must be
done gradually.6”

“A major problem in developing a state-level retail GST stems from the very fact that states don't
have the authority to impose a tax on services. As noted above, states can only impose a nuisance
tax on goods. Taxes on services aren't imputed to the middle or state, but the previous levies
taxes on some services supported the facility to tax residual elements. Proper collection of the tax
on goods and services would therefore require an amendment to the constitution. The central
government can use this as leverage to convince states to lower and eventually abolish interstate
sales taxes so that a GST tax becomes a reality.7”

“Critical evaluation of the Indian tax System”

“Unstable Law: India's tax Law shows significant instability mainly thanks to the introduction,
withdrawal, and reintroduction of exemptions and concessions for various purposes. An
estimated 3,300 changes were made to the tax Act between 1961 and 1990 8. Because the tax Act
observed, "The instability of our tax laws is one among its worst features. The laws are filled
with uncertainty and changes are as unpredictable as they're frequent. Certainly, after quite half a
century of applying the tax laws of 1922 and 1961, it should be possible to possess a permanent
legal system.9 Frequent changes have created uncertainty. And confusion for taxpayers and debt
collectors.”

“Variety of exemptions/concessions it's quite common in tax laws to incorporate provisions that
exclude certain elements and deduct others from the assets. These tax advantages are mentioned
within the literature as tax expenses and sometimes resemble the famous tax loopholes. As in
other countries, exclusions, deductions, and discounts are an integral part of the Indian legal
system, which is meant to encourage the spread of socially desirable activities. However, their
large size harmed sales performance. Together, these concessions, each with its justification,
have the effect of undermining the assets and therefore the progressiveness of the legal system.
6
Shankar Acharya, “Thirty years of Tax Reforms in India”, Economic and Political Weekly (May 14): 2061-2069
7
Bhall and Surjit, “Tax Rates, Tax Compliance and Tax Revenues in India 1988-2008”, Quarterly Journal of
Economics.
8
N.A. Palkivala and B.A. Palkivala, The Law and Practice of income tax (Bombay: N.M. T ripathi Private ltd., 1990),
Vol.1, p.9.
9
Government of India, ministry of finance, final report of direct tax laws Committee (Chairmain, C.C. Chokshi),
1978, para 1-0, 10.
The supposedly high statutory tax rates convince be an illusion given the varied
exemptions/concessions that drastically reduce effective tax rates. The abundance of
exemptions/concessions has made the legislation on tax complex and clouded its assessment,
especially from the purpose of view of equity. Exceptions and concessions are often the results
of persistent and tactical lobbying by interest groups instead of economic justifications.”

“Indian Tax Reform - An Inquiry, 1956 within the mid-1950s, British economist Nicholas
Kaldor, at the request of the Indian government, administered a review of the Indian legal
system, particularly concerning the taxation of people and corporations. It should be recalled that
from 1953 to 1954, the Indian Taxation Commission had already thoroughly investigated the
Indian legal system. Nicholas Kaldor made the primary systematic estimates of evasion in India.
He estimated the tax loss thanks to evasion of Rs. 200 to Rs. 300 crore for the year 1953-54.
Kaldor's estimates were supported some preliminary value figures from the Central Statistical
Organization. Kaldor made it clear in his report that his estimates were preliminary and will be
interpreted with caution. Between April 1, 1946, and March 31, 1948, a capital gains tax was
briefly effective in India on capital gains made on the advice of Nicholas Kaldor. The tax was
reintroduced in 1956 and applied to capital gains realized after April 1, 1956. Similarly, an
"integrated system of direct taxation" was introduced in India in mid-1956. Three new taxes were
introduced in 1957 and 1958. namely. land tax, expense tax, and tax. the estate tax has existed
since 1953. The philosophy behind the introduction of the integrated system of direct taxation
was to stop fraud and avoid direct taxation, thus reducing income and capital gaps.”

Summary of Kaldor’s Survey Report

“A more efficient and equitable legal system is one of the foremost important requirements for
the fulfillment of India‟s national aspirations. at the present the entire revenue raised in taxation
by the center and state is small over 7 percent of national income; and on the record of the five
and 6 years, the tax income doesn't exhibit that natural buoyancy i.e. the automated rise in yield
with the rise in national production and income which may be a common feature of the legal
system of western countries. The second five-year plan envisages additional tax income (by the
center and states) of Rs.450 crore for the five years, a deficit expenditure of Rs. 1200 crore and a
“gap” of a further Rs. 400 crore, the amount of deficit expenditure that the economy can absorb
is not likely to exceed Rs. 150 crores a year, or, say, Rs. 800 crore in the five years. Hence, if the
targets of the second five-year plan are to be fulfilled the additional taxation required is more of
the order of Rs. 1250 crore for the five years (or Rs. 250 crores a year) then of Rs. 450 crore.
There is nothing impossible about these targets; provided the problem is tackled on bold lines
and the tax system is subjected to a thorough and comprehensive reform. It essential that the
additional burden that will inevitably be imposed ( either through taxation or through an
inflationary rise in prices) on the board masses of the population should be complemented by an
efficient system of progressive taxation on the same minority of the well-to-do who in India
number only about one percent of the population. Without that, the rise in expenditure during the
plan will inevitably increase the wealth of the richest classes disproportionately, and the
distribution of the burden imposed on the community at large will be contrary to the sense of
justice and equity of a democratic society. The present system of direct taxation in India is both
inefficient and inequitable. It is inequitable because the present base of taxation, “income” as
statutorily defined in defective and biased as a measure of taxable capacity and is capable of
being manipulated by certain classes of taxpayers. It is inefficient because the limited character
of the information furnished by taxpayers, and the absence of any comprehensive reporting
system on property transaction and property income make large-scale evasion through
concealment or understatement of profits and property income relatively easy.”

