REPORT ON THE INDIAN TAX SYSTEM

NAME: Gavisidda
USN: 1AM24CS077
Branch -CSE ‘B’

INTRODUCTION:

An essential tool for raising money to support public services and government activities in
India is the tax system. It is essential to social justice, income redistribution, and economic
growth. Both the federal and state governments impose a variety of taxes under the system,
including indirect taxes like the Goods and Services Tax (GST) and direct levies like income
tax. This paper offers a thorough examination of the Indian tax system, looking at its
background, present problems, suggested fixes, and the effects of recent changes.

BACKGROUND

2.1 Historical Background

Since gaining independence in 1947, the Indian tax system has undergone substantial change.
At first, the goal was to generate income to fund the just established government. The British
colonial system, which placed a higher priority on revenue collection than on economic
growth, had a significant impact on the tax structure.

2.2 The Tax System's Structure

The dual structure of the Indian tax system means that both the federal government and the
states have the power to impose taxes. A disjointed tax system results from the way the
Indian Constitution divides the taxing authority between the federal government and the
states.

2.3 New Reforms

A major change to the Indian tax system was brought about by the July 2017 implementation
of the Goods and Services Tax (GST). The goals of the GST were to ensure a smooth credit
flow across the supply chain, prevent the cascading impact of taxes, and standardise the
indirect tax structure. The goal of the change was to improve tax collection and streamline
compliance.

PROBLEMS/CHALLENGES:

The Indian tax system still confronts a number of difficulties in spite of the reforms:

3.1 Limited Tax Base

A sizable section of the economy is still exempt from taxes, especially the unorganised
sector. Only over 3% of people are estimated to pay income taxes, which results in a
significant reliance on a small number of taxpayers. The government's capacity to raise
money and pay for public services is hampered by this small tax base. (NIPFP, 2021)

3.2 Elevated Tax Rates

The current tax rates are frequently seen as onerous, especially when it comes to business
taxation. Tax evasion and avoidance can result from high tax rates that deter investment and
compliance. Confusion and non-compliance may also result from the tax structure's
complexity.

3.3 Problems with Tax Administration

Ineffective tax administration and collection practices have led to a rise in conflicts and a bad
image of the tax system, which is often called "tax terrorism." These problems are made
worse by corruption and administrative roadblocks, which erode public confidence in the
system. (IMF Report, 2020).

3.4 The Intricacy of Tax Laws

Taxpayers are confused by the variety of taxes and the frequent changes to tax regulations.
The tax system's intricacy raises the cost of compliance and may discourage people and
companies from engaging in the formal economy. (Government of India, 2019).

3.5 Technological Difficulties

Even if digitalisation has made tax administration better, many taxpayers still have trouble
accessing technology and comprehending online tax procedures, particularly those who live
in rural regions. Inequalities in tax compliance may be made worse by the digital divide.
(World Bank, 2022).

SOLUTIONS:

To address these challenges, several solutions have been proposed:

4.1 GST Implementation

The GST seeks to streamline the tax system and increase compliance by replacing several
indirect taxes with a single tax. To solve the teething problems related to its implementation,
such as making sure that all states are on board and that the technology utilised for GST filing
is easy to use, ongoing efforts are required.

4.2 Extending the Tax Shelter

Through improved outreach, education, and compliance incentives, the government should
concentrate on bringing more industries and people into the tax system. This may entail
helping small firms and streamlining the tax filing procedure.

4.3 Tax Administration Reform

Efficiency may be increased and conflicts can be decreased by implementing digital solutions
and modernising tax collecting procedures. For efficient tax administration, infrastructural
improvements and tax official training are also essential.
4.4 Making Tax Laws Simpler
Simplifying tax laws to make them easier for the typical taxpayer to comprehend and use can
save compliance costs and boost system trust. For tax-related enquiries, a one-window
clearing process could be useful.

4.5 Raising Awareness

A culture of compliance may be promoted by running campaigns to inform taxpayers of their
rights and obligations under the tax code. Workshops, seminars, and internet resources might
all fall under this category.

RESULTS OF THE FINDINGS:

Increased tax compliance and revenue collection are two encouraging outcomes of the GST
adoption.

5.1 Income Production

The Ministry of Finance claims that since the introduction of the GST, monthly revenues
have regularly surpassed projections, averaging more than INR 1 lakh crore. This suggests a
wider tax base and a favourable reaction from businesses. (Ministry of Finance, 2023).

5.2 Rates of Compliance

A larger tax base is shown by the notable growth in the number of registered taxpayers. There
are still issues with the unorganised sector, though, and more people and companies need to
be brought into the tax system. (Economic Survey of India, 2022).

5.3 Effectiveness of Administration

Although productivity has increased thanks to digital platforms for filing and compliance,
smaller firms are still not fully embracing technology. To improve administrative efficiency,
ongoing training and technological investments are crucial. (World Bank, 2022).

DISCUSSION/ANALYSIS

The results of the findings highlight both the successes and ongoing challenges of the Indian
tax system.

6.1 Comparative analysis:

India continues to have a low tax-to-GDP ratio in comparison to other nations.
Global Context: In 2020, India's tax-to-GDP ratio was around 17%, while Brazil's and South
Africa's were 30% and 25%, respectively, according to the World Bank. This suggests that in
order to comply with international norms, India must improve its tax collecting systems.
Efficiency of Tax Structure: New Zealand and other nations with less complicated tax
systems have reduced administrative expenses and higher compliance rates. India may further
simplify its tax system by taking inspiration from these examples. (World Bank, 2022).
6.2 Economic implications:
To finance social welfare initiatives, infrastructure improvements, and public services, a
strong tax framework is necessary.
Public Spending: Higher tax collections may result in more money being spent on
infrastructure, education, and health care—all of which are essential for long-term, steady
economic growth. Investment in Human Capital: Investments in human capital may boost
economic results and productivity when they are made possible by a just and effective tax
structure. (IMF Report, 2020).

