3. Tax Reforms in India, Indian Economy, Civil Services Examination | RAS RPSC Prelims Preparation - Notes, Study Material & Tests - RPSC RAS (Rajasthan) PDF Download

Introduction

Since 1990 i.e. the liberalization of Indian economy saw the beginning of Taxation reforms in the nation. The taxation system in the nation has been subjected to consistent and comprehensive reform. Following factors arise the need for tax reforms in India:-

• Tax resources must be maximized for increased social sector investment in the economy.
• International competitiveness must be imparted to Indian economy in the globalized world.
• Transaction costs are high which must be reduced.
• Investment flow should be maximized.
• Equity should be improved
• The high cost nature of Indian economy should be changed.
• Compliance should be increased.

Direct & Indirect Tax Reforms

Direct tax reforms undertaken by the government are as follows:-

• Reduction and rationalization of tax rates, India now has three rates of income tax with the highest being at 30%.
• Simplification of process, through e-filling and simplifying the tax return forms.
• Strengthening of administration to check the leakage and increasing the tax base.
• Widening of tax base to include more tax payers in the tax net.
• Withdrawal of tax exceptions gradually.
• Minimum Alternate Tax (MAT) was introduced for the ‘Zero Tax’ companies.
• The direct tax code of 2010 replace the outdated tax code of 1961.

Indirect tax reforms undertaken by the government are as follows:-

• Reduction in the peak tariff rates.
• reduction in the number of slabs
• Progressive change from specific duty to ad valor-em tax.
• VAT is introduced.
• GST has been planned to be introduced.
• Negative list of services since 2012.

Subsidies- Cash Transfer of Subsidy Issue.

A subsidy is a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public.

Direct Cash Transfer Scheme is a poverty reduction measure in which government subsidies and other benefits are given directly to the poor in cash rather than in the form of subsidies.

It can help the government reach out to identified beneficiaries and can plug leakages. Currently, ration shop owners divert subsidised PDS grains or kerosene to open market and make fast buck. Such Leakages could stop. The scheme will also enhance efficiency of welfare schemes.

The money is directly transferred into bank accounts of beneficiaries. LPG and kerosene subsidies, pension payments, scholarships and employment guarantee scheme payments as well as benefits under other government welfare programmes will be made directly to beneficiaries. The money can then be used to buy services from the market. For eg. if subsidy on LPG or kerosene is abolished and the government still wants to give the subsidy to the poor, the subsidy portion will be transferred as cash into the banks of the intended beneficiaries.

It is feared that the money may not be used for the intended purpose and men may squander it.

Electronic Benefit Transfer (EBT) has already begun on a pilot basis in Andhra Pradesh, Chhattisgarh, Punjab, Rajasthan, Tamil Nadu, West Bengal, Karnataka, Pondicherry and Sikkim. The government claims the results are encouraging.

Only Aadhar card holders will get cash transfer. As of today, only 21 crore of the 120 crore people have Aadhar cards. Two other drawbacks are that most BPL families don’t have bank accounts and several villages don’t have any bank branches. These factors can limit the reach of cash transfer.

Value Added Tax

Under the constitution the States have the exclusive power to tax sales and purchases of goods other than newspapers

• There are however defects of sales tax
  • It is regressive in nature. Families with low income a larger proportion of their income as sales tax.
  • Has a cascading effect – tax is collected at all stages and every time a commodity is bought or sold
  • Sales tax is easily evaded by the consumers by not asking for receipts.
• VAT is the tax on the value added to goods in the process of production and distribution.
• With the implementation of VAT, the origin based Central Sales Tax is phased out.
• Introduced from April 1, 2005
• Advantages
  • Is a neutral tax. Does not have a distortionary effect
  • Imposed on a large number of firms instead of at the final stage
  • Easier to enforce as tax paid by one firm is reported as a deduction by a subsequent firm
  • Difficult to evade as collection is done at different stages
  • Incentive to produce and invest more as producer goods can be easily excluded under VAT
  • Encourages exports since VAT is identifiable and fully rebated on exports
• Difficulties in implementing
  • For collection of VAT all producers, distributers, traders and everyone in the chain of production should keep proper account of all their transactions
  • Bribing of sales tax officials to escape taxes
  • The government has to simplify VAT procedures for small traders and artisans

Goods and Services Tax (GST)

• Ready to be introduced from 1^st July, 2017
• All indirect taxes except customs duty are unified into GST
• GST is of three kinds – Centre GST, state GST, Inter-state GST
• Liquor for human consumption and petroleum products kept out of GST
• GST Council created to fix the rates of taxation
• At present four rate exists – 6%, 12%, 18% and 26% depending on the goods or service and turnover of the business.

State Finances

• Borrowing by the State governments is subordinated to prior approval by the national government <Article 293>
• Furthermore, State Governments are not permitted to borrow externally unlike the centre.

Public Debts

• The aggregate stock of public debt of the Centre and States as a percentage of GDP is high (around 75 pc)
• Unique features of public debt in India
  • States have no direct exposure to external debt
  • Almost the whole of PD is local currency denominated and held almost wholly by residents
  • The PD of both centre and states is actively managed by the RBI ensuring comfort the financial markets without any undue volatility.
  • The g-sec market has developed significantly in recent years
  • Contractual savings supplement marketable debt in financing deficits
  • Direct monetary financing of primary issues of debt has been discontinued since April 2006.

Public Finance

Public finance is the study of the role of the government in the economy. It is the branch of economics which assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones.

It includes the study of:-

• Fiscal Policy
• Deficits and Deficit Financing
• Fiscal Consolidation
• Public Debt- Internal and External debt

Fiscal policy relates to raising and expenditure of money in quantitative and qualitative manner.Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty. The role and objectives of fiscal policy gained prominence during the recent global economic crisis, when governments stepped in to support financial systems, jump-start growth, and mitigate the impact of the crisis on vulnerable groups.

Historically, the prominence of fiscal policy as a policy tool has waxed and waned. Before 1930, an approach of limited government, or laissez-faire, prevailed. With the stock market crash and the Great Depression, policymakers pushed for governments to play a more proactive role in the economy. More recently, countries had scaled back the size and function of government—with markets taking on an enhanced role in the allocation of goods and services—but when the global financial crisis threatened worldwide recession, many countries returned to a more active fiscal policy.

How does fiscal policy work?

When policymakers seek to influence the economy, they have two main tools at their disposal—monetary policy and fiscal policy. Central banks indirectly target activity by influencing the money supply through adjustments to interest rates, bank reserve requirements, and the purchase and sale of government securities and foreign exchange. Governments influence the economy by changing the level and types of taxes, the extent and composition of spending, and the degree and form of borrowing.

Deficit financing, practice in which a government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds.

Fiscal consolidation is a term that is used to describe the creation of strategies that are aimed at minimizing deficits while also curtailing the accumulation of more debt. The term is most commonly employed when referring to efforts of a local or national government to lower the level of debt carried by the jurisdiction, but can also be applied to the efforts of businesses or even households to reduce debt while simultaneously limiting the generation of new debt obligations. From this perspective, the goal of fiscal consolidation in any setting is to improve financial stability by creating a more desirable financial position.

The public debt is defined as how much a country owes to lenders outside of itself. These can include individuals, businesses and even other governments. public debt is the accumulation of annual budget deficits. It’s the result of years of government leaders spending more than they take in via tax revenues.