“A more efficient and fair tax system is one of the most important preconditions for achieving
India's national goals. Currently, central and state tax revenues represent just over 7% of national
income. and based on five- and six-year data, tax revenues are naturally not dynamic; H. the
automatic increase of income with the increase of production and national income, which is a
common feature of the tax system of Western countries. The second five-year plan provides for
additional tax revenues (through the power plant and states) of Rs.450 crore over the five years,
leaving a deficit of Rs.1,200 crore and a "hole" of another Rs.400 crore. In my opinion (and this
is shared by most economists in my opinion), it is unlikely that the amount of deficit spending
the economy can absorb will exceed Rs.150 crore per year, or let's say Rs.800 crore. . Five-year
period. So, if the goals of the second five-year plan are to be met, the additional fee will instead
be in the range of Rs. 1,250 crore for five years (or Rs. 250 crores per year) then Rs. 450 crore.
Nothing is impossible on these goals; provided that the problem is resolved courageously and
that the tax system undergoes a profound and comprehensive reform.”
“The main recommendations for direct taxation include increasing the tax exemption limit,
streamlining exemptions, removing preferential treatment for long-term capital gains, and
removing tax exemptions. land tax. Regarding indirect taxation, the most recommendations
concern broadening the assets, removing exemptions, extending service tax coverage, etc. The
direct taxation working party was given the subsequent mandate: minimize, eliminate anomalies
and improve” justice-

 Better services for taxpayers to scale back compliance costs, ensure transparency and
facilitate voluntary compliance; and
 other matters associated with the foregoing points.

“Recommendations for Tax Administration Reform Traditionally, the role of the tax
administration has been to enforce tax laws and supply a minimum of minimal services to
taxpayers. Most employees who cannot accept their new role still oppose this shift from
enforcement to mediator roles. Taking under consideration international best taxpayer practice
and therefore the future program to broaden the assets through voluntary membership, the
subsequent steps should be taken to expand the present scope of the utility for the taxpayer: and
quantitatively the present scope of advantages for taxpayers. These should include the range of
taxpayer services including the introduction of a phone system (via voice message) to remind
taxpayers of important dates and therefore the provision of pre-formatted programmed floppy
disks for sale.”

• “First, tax program design is of the utmost importance to tax authorities. Secondly, if the goal is
to realize a transparent, efficient, and sustainable tax administration, the structure of all taxes
must contain common elements. These are low rates, few nominal rates, a broad base, few
exceptions, few incentives, few quotas, and few temporary measures. And in cases where there
are exceptions, there should be clear guidelines. The working party unanimously endorses these
general tax principles. Numerous recommendations stem from these goals. The working party
adheres to the subsequent principles, as began within the report of the Advisory Group on tax
program and Tax Authorities for the 10th Draft Tariff Plan:”

• “the essential exemption limit should be moderately balanced between tax obligations at the
lower levels of administrative burdens. Collection and compliance burden for smaller taxpayers.
the power of the tax administration to supply top-quality services to taxpayers also will have a
big influence on the selection of the exemption ceiling.”

• the number of control plates must be small and their area large enough to attenuate the trouble
thanks to the sliding of the gripper.

• “the utmost marginal rate should be moderate to attenuate distortions within the economic
behavior of taxpayers and minimize the motivation to avoid taxes. In light of the principles
approved above:”

• “The introduction of one rate for people is rejected in favor of a reformed tax system with
multiple tax rates. The working party believes that the choice may be a multi-tariff system, but
with a minimal difference between the tariffs.”

• Given the disruptive effects of several panels, the task force opts for a two-tier income tax plan.
• “And achieving the complete effect of lower tax rates requires not only an optimal enforcement
strategy but also ensuring that the advantages of a tax cut apply to all or any income brackets,
taxation, and aren't limited to a couple of taxpayers. elevated. this is often optionally achieved by
having a broad base of the actuator plates.”

Conclusion:

“The tax reform process begins with a serious overhaul of the legal system or tax structure that
supported a country's policy goals. It includes identifying the causes of operational inefficiencies
and inefficiencies. supported this empirical evidence, tax reform measures are recommended to
enhance efficiency and effectiveness. Tax reforms also are needed as a result of changing socio-
economic and political contexts. Changes within the economic structure may require structural
changes within the tax structure. The tax structure should simplify tax procedures and reduce
compliance costs. The new economic policies and tax reforms, including lower marginal tax
rates, a broad base, the adoption of a minimum set of tax rates, and therefore the simplification of
the legal system with a minimum of exemptions and concessions, should pursue a broader
national policy Development.”