Review of Indian Tax System

Indian Taxation System
India has a well-developed tax structure with clearly demarcated

authority between Central and State Governments and local
bodies. Central Government levies taxes on income (except tax
on agricultural income, which the State Governments can levy),
customs duties, Central Goods & Services tax (CGST) &
Integrated Goods & Services Tax (IGST).State Good& Services
Tax (SGST), stamp duty, state excise, land revenue and
profession tax are levied by the State Governments. Local bodies
are empowered to levy tax on properties, octroi and for utilities
like water supply, drainage etc. Indian taxation system has
undergone tremendous reforms during 2017. The multiple
indirect taxes have been subsumed in the new Good & Services
Tax which was implemented from 1stJuly 2017.
With the implementation of GST almost 17 types of indirect taxes
have been abolished making the indirect tax compliance much
easier and free from bureaucracy. The government introduced
Goods and Services Tax (GST) in 2017 which is the most
important tax reform in independent India till date. Earlier,
governments levied various state and central taxes for availing
various services or buying different goods. The taxation was
complex and contradicting rules enabled some people to evade
taxes through loopholes in the system. After the introduction of
GST, higher percentage of assesses was brought in the taxation
umbrella and it made tougher for evaders to escape from paying
taxes. Also tax rates have been rationalized and tax laws have
been simplified in recent years, resulting in better compliance,
ease of tax payment and better enforcement. The process of
rationalization of tax administration is ongoing in India.
Features of Indian Tax Structure
Some of the features are:
1. The Scientific Division of Tax Powers

2. Multiplicity of Tax Structure
3. Larger share of Indirect Taxes
4. Insufficient Tax Revenue
5. Greater Importance to Sate Government in Federal Fiscal System
6. Incidence of Taxation
7. Progressiveness in Tax Structure
8. Narrow Base and Others.
1. The Scientific Division of Tax Powers
India being a federation, there is the existence of a multi-level
finance system. The constitution of India forms the basis of
division of powers into:
(a) Union,
(b) State, and
(c) Concurrent.
Based on this the constitution has also made a provision for
division of tax powers between the centre and the states.
The area and sphere of taxation of centre and state is clearly
demarcated as per constitutional provision. Taxes which are in the
purview of central government accounted for 50 percent of its
revenue. Some taxes are again levied by the Central government
and the proceeds of such taxes are divided between the centre and
the state governments.
2. Multiplicity of Tax Structure
India is having a broad based and extensive tax structure. Its main
feature is the existence of multiplicity of taxes. There are both
union government taxes and state government taxes. The tax
structure includes both direct and indirect taxes.
In the case of states indirect taxes play a dominant role, in the
composition of tax revenue. Among the direct taxes imposed in
India, the most important is income tax. Other prominent taxes
are wealth tax capital gains tax, gift tax etc. The indirect taxes in
India consists of GST, excise duties, customs duties, etc.
3. Larger share of Indirect Taxes
In India in the total tax revenue there is the domination of indirect
taxes over direct taxes. It is that because of the undeveloped
character of the economy and glaring inequality in income, the
scope of direct taxes is limited.
4. Insufficient Tax Revenue
In-spite of rising trend in tax revenue, the total revenue remained

small when compared to developed countries. The tax GDP ratio
generally remained in the range of 8 percent to 9 percent in India.
5. Greater Importance to Sate Government in Federal Fiscal

System
In Indian fiscal federalism much importance is assigned to state

governments. This is because of the growing responsibilities of
the state government in the discharge of developmental activities.
6. Incidence of Taxation
The urban population depends more on service and business

sector and enjoys comparatively higher income and taxpaying
capacity.
7. Progressiveness in Tax Structure
Indian tax structure is framed in such a way that all indices of ability
to pay is taxed. The direct tax is framed in such a way that as tax
base increases, tax rate also rises sharply. Excise duties are levied
and collected discriminately, depending on the type of commodity
and the class of consumers.
8. Narrow Base
The tax base is very narrow in India in the case of both direct and
indirect taxes. A planning commission estimate shows that only one
percent of working population comes under the preview of direct tax.
9. Complexity of Indian Tax Laws

Both direct and Indirect tax laws are highly complex, with a lot of
loopholes which enable the people to avoid as well as to evade taxes.
Evaluation of Indian tax system
1. Adequacy and productivity:
Contrary to the earlier phase, tax system has exhibited a good deal of
buoyancy in recent years. The tax revenue has been continuously
increasing along with an increase in national income. However, the
increase in tax revenue has not been adequate enough to meet the
growing requirements of the developing economy.
2. Efficiency:
Indian tax system falls short of the criterion of efficiency. On account

of complicated laws and rapid changes in their provisions, the tax
system has lost the qualities of simplicity and certainty. As a result, on
the one hand, this has led to massive tax evasion and avoidance. This
has generated massive black money, which, in turn, has given rise to
serious distortions in the economic and socio political Set-up. On the
other, the taxpayers have to incur high costs in paying up taxes.
3. Equity:
Our tax system also falls short of the criterion of equity. Although
our direct taxes are highly progressive, undue reliance on indirect
taxes has more than counter-balanced that effect. Leaving
agricultural income out of the tax net has been a source of additional
inequity. Likewise, the proliferating unorganised industrial sector is
providing complete, tax haven.
4. Certainty:
The scheme of taxes in India has been considerably fluctuating,

resulting in frequent tampering with tax exemptions, incentives and
concessions leading to uncertainty. Even the goals of taxation have
been changing.

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Review of Indian Tax System

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Indian Taxation System

India has a well-developed tax structure with clearly demarcated

1. The Scientific Division of Tax Powers

In-spite of rising trend in tax revenue, the total revenue remained

5. Greater Importance to Sate Government in Federal Fiscal

In Indian fiscal federalism much importance is assigned to state

The urban population depends more on service and business

9. Complexity of Indian Tax Laws

Indian tax system falls short of the criterion of efficiency. On account

The scheme of taxes in India has been considerably fluctuating,

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