Scientific Society of Advanced Research and Social Change SSARSC International Journal of Management Volume 3 Issue 1, January-June 2017, ISSN 2349-6975

The Impact of Indian Taxation system on its Economic Growth

C.A. (Dr.) Pramod Kumar Pandey Associate Professor National Institute of Financial Management (An Autonomous Institution of Ministry of Finance, ) Faridabad, Haryana. Contact No: 09871316239 Email Id: [email protected]/[email protected]

Abstract: Government exchequer and flourish the overall business scene. Resent Budget 2014 Indian taxing system is undergoing has also played important role in this revolutionary change today. is one of direction. the most important sources of revenue to the Government and at the same time one of the Broadly taxing system may be classified into deciding parameter for economic growth. three parts: Whereas impacts directly the a) Progressive taxation system disposable income, the impacts b) Regressive taxation system the prices of goods and services in the c) Proportional taxation system market. The basic objective of this article is to evaluate the impact of both direct and Progressive taxation implies a taxing indirect on economic growth of India. system where increases with increase in income, thus if a person has Key words: disposable income, GDP, higher income, he will bear more tax burden inflation rate, revenue due to increased tax rate than person having lesser income. Introduction Regressive taxation means a taxing system Today Indian taxing system is going a where tax rate reduces with increase in revolutionary change owing to spreading the income and thus a person having lesser wings of Indian business into global market. income faces lesser tax burden due to facing Indian Government is paying its full lesser tax rates. attention to liberalize the taxing system and Proportion tax means a taxing system of at the same time closing the loopholes to charging tax on a fixed proportion disable the intruders to evade the taxing irrespective of level of amount on which tax system so as to enlarge the revenue to is to be levied. Thus, the same tax rate www.ssarsc.org Page 1

Scientific Society of Advanced Research and Social Change SSARSC International Journal of Management Volume 3 Issue 1, January-June 2017, ISSN 2349-6975 applies to different persons having different society, progressive taxation system is taxable amounts. followed.

Tax may be levied on natural persons like Among direct tax only two types of taxes individual, Hindu undivided family artificial are in existence today, namely entities like Firm, association of persons, and company, society etc. and also on goods and services. Thus, another classification of tax Income tax: Under Indian income we found into direct tax and indirect tax. both flat rate () and slab rate () applies. Tax is computed Direct tax means a type of tax which is paid on total income. On lottery income, long by a person directly to the Government. For term capital gain, and in some cases short example income tax and wealth tax in India. term capital gain is taxed under proportional taxation system. Again the income of Indirect tax means tax on goods and assesses such as for companies, firms etc. services which are paid by a person to the proportional taxation system is applied producer, seller or service provider who is while for individual and cooperative society, liable to pay the same to the account of progressive taxation system is followed. Government. For example , duty, VAT, , entertainment Wealth tax: wealth tax is levied at 1% on tax etc. in India. Now a modern system of the net wealth of individual, Hindu taxing all goods and services ―goods and undivided family and company if net wealth services tax‖ is about to be introduced. This exceeds Rs.30 lakhs on the valuation date. It will replace all existing enactments relating is payable in every assessment year based on to goods and services. valuation of net wealth on the respective valuation dates. Valuation date means last Taxing system in India day of the corresponding previous year relating to each assessment year. Net wealth In India, progressive and proportional taxing is computed as the difference between value systems are followed. In Indian tax law, slab of assets and the value of liabilities. Assets wise taxability arises somewhat for income include House, Motor car, Jewellery, Urban tax while proportional tax is applicable for land, Cash in hand and yatch, boat and air other taxes, for example excise duty, craft. customs duty, VAT, service tax, wealth tax etc. Further under income tax, lottery Among the indirect taxes regime important income, long term capital gain, and in some ones are Excise duty, service tax, customs cases short term capital gain is taxed under duty and , proportional taxation system. Again the income of assesses such as for companies, Excise duty: Excise duty is levied on firms etc. proportional taxation system is manufacture or production of excisable applied while for individual and cooperative goods in India at the rates specified in www.ssarsc.org Page 2

Scientific Society of Advanced Research and Social Change SSARSC International Journal of Management Volume 3 Issue 1, January-June 2017, ISSN 2349-6975

Central excise act. It is based on value .Thus, it is a multi-point taxation system on added concept since it includes the provision value addition. It has been introduced to of input covered under CENVAT avoid cascading () effect and credit rules. to check .