6.3 Social equity considerations:

In order to combat socioeconomic inequality, the tax system is essential.
Redistribution of Wealth: Redistributing wealth and lowering income inequality are two
benefits of a progressive tax system. However, the existing system has come under fire for
being regressive, especially when it comes to indirect taxes like GST that disproportionately
impact those with lower incomes.
Targeted Welfare initiatives: To help underprivileged populations and combat poverty, the
government may utilise tax money to finance targeted welfare initiatives. ( NIPFP, 2021).

6.4 Future projects:

The Indian tax system has a number of potential and difficulties in the future.
Digital Transformation: Tax administration's ongoing digital transformation has the potential
to improve compliance and efficiency. It will be essential to invest in tax authorities' training
and technology.
Policy Reforms: Improving compliance and revenue generation will need ongoing policy
reforms targeted at expanding the tax base and streamlining tax rules.
Sustainable Development Goals: Addressing social and economic disparities and fostering
sustainable growth may be achieved by coordinating the tax system with the Sustainable
Development Goals (SDGs) of the UN. (UN SDG Report, 2021).

SUGGESTIONS:

7.1 Campaigns for Public Awareness

Organise initiatives to inform taxpayers of their tax system rights and obligations. To increase
comprehension and compliance, this might involve workshops, seminars, and internet
resources.

7.2 Tax Law Simplification

Simplify tax laws so that the typical taxpayer may better comprehend and access them. For
tax-related enquiries, a one-window clearing process could be useful.
7.3 Developments in Technology
To cut down on human error and boost productivity, invest in digital systems for tax
collection and compliance monitoring. Accessibility can be improved via mobile tax filing
and payment apps, particularly for small enterprises.

7.4 Increasing the Strictness of the Law

Boost tax authorities' ability to enforce compliance by providing them with greater resources
and training, while making sure that enforcement is impartial and open. This may contribute
to increased systemic trust.

7.5 Promoting Consensual Behaviour

Provide tax credits for persistent compliance or lowered fines for early filers as incentives for
on-time tax payments and compliance. This may encourage a voluntary compliance culture
among taxpayers.

CONCLUSION:

The current state of the Indian tax system need continuous adjustments to solve its underlying
issues. Although the effective introduction of the GST is a positive move, further work is
required to increase administrative efficiency, clarify tax legislation, and expand the revenue
base. A just and effective tax structure is necessary for long-term economic growth. India can
establish a tax system that not only provides for its revenue requirements but also encourages
a culture of compliance and trust among its population by tackling the issues and putting the
recommended improvements into practice.

REFERENCE:

1. Tax Administration Reform Commission (TARC) Reports

2. Government of India, Ministry of Finance Publications
3. Economic Survey of India (various years)
4. World Bank Reports on Taxation in India
5. International Monetary Fund (IMF) Reports on Tax Policy in Emerging Economies
6. Various academic articles and research papers on Indian tax reforms and GST
implementation.
7. Reports from the National Institute of Public Finance and Policy (NIPFP)
8. Articles from reputable financial journals and newspapers covering tax reforms and
economic policies in India.
QUESTIONNAIRE:

1. What was one major goal of introducing the Goods and Services Tax (GST) in India in
2017?
A. Increase direct tax rates
B. Ensure smooth credit flow across the supply chain
C. Abolish income tax completely
D. Increase customs duty rates
Answer: B. Ensure smooth credit flow across the supply chain

2. Which of the following is an example of an indirect tax in India?

A. Income tax
B. Wealth tax
C. Goods and Services Tax (GST)
D. Capital gains tax
Answer: C. Goods and Services Tax (GST)

3. What is a key problem with India’s tax base as mentioned in the report?
A. It is too large to manage
B. It is highly dependent on the unorganised sector
C. It is too small with only ~3% paying income taxes
D. It has no indirect taxes
Answer: C. It is too small with only ~3% paying income taxes

4. What does the term “tax terrorism” in the document refer to?
A. High import taxes
B. Ineffective tax administration and harassment
C. Tax exemption policies
D. Corporate tax holidays
Answer: B. Ineffective tax administration and harassment

Q5. Which sector has particular difficulty accessing technology for tax compliance?
A. Large corporations
B. Urban professionals
C. Rural areas
D. Multinational companies
Answer: C. Rural areas
6. According to the World Bank (2020), what was India's approximate tax-to-GDP ratio?
A. 10%
B. 17%
C. 25%
D. 35%
Answer: B. 17%

7. Which of the following is NOT mentioned as a proposed solution to improve India’s tax
system?
A. Simplifying tax laws
B. Raising awareness
C. Abolishing GST
D. Improving tax administration
Answer: C. Abolishing GST

8. What has been one positive outcome of GST implementation according to the report?
A. Decline in tax compliance
B. Monthly revenues exceeding INR 1 lakh crore
C. Elimination of all indirect taxes
D. Tax rates being abolished
Answer: B. Monthly revenues exceeding INR 1 lakh crore

9. How can technology help improve tax administration?

A. By increasing corruption
B. By making tax laws more complex
C. By reducing human error and boosting productivity
D. By eliminating direct taxes
Answer: C. By reducing human error and boosting productivity

10. Which recommendation is made to encourage voluntary compliance among taxpayers?

A. Increase penalties for late payment
B. Provide tax credits for consistent compliance
C. Abolish all taxes for rural areas
D. Introduce new taxes for small businesses
Answer: B. Provide tax credits for consistent compliance