Tax System and Reform in India

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Tax System and Reform in India

• V N Alok
• Indian Institute of Public Administration
• vnalok_at_gmail.com

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Outline of Presentation

• BRIC
• India,s Economic Structure
• Indias Economic Development
• Tax Assignment in Indian Federation
• Tax Reforms in India
• Move towards Goods and Service Tax

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Rise of BRIC

• Source The World Bank (K Georgieva, 2006)

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Unity in diversity in India

• Many Ethnic Groups
• Many Languages
• Many Religions

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Diversity in India

• Population 1150 m Area 3.285 m sq km
• Area 1/3 of the US/China
• Density around 1/3 of Bangladesh
• 22 languages 1576 mother tongues
• 5200 religions 2500-3700 castes
• Scheduled Castes and Scheduled Tribes
• Choices of people vary from one region to another

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Religious Diversity ()
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British India vs Modern India
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Indian Federation the setting

• Union Government
• 28 States
• Special Category States
• Non-special category states
• Union territories
• Rural local governments
• Urban local governments

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National Income Sectoral Shares
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Governance and Policy Making

• Constitution
• President
• ? Legislature
• Lok Sabha (House of the People) Rajya Sabha
  (House of the States)
• Executive
• Prime Minister Cabinet
• Chief Ministers of States
• Finance Commission
• Planning Commission
• Inter State Council
• National Development Council
• State Finance Commissions
• Parliament

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What made Govt. to initiate structural reforms in
1991?

• Twin chronic imbalances -
• fiscal external trade
• Fiscal deficit was more than 8 of GDP
• An annual inflation rate was 12
• Foreign exchange reserve of US 1 B
• Low growth of the economy 1.5

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Components of Structural Adjustment Programme

• Fiscal Reform
• Tax Reform
• Trade Policy Reform
• Monetary Policy Reform
• Financial Sector Reform
• Devaluation
• Exchange Controls
• Privatization
• Labour Deregulation
• Administrative Reforms

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Macro Economic Highlights of the 1990s

• External Sector Reforms
• Devaluation, Convertibility of Rs, FDI, Low
  tariff, Removal of QRs
• Financial Sector Reforms
• Free interest rates, Pvt.banks
• Growth rate picked up
• Inflation was contained
• Many measures to improve fiscal sector

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Growth of the GDP
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Deficits of Centre and States
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Tax GDP Ratios
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Quick Review of Tax Assignment in the Indian
Federation

• Tax Powers of the Union and States are specified
  by law
• Seventh Schedule to the Indian Constitution

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Division of Commodity Taxes between Union and
States

• UNION LIST
• Cen- VAT
• Custom Duty
• Central Sales Tax
• Tax on services

• STATE LIST
• State-VAT/ Sales tax
• Motor vehicles tax
• Passengers and goods tax
• Octroi/Entry Tax
• State Excise
• Entertainment tax
• Electricity Duty

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Category of Tax Arrangement

• Service Tax Levied by the Union but
  appropriated by both, not part of divisible pool
• Taxes levied by the Union but appropriated by the
  States
• Taxes levied by Union but shared with States
• Taxes of States collected by Union and passed to
  States

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Own source revenue of each level of Government (
Share)
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Infirmities

• Considerable Decentralization of Public
  Expenditure
• Centralization of Revenue Collection
• Sharp Imbalance between the Taxing Powers and
  Spending Responsibilities
• Tax Exporting and Tax Competition

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Shares of Central TaxesVertical Distribution

• Commission States share in net proceeds of
• Income Tax Union Excise
• 1st 55 40
• 2nd 60 25
• 3rd 66.66 20
• 4th 75 20
• 5th 75 20
• 6th 80 20
• 7th 85 40
• 8th 85 45
• 9th 85 45
• 10th 77.5 47.5 (29 from 1.4.96 )
• 11th 29.5 of global taxes
• 12th 30.5 of global taxes

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Objectives of Tax Reform

• Low import tariffs towards ASEAN level.
• Broad based, moderately progressive personal
  income tax
• Corporate tax, a single rate tax, at par with
  personal income tax.
• A broad based consumption tax in the form of VAT.

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Reforms in Direct Taxes

• Trends up to Nineties
• Taxation Enquiry Commission 1953-54
• Higher tax rates for mobilizing resources
• Kaldor 1956 integrated approach along with wealth
  tax, gift tax, expenditure tax.

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Indira Gandhi Budget Speech in 1970

• Taxation is also a major instrument in all
  modern societies to achieve greater equality of
  incomes and wealth. .The marginal rates will be
  increased progressively on all incomes. With the
  addition of the surcharge at 10 per cent, the
  maximum rate (will be) 93.5 per cent.

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Reforms in Direct Taxes (contd.)

• Tax reforms in the 1990s
• Tax Reforms Committee 1991-93
• Three rate structure of income tax (20,30,40)
• Removal of exemptions under income tax.
• Wealth tax exemption raised and financial assets
  excluded.

