Features Of Indian Tax System

It is taxation which plays the major role in every country as a way of collecting public revenue. Government of both developed and underdeveloped country uses the system of taxation as a weapon of revenue collection. However, when the tax structures of different countries are observed carefully, we find some distinct structural differences between the developed and underdeveloped economies. As a developing country India needs a huge amount of revenue where taxation plays a unique role. When examined carefully, one notices the following features of Indian tax system.

• Dominance of Indirect taxes:  Dominance of indirect tax in the tax system is a very common characteristic in developing and underdeveloped economies.  Central government revenues from indirect and direct taxes were in the ratio of 74:26 respectively in 1994-95.  In the same year the ratio for State government was 83:17. But this dominance is rapidly decreasing as a result of development. As mentioned in a report by the Department of Revenue, Ministry of Finance of the Govt. of India, the net collection of direct taxes in 2007-08 was Rs. 312213crores which was  6.67% of the GDP of that time period. On the other hand the net collection of indirect tax in that period was Rs. 276696crores which was 5.87% of the GDP of that period.
• Adhocism:  Several taxes are imposed on ‘adhoc’ basis to meet deficits and they are withdrawn later on.  Some taxes are introduced and withdrawn later for political reasons.
• Bias in incidence of taxes:  According to indirect taxation enquiry committee, “The burden of the urban households was distinctly higher than the rural households in the corresponding expenditure class”.  Urban population is taxed far higher than the rural rich.
• Complexity and corruption:  A provoking feature of the Indian tax system is its complexity.  Both direct and indirect tax laws are highly complex.  This provides enough scope for avoiding and evading taxes.
• Imbalance in tax system:  Excessive emphasis on indirect taxes has resulted in the glaring imbalances of nearly 100% citizens affected by indirect taxes but hardly 1% of the population coming under the purview of direct taxation.
• Lack of co-ordination:  Our Federal Finance system allows Union and States levy taxes independently at different rates.  There is no coordination between the taxes to allow a well organized, planned and co-ordinated tax system to evolve.
• Lack of built-in elasticity:  Income from taxation does not increase automatically in India in proportion to increase in National income.  Hence, the government is compelled to increase taxes every year to maintain a constant tax income ratio.
• Administrative inefficiency and corruption:  A baneful feature of the Indian tax system is the lack of administrative efficiency.  Corruption exists in the administrative machinery from top to bottom.  Such a system encourages the spirit of corruption among the tax payers also.
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