Tax Structure And Its Economic Implications In India

    The Indian economy has experienced a decrease of 18.3% in the economic growth in the second quarter of 2020, the outcome of which was a net growth of just 23.9%. In addition, the fact retains the ranking of India due to pandemic. India is recorded to be the third-worst affected country due to the pandemic by the outbreak of COVID-19.[1] The outbreak of the virus has adversely affected the economy of India, where the businesses were shut and natives didn’t have much of a source for generating income, charging tax, not only this, the individuals spent a large portion of their savings to survive the period of lockdown and even now, when the lockdown is lifted. The money flow in the economy has come to a stagnant position.

    The current situation recorded a decline in revenue generated from the taxes, which is even lower as and when compared to pandemic lockdown. It was noted that there was an average decline by 12.5 percent[2] in the revenues generated from the taxes. Before discussing in detail the effects of the tax on the economy, we need to first understand the basic idea of the tax structure that exists in India.

    TAX

    Tax is generally levied by the government for the benefit of the public at large so that the government by collecting taxes from the taxpayers, utilizes revenue so generated by collecting tax for the welfare of the public and to improve the standard of living for the natives of the country. Tax, as per modern economics is defined as “a mode of income with the motive of redistribution of ‘income’ in the economy.”

    The term tax is defined as a compulsory amount which is levied by either the Central Government or State Government or both charged on the income earned by the individuals, on profits earned by the business, on sale or purchase of certain goods or services as defined in the statute of the country. However, the tax so levied, is defined as per the burden on the person to pay the tax, the nature of the tax, and the statutes governing them thereon.

    HISTORY OF TAXATION IN INDIA

    Tax existed in India when India was ruled by various kings and they used to collect ‘kar’ i.e. tax from the people living in his territory and then would further utilize that money in the development of the particular territory. It was mentioned in the ‘shastras’ that, ‘a king must not impose either too high rates of taxes or spare all from paying taxes’ that is a king must create a balance while levying a tax so that it does not create a burden to the taxpayer. Further, Chanakya (Kautilya) stated that a king can charge a high rate of taxes in adverse situations related to any natural calamities or in the situation of wars.

    Later on, in the 1860s the introduction of tax took place. In 1857 the government faced heavy losses due to the ‘Military Mutiny.’ To recover such losses; Sir James Wilson introduced the concept of ‘tax.’

    It was then in 1961 when the Ministry of Law came up with the Act based on Income tax, which was further enforced in India as the Income Tax Act,1961 on 1st April 1962. The Union Budget presented brings in amendments to the taxation laws every year.

    In the year 2000, the Atal Bihari Vajpayee Government came up with the proposal of ‘One India, One tax Notion.’ The Kelkar Committee was formulated to make laws related to it. Further, 17 taxes were subsumed to formulate Goods and Services Tax, to eradicate the cascading effect (tax on tax) and to bring a uniform law to levy a tax on goods and services.

    TAXATION STRUCTURE OF INDIA

    India has a three-tier federal tax structure, that is, the power to levy and collect taxes that have been divided amongst the union government, the state government, and amongst the local bodies in the urban and rural areas.

    Article 246 gives the power to the Union Government to make laws on the matters listed in List I (Union List), the State Government on the matters listed in List II (State List), and both center and state together can make laws on matters listed in List III (Concurrent List).

    Further, Article 265 of the Constitution of India, gives power to both, the Union and the State Government  to make laws within the authority of law. 

    METHOD OF TAXATION    

    The nature of tax can be classified into three main categories namely Proportional Tax, Progressive Tax, and Regressive Tax. The explanation is as follows:

    PROPORTIONAL TAX

    It states that every person must pay a proportional amount of tax on the income earned by the person. For Example: As per the Income Tax Act, tax at the rate of 30 percent is charged on any other domestic companies in India irrespective of their income.[3]

    PROGRESSIVE TAX

    It means that as the income of the person increases, the burden to pay tax by such person also tends to increase. For Example, the slab rates mentioned in the Income Tax Act is the perfect example of progressive tax where the person having an income ranging from 2.5 Lakhs to 5 Lakhs has to pay tax at the rate of 5% whereas, the income if ranges between 5Lakhs to 7.5 Lakhs, the person needs to pay tax at the rate of 10%.[4]

    REGRESSIVE TAX

    It means that as the tax rate decreases, the amount of taxes to be paid tends to increase. It creates a burden on the taxpayers from the low-income groups which results in, the rich getting richer and the poor getting poorer. For Example , indirect taxes on sales, services, etc.

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    TYPES OF TAXES

    Taxes are generally classified into two types, Direct Tax, and Indirect Tax. The main point of distinction between the two lies in the implementation of the same, that is, when the person burdened to pay the taxes deposits such amount to the imposing entity directly or indirectly.

