India’s taxation system has undergone significant reforms in recent years, aimed at simplifying the tax structure, expanding the tax base, and reducing tax evasion. The old tax system, characterized by multiple indirect taxes and a complex tax structure, has been replaced by a more unified and simpler tax regime.
Under the old system, the central government levied taxes such as Excise Duty and Service Tax, while the state governments levied taxes such as Value-Added Tax (VAT) and Sales Tax. This resulted in cascading of taxes, with taxes being levied on taxes, leading to higher costs for businesses and consumers. This system was also complex, with different tax rates and exemptions for different goods and services, making it difficult for businesses to comply with the tax laws.
The Goods and Services Tax (GST), introduced in 2017, subsumed most of these indirect taxes under one tax, making the tax system simpler and more unified. GST has increased the tax base by bringing many informal businesses into the formal sector and reducing tax evasion. The seamless flow of input tax credits has also helped in reducing the cost of goods and services. Under GST, there are four tax slabs – 5%, 12%, 18%, and 28% – with different rates for different goods and services.
In the personal income tax system, there have been only minor changes in recent years. The tax slabs and exemptions have been modified, with the government introducing new tax proposals such as the Taxation Laws (Amendment) Act, 2019, which introduced the tax on buyback of shares, and the Direct Tax Vivad se Vishwas Act, 2020, which provided a dispute resolution mechanism for direct tax cases.
The introduction of GST has been a major reform in India’s indirect tax system, leading to a simpler, more efficient, and unified tax system. However, the personal income tax system remains largely unchanged, with scope for further simplification and rationalization. The government’s focus on expanding the tax base, reducing tax evasion, and simplifying the tax system is expected to continue in the future, making the taxation regime more taxpayer-friendly and transparent.
Direct Taxes vs Indirect Taxes in India
Indirect taxes are taxes imposed on goods and services, and the burden of the tax is passed on to the end consumer. Examples of indirect taxes in India include the Goods and Services Tax (GST) and customs duties. GST, introduced in 2017, subsumed most of the indirect taxes levied by the central and state governments, resulting in a more unified and simpler tax regime. GST has a wide reach, as it covers most goods and services, and has helped in expanding the tax base by bringing many informal businesses into the formal sector.
On the other hand, direct taxes are taxes imposed directly on individuals and businesses, based on their income or wealth. Examples of direct taxes in India include personal income tax and corporate tax. The personal income tax system has remained largely unchanged, with only minor modifications being made to the tax slabs and exemptions. The corporate tax rate has been reduced from 30% to 22% for domestic companies and from 40% to 25% for new domestic manufacturing companies, in a bid to boost investment and economic growth.
Both indirect taxes and direct taxes play a critical role in the Indian tax system, with indirect taxes providing a stable and predictable source of revenue, while direct taxes help in ensuring a more equitable distribution of the tax burden. The government’s focus on expanding the tax base, reducing tax evasion, and simplifying the tax system is expected to continue in the future, making the taxation regime more taxpayer-friendly and transparent.
Direct Taxes
Direct taxes are taxes imposed directly on individuals and businesses, based on their income or wealth. In India, direct taxes include personal income tax and corporate tax.
Under the personal income tax regime, individuals are taxed based on their income, with different tax slabs and exemptions applicable for different levels of income. In recent years, there have been only minor changes to the personal income tax system, with modifications made to the tax slabs and exemptions. The government has also introduced new tax proposals, such as the Taxation Laws (Amendment) Act, 2019, which introduced the tax on buyback of shares, and the Direct Tax Vivad se Vishwas Act, 2020, which provided a dispute resolution mechanism for direct tax cases.
The corporate tax rate in India has been reduced from 30% to 22% for domestic companies and from 40% to 25% for new domestic manufacturing companies, in a bid to boost investment and economic growth. The government has also introduced measures to reduce tax evasion and ensure compliance by businesses.
Direct taxes play a critical role in the Indian tax system, helping in ensuring a more equitable distribution of the tax burden. The government’s focus on reducing tax evasion and ensuring compliance by businesses is expected to continue in the future, making the taxation regime more transparent and taxpayer-friendly. However, there is scope for further simplification and rationalization of the personal income tax system.
Indirect Taxes
Indirect taxes are taxes imposed on goods and services, with the burden of the tax passed on to the end consumer. In India, indirect taxes have undergone significant reforms in recent years, aimed at simplifying the tax structure, expanding the tax base, and reducing tax evasion.
Under the old indirect tax regime, multiple taxes were levied by the central and state governments, such as Excise Duty, Service Tax, Value-Added Tax (VAT), and others. This resulted in cascading of taxes, with taxes being levied on taxes, leading to higher costs for businesses and consumers. The system was also complex, with different tax rates and exemptions for different goods and services, making it difficult for businesses to comply with the tax laws.