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Rates of Personal Income Tax in 2009

• Taxable Income Slab (Rs) Rate ()
• Upto 1,60,000 Nil
• Upto 1,90,000 (for woman) Nil
• Upto 2,40,000 (for senior citizen) Nil
• 1,60,000 3,00,000 10
• 3,00,000 5,00,000 20
• 5,00,000 upwards 30

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Opening up of the Economy

• Reduction in the custom duty was mainly
  recommended by TRC.
• Commenced in 1990-91. Peak rate was
• 110 in 1992-93
• 85 in 1993-94
• 65 in 1994-95
• 50 in 1995-96..
• 15 in 2005-06
• 10 in 2007-08

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Custom Duty Structure

• Basic Duty Peak Rate 10
• Many Items above rates e.g car, alcohol
• Additional Custom Duty
• Special Custom Duty
• Education Cess

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Basic Features of Indirect Tax System

• Multiplicity of rates
• Plethora of exemptions
• Taxation of inputs and cascading
• Complex laws archaic administration
• High cost of compliance
• Lack of Harmony

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Reform in Union Excise duties

• Jha Committee 1978- Recommendations of Manvat
  implemented partly in 1986 in the form of modvat.
• Tax Reform Committee 1993 further gave a fillip.
• Covered all commodities.
• Converted into a Cenvat by 2001.
• Tax rate 16.

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Reform in Union Excise duties (contd.)

• Input credit can be taken immediately, 50 for
  capital goods in the same year.
• Exemption notifications reduced.
• specific rates are converted into ad valorem
  rates.
• Simplified tax structure and resulted in
  transparency of the tax burden.

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Reform in Union Excise duties (contd.)

• Some additional duties continue
• Additional excise on some items- 8 mainly final
  goods.
• ADILSAT on sugar, tobacco, textiles.
• Additional excise on textiles and tobacco.
• Education Cess.

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Reform of State Domestic Trade Taxes

• Variety of taxes.
• Efforts have been made to reform sales tax, stamp
  duty and registration fee, and octroi.
• A model law for stamp duty and registration fee
  is prepared. Rates rationalized, efforts on for
  reform of administrative procedures.

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Reform of sales tax

• Deliberation spanning over one decade.
• Report led by Amaresh Bagchi
• Committee of State Finance Ministers 1995, and
  1998.
• Chief Ministers Committee of 1999.
• Conference of Chief Ministers and Finance
  Minister 16 November 1999.
• Setting up of the Empowered Committee

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Design of State VAT

• Three-rate structure 0, 4, 12.5.
• Exceptions of 1 for gold, silver, precious and
  semi-precious stones and 20 for liquor.
• Petroleum products out of VAT.
• 0 for
• (a) natural and unprocessed products (such as
  betel leaves, earthen pot etc.),
• (b) items which are legally barred from taxation
  on sale (such as newspaper, national flag etc.),
  and
• (c) items which have social implications (such as
  books, periodicals, slate, slate-pencils etc.).

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Design of State VAT (contd.)

• Four percent applicable to essential commodities
  (such as branded bread, bulk drugs, paper etc.),
  declared goods (such as iron steel, hide
  skins etc.) and industrial and agricultural basic
  inputs (such as printing ink, coir, beedi leaves,
  fibres, seeds etc.), and capital goods.
• For all other goods there will be a floor rate of
  12.5.

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Issues in design of State VAT

• Special treatment of small dealers-Composition
  scheme for dealers in turnover bracket of 5 to 5
  million.
• The model VAT Law of 1998 0.5 to 2.5 million
• Floor rate versus the rate- the issue of
  autonomy.

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Issues in Taxation of Interstate Trade

• Present scheme of CST at the rate of 4 or 10 in
  vogue since 1956.
• Causes interaction and corruption.
• CST inconsistent with destination based VAT

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Tax Buoyancies - of Centre and State
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• I will reinforce the Central Governments
  catalytic role to facilitate the introduction of
  GST by 1st April, 2010 after due consultations
  with all stakeholders.
• - Part of the Union Budget Speech
  2009-10

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Quick Review of Developments - Leading to Policy
Announcement

• Progress Towards Comprehensive GST
• Dual VAT System
• Independent Central VAT
• Independent State VAT
• Three Rate Structure of 0, 4, 12.5
• Phasing out Central Sales Tax
• Discontinue Fiscal Incentives

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GST Options for India

• Federal GST with Tax Sharing
• B. Autonomous State- GSTs
• C. Dual GST

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Federal GST with Tax Sharing

• Merits
• Levied and administered by the Union
• Replaces both Cen-VAT State-VAT
• Tax rates unified across the country
• Covers all transactions from manufacture to
  retail
• Attractive to many particularly trade and
  industry
• Conducive to common market
• No inter-state border control

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Federal GST with Tax Sharing

• Drawbacks
• States to surrender autonomy of tax power
• States to surrender buoyant source of revenue
• Damage the federal fabric
• More dependency on the Union
• Sales tax establishments will be abandoned
• Fiscal decentralisation be affected adversely
• Politically it will not be accepted

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Autonomous State-GSTs

• Centre to withdraw from the field of domestic
  trade taxes except sumptuary items and taxation
  of services
• Levied, administered, collected and retained by
  the States
• Common market will be distorted
• Arrangements required for inter- State
  transactions
• Implications for federal transfers revenue
  equalizing role gets affected

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Dual GST

• Converting Cen -VAT to Cen-GST
• States convert sales taxes/state VATs into
  State-GST
• Fine blend of the fiscal autonomy of States and
  harmonization
• Harmonization in fixing tax base, legislations
  and administrative procedures
• Harmonization of tax rates can also be achieved
• Conducive to common market
• Inter-State sales need to be attended to
• Federal fiscal equations do not go through basic
  changes
• Article 307 needs to be invoked.

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Steps for Dual GST

• Combination of Union and State GSTs
• Single State rates or vary within agreed bands
• Requires constitutional change
• Concurrent taxation powers on goods and services
• Harmonization of tax base, legislation and admn
• Major overhaul in institutional and
  administrative infrastructure
• Agreement on place of supply rules (trade matrix)
• Union State tax collection agreement

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Thank You!