    The two types of taxes are explained as follows:

    DIRECT TAX

    Direct tax implies that the burden and the incidence fall under the same category meaning thereby, the person who is liable to pay tax pays so directly to the imposing entity. It must be noted that the burden to pay such a tax cannot be shifted onto any other person if otherwise provided by the law. For example, income tax levied as per the provisions of Income Tax Act, 1961, etc.

    INDIRECT TAX

    Indirect tax implies that the burden and the incidence to pay such tax falls on different individuals meaning thereby, the burden to pay tax and the taxpayer can be on two different individuals. The tax is not directly levied on the taxpayer but it is the burden on the taxpayer to deposit such a tax to the authorities. For example , goods and service tax, entertainment tax, etc.

    IS INDIA FACING A FISCAL CRISIS?

    Is Indian tax revenue going to get worse? Is pandemic the sole reason for such a decline? It is recorded that the revenue collection of the Goods and Service Tax has declined to a net of 12 percent in the month of August. [5]

    Gross Total Revenue (GTR) earned by the country has also declined. GTR is defined as the net receipts the government receives from all the taxes, the major 5 taxes of which include direct tax(mainly Income Tax), indirect tax(mainly GST), customs duties, capital revenues, and revenue which is receivable from the state-owned entities/enterprises. The GTR dropped to 29.5 percent for the months from April to July 2020. The net tax revenue which was Rs. 3.39 lakhs crore declined to the net revenue of Rs. 2.02 lakh crore in April to July 2020.

    According to the statistics, a deficit of 8.21 lakh crore was found amongst the revenue and the expenditure incurred.[6] The revenue received by the government for April to July 2020 was found to be Rs. 2.27 lakh crore which is very less as per the target set by the authorities.

    The Finance Minister of India, Nirmala Sitaraman on the current decline/contraction in the fiscal position of the economy states that the outbreak of coronavirus is an ‘Act of God,’ which led to many controversial headlines. She further mentions that instead of focusing on the inflation in the economy, the need of the hour is to ensure growth by eradicating unemployment. The statement to some extent, is true but how is growth possible if the economy is declining and inflating at the same time.

    CONCLUSION

    The increase in cess or surcharge is no solution to this problem, as it will only create an additional burden as well as would create disinterest among the taxpayers. The solution to this problem is by creating more ‘demand’ in the economy. Moreover, the government can charge a higher rate of tax on the goods such as alcohol, cigarettes, tobacco, jewelry, and ornaments, etc. so that the poor are not burdened to pay more and the person who can buy such goods and services in the current situation can contribute more in the upliftment of the economy.

    Moreover, the foreign countries have come up with schemes wherein the small scale companies who are unable to pay taxes are exempted from such payment for some while so that these companies do not shut down. Countries like Peru have come up with the concept of ‘solidarity tax’ where only one-time tax would be imposed on the higher section (in terms of wealth) of the society to stabilize the fiscal economy of Peru.[7] Moreover, countries like China and Australia have waived late payment fees on the taxes and surcharge, expanded the horizon of tax incentives by extending due dates, allowing certain expenses as deductions, etc.[8]

    The need of the hour is not to lay off workers, or non-payment of taxes, to cut down cost etc but to ensure that the natives are allowed some relaxation in the payments so that the economy becomes normal once again.

    REFERENCES

    [1]India GDP Annual Growth Rate, available at https://tradingeconomics.com/india/gdp-growth-annual (last visited on 06/10/2020).

    [2]India’s Fiscal Crisis Can Only Get Worse As Tax Revenue Is Seen Dropping 12.5% In 2020-21, available at https://theprint.in/ilanomics/indias-fiscal-crisis-can-only-get-worse-as-tax-revenue-is-seen-dropping-12-5-in-2020-21/495364/ (last visited on 06/10/2020).

    [3] FY 2020-21 (AY 2021-22).

    [4] FY 2020-21 (AY 2021-22).

    [5]India Government Revenues, available at https://tradingeconomics.com/india/government-revenues (last visited on 06/10/2020).

    [6] India’s Fiscal Deficit Breaches Full-Year Target In Four Months, available at https://www.bloombergquint.com/economy-finance/indias-fiscal-deficit-breaches-full-year-target-in-four-months (last visited on 06/10/2020)

    [7]Countries Seek New Revenue Sources to Pay for Virus Relief (1), available at https://news.bloombergtax.com/daily-tax-report-international/countries-hunt-for-new-revenue-sources-to-pay-for-virus-relief (last visited on 06/10/2020).

    [8]International Monetary Fund- Policy Responses to COVID-19, available at https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19 (last visited on 06/10/2020).


    BY KHUSHBOO GARG | UNIVERSITY INSTITUTE OF LAW, REGIONAL CENTER, LUDHIANA

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