The introduction of the Goods and Services Tax (GST) in 2017 marked a major reform in India’s indirect tax regime. GST subsumed most of the indirect taxes under one tax, resulting in a simpler and more unified tax system. GST has a wide reach, covering most goods and services, and has helped in expanding the tax base by bringing many informal businesses into the formal sector and reducing tax evasion. Additionally, the seamless flow of input tax credits has helped in reducing the cost of goods and services.
Indirect taxes play a critical role in the Indian tax system, providing a stable and predictable source of revenue. The introduction of GST has been a major reform, resulting in a simpler, more efficient, and unified tax system. The government’s focus on expanding the tax base, reducing tax evasion, and simplifying the tax system is expected to continue in the future, making the taxation regime more taxpayer-friendly and transparent.
Tax Payers in India
According to the data released by the Ministry of Finance, the number of tax returns filed in the country increased from 5.42 crore in financial year 2014-15 to 7.41 crore in financial year 2018-19. This represents a growth of 37% over the period.
However, despite the increase in the number of tax returns filed, the percentage of tax payers in India as a proportion of the total population remains low. As per the World Bank data, the tax-to-GDP ratio in India was 11.2% in 2019-20, which is lower than the average for developing countries and far lower than the tax-to-GDP ratio in advanced economies.
The number of tax payers in India is increasing, but the low tax-to-GDP ratio highlights the need for further efforts to expand the tax base and increase compliance. The government has introduced various measures, such as the Goods and Services Tax (GST) and the Direct Tax Vivad se Vishwas Act, 2020, to simplify the tax system and reduce tax evasion, with the aim of increasing the number of tax payers in the country.
Taxation as a political issue in India
Taxation is a political issue in India, as it affects the lives of millions of citizens and is a key source of revenue for the government. The government’s taxation policies and reforms have a significant impact on the economy and the standard of living of citizens, making it a central issue in political debates and discussions.
In recent years, the government has introduced several reforms aimed at simplifying the tax system and expanding the tax base. The introduction of the Goods and Services Tax (GST) in 2017, which subsumed multiple indirect taxes under one tax, was a major reform aimed at simplifying the tax structure and reducing tax evasion. The Direct Tax Vivad se Vishwas Act, 2020, provided a dispute resolution mechanism for direct tax cases and aimed at reducing the pendency of tax cases.
However, the implementation of these reforms has also faced challenges, with businesses and individuals sometimes facing difficulties in complying with the new tax laws. There have also been debates about the impact of the reforms on the economy and the standard of living of citizens, with some arguing that the reforms have increased the tax burden on citizens and businesses.
Taxation is a political issue in India, with the government’s taxation policies and reforms affecting the economy and the standard of living of citizens. The government’s focus on simplifying the tax system, expanding the tax base, and reducing tax evasion is expected to continue in the future, with the aim of making the taxation regime more transparent and taxpayer-friendly.
What is The Direct Tax Vivad se Vishwas Act, 2020?
The Direct Tax Vivad se Vishwas Act, 2020 is a landmark tax reform introduced by the Indian government aimed at resolving the long-pending direct tax disputes and reducing the pendency of tax cases. The act provides an opportunity for taxpayers to settle their direct tax disputes by paying a reduced amount of tax, without facing any penalty or interest.
One of the key provisions of the Vivad se Vishwas Act is the settlement of disputes through the payment of outstanding tax, which is significantly lower than the tax liability that would have been payable in case of a regular assessment. Taxpayers can settle their disputes by paying the amount of outstanding tax due, without having to pay any additional interest or penalty. The act provides for a dispute resolution mechanism that is simple, quick, and cost-effective, making it an attractive option for taxpayers facing direct tax disputes.
The act also provides for a time-bound resolution of disputes, with a deadline of March 31, 2021, for taxpayers to take advantage of the settlement provisions. Taxpayers who do not settle their disputes by the deadline face the risk of having to pay higher tax, interest, and penalty, as well as facing the possibility of prosecution.
The Direct Tax Vivad se Vishwas Act, 2020, is a significant reform aimed at resolving the long-pending direct tax disputes and reducing the pendency of tax cases. The act provides an opportunity for taxpayers to settle their disputes by paying a reduced amount of tax, without facing any penalty or interest, making it an attractive option for taxpayers facing direct tax disputes. The time-bound resolution of disputes and the simple, quick, and cost-effective dispute resolution mechanism provided by the act are expected to boost taxpayer confidence and help improve the tax compliance environment in India.
