Course Name: B. Com.

H
Semester: II nd
Paper Code: BCOMH202
Title of the Paper: Indian Economy
Name of Faculty: Anju Singh
Designation: Assistant Professor

BCH 202: INDIAN ECONOMY

 UNIT III

What is Tax Reform?

 Taxation is an important exercise for the economic and social development

of the country. It provides the resources to use goods and services to the
people.
 Various tax reform committees were constituted in India in 1971, 1977, but
they suggested ad-hoc measures focused on the impending crisis.
 The Tax Reforms Committee of 1991 suggested a reduction in the rates of
all major taxes, i.e., customs, individual, and corporate income and excise
taxes to reasonable levels, maintaining progressivity but not such to induce
evasion, broadening the base of all the taxes by minimizing exemptions and
concessions, drastic simplification of laws and procedures, etc.

Issues with India’s Taxation System

 Retrospective taxation has impacted the inflow of foreign capital to India.

 An unstable policy environment pertaining to tariffs and taxes needs to be
resolved to boost business and investments ties.
 The complex web of taxation laws of the Central and many State
Governments cause complexities and litigation.
 Increased threshold provided in case of personal income taxes and
exemptions, tax cuts, preferential tax rates, deferral of tax liabilities etc. lead
to a lower tax base.
 Tax evasion and corruption undermine the governance practices by the state.
 Weakness of tax administration such as lack of technical expertise and
financial resources, poorly drafted laws and corruption.
 Structural issues such as low financial literacy, a large share of the informal
economy and a large number of cash based transactions.

Direct Tax Reforms

 Direct tax is a progressive tax as the proportion of tax liability rises as an

individual or entity's income increases. Examples of direct taxes are income
tax, corporate tax, dividend distribution tax, securities transaction tax, fringe
benefits tax and wealth tax.
 Various committees such as Arbind Modi Committee on Income Tax
Reforms and Akhilesh Ranjan Panel on formulating a new Direct Tax
Code (DTC), aims to revise, consolidate and simplify the structure of direct

BCH 202: INDIAN ECONOMY

 tax laws (like Income-tax Act, 1961; Wealth Tax Act, 1957) in India into a
single legislation

Need for Direct Tax Reforms

 Rationalization of income tax structure as the tax rate structure – slabs of

10%, 20% & 30% in personal income tax - has mostly remained the same in
the last 20 years
 The urgency to simplify the corporate tax structure, for example in 2014-
15, small companies having a profit of up to ₹1 cr paid an average tax rate of
29.37% while companies having a profit of greater than ₹500 cr paid an
average tax rate of only 22.88%.
 Widen the tax base and prevent potential revenue loss due to lower tax
rates and simplified tax structure.
 Maintain the balance between direct and indirect taxes, for instance, the
contribution of direct taxes has declined from 60% in 2010-11 to 52% in 2017-
18.

Measures Taken By The Government

 Various initiatives were launched to increase tax compliance such as the E-

Sahyog portal to facilitate online filing of the returns; extension of Indian
Customs Single Window Interface for Facilitating Trade (SWIFT), etc.
 Simplification of tax laws such as specific class of persons exempted from
the anti-abuse provisions of Section 50CA and Section 56 of the Income Tax
Act.
 Providing relief for startups with Capital gains exemptions from the sale of
residential houses for investment in start-ups extended till FY21, resolving
angel tax issues, etc.
 Providing various anti-tax avoidance measures such as Advanced Pricing
Agreements (APAs), GAAR (General Anti-Avoidance Rules), etc.

Direct Tax Code (DTC)

It was envisioned to consolidate all direct tax laws of the central government and
make the tax system more efficient and resilient. DTC intends to bring horizontal
equity among different classes of taxpayers in line with best international
practices. It will help to phase out the multiplicity of tax exemptions and
deductions in order to widen and deepen the tax base. Such tax reforms

BCH 202: INDIAN ECONOMY

will increase compliance, therefore simpler tax lead to a stable and robust taxation
system.

Proposal for Direct Tax Code (DTC)

 The government adopted the proposed increased tax slabs in the financial
year 2012 – 2013.
 Corporate Income Tax should be 30% with no surcharge on corporate tax.
 The Minimum Alternate Tax (MAT) rate should be 20% from the earlier
tax rate of 18.5%.
 Few schemes like PF, Gratuity, pension funds, etc would still come under
EEE.

Vivad Se Vishwas Scheme

 This scheme was enacted with the goal to reduce pending income tax
litigation, generating timely revenue for the government and benefiting
taxpayers.
 The individuals/companies that opt for the scheme are required to pay a
requisite tax following which all litigation against them are closed by the
tax department and penal proceedings are also dropped.

Faceless Tax Assessment Scheme

 A taxpayer or an assessee is not required to visit an I-T department office or

meet a department official for income tax-related businesses.
 It was launched in 2019 to promote an efficient and effective tax
administration, minimizing physical interface, increasing accountability and
introducing of team-based assessments.

Indirect Tax Framework

 Indirect taxes are consumption-based taxes that are applied to goods or

services when they are bought and sold.
 The government receives indirect tax payments from the seller of the
good/service, the seller, in turn, passes the tax on to the end-user i.e. buyer of
the good/service.
 Examples of indirect taxes are goods and services tax, customs duty, excise
duty, sales tax, etc.

BCH 202: INDIAN ECONOMY

Goods and Services Tax (GST)

 This indirect tax system was introduced to collect and reduce tax evasion, is
easy to understand for the customer and will reduce the tax burden for
industry, it ensures that there is no cascading effect of the tax and there is
the harmonization of tax laws, procedures, and rates of tax. GST is
applicable to the supply of goods or services as compared to the manufacture
of goods or on sale of goods or on the provision of services.

Recent Measures by The Government

 Taxation Laws (Amendment) Ordinance 2019 provided a concessional tax

regime of 22% for all existing domestic companies from FY 2019-20 if they
do not avail any specified exemption or incentive.
 Taxation Laws (Amendment) Ordinance 2019 has led to a reduction of the
tax rate to 15% for new manufacturing domestic companies if such
company does not avail any specified exemption or incentive
 The rate of MAT has also been reduced from 18.5% to 15%
 The Finance Act, 2020 removed the Dividend Distribution Tax
(DDT) under which the companies are not required to pay DDT.

Conclusion

Earlier tax reforms suffered from increased red-tapism and other bureaucratic
hurdles that resulted in the development of a complex tax system. This complexity
and presence of multiple layers encouraged leakage, corruption thereby decreasing
the tax base. Various tax reforms were carried out in direct and indirect taxation that
resulted in simplification of tax structure and better compliance.

BCH 202: INDIAN ECONOMY