Customs duty: Customs duty is levied on Goods and Services Tax (GST) goods imported or exported from India at the rates specified in Customs tariff act. Till now in India, there are separate Import means bringing into India from a enactments for goods and services. Efforts place outside India while means are being made to consolidate the taxing taking out of India from a place outside system for entire goods and services. India. India includes territorial waters of Goods and service Tax has evolved as a India which extends up to 12 nautical miles modern Taxing system. It is a composite from the base line. Taxing system which covers all goods and Service tax: Service tax is a type of indirect services for specified transactions. This New tax which levied on services. It is Act will replace all indirect Taxes being consumption based destination tax. It is presently levied on all goods and services by governed by chapter V and chapter V-A of central as well as state government. the 1994 as amended to finance However, this new act is yet to be act 2012. Service tax is levied @12% of implemented in India. gross value of taxable service. Additionally Tax Collection pattern in India education cess @ 2% and higher education cess @ 1% is also payable. Thus, the Gross tax collection in India is more or less effective rate of tax comes out to 12.36%. stagnant after financial year 2009-10, if we take it as % of GDP (Table-I). To meet the Sales tax: Sales Tax is the older version of challenges, the Government is financing its VAT. Under Sales Tax system, Tax was fiscal deficit by cutting down its levied on entire selling price and not on expenditure. This is not only lowering down value added. Thus, there was double the capital formation in the country but also taxation effect under sales tax system. Even adversely affecting the overall economic now sales tax is prevalent in inter-state sales. growth. The pattern of indirect collection is VAT: VAT is the short version of value also not showing any favourable growth added tax. It is a type of indirect tax which (Table-II). Shortfall has not only incurred in is levied on sale of goods within a state. tax collection but also in non-debt receipts. VAT is a modern system of taxing goods which has been introduced to replace the existing sales tax system. Under VAT system tax is levied on the value added at each stage of production or distribution www.ssarsc.org Page 3

Scientific Society of Advanced Research and Social Change SSARSC International Journal of Management Volume 3 Issue 1, January-June 2017, ISSN 2349-6975

The impact of direct tax on economic Impact of indirect tax on economic growth growth Since the burden of Indirect taxes directly The direct tax is one of the important fall on the consumers, it directly impacts the sources of . Further it cost of goods and services. Thus, indirect also impacts directly the disposable income tax increases the efficiency of the producers, of individuals. If direct tax rate is increased since to maintain their demand they will by the Government, people start saving for have to put their full efforts towards cost investment purposes. Due to this behavior of cutting measures. Further, this effort of individual’s income generation process of producers also brings proper utilization of economy is hampered. Particularly this is resources in the economy. The consumers true for luxury commodities. This decreases are at freedom to select products at their the production of luxury commodities in the choice, thus healthy competition also grows economy and as a result also adversely in the economy. Thus, broadly following affects the GDP and standards of living. are the positive sides of indirect taxes on the However on the positive sides, if proper economic growth: deductions are allowed based on investments, it leads to capital formation in  Better utilization of resources the country. Thus, broadly following are the  Increase in efficiency of producers positive sides of direct taxes on the  Growth of healthy competition in the economic growth: market  More freedom of choice to the  Better capital formation consumers  Inducement of saving and investment  Increase in demand for luxury goods  Surety of Government’s revenue  Increase in standard of living of growth people  Increase in planned expenditure of government The Road Map of new budget 2014  Decrease in inflation rate due to lesser availability of disposable The new Government has many challenges income to persons to face. Food inflation, economic growth,  Timely availability of revenue to the reduction in fiscal deficit, inviting more Government foreign capital flow, infrastructural development are some of the special emphasis areas.

 Fiscal deficit has been aimed at 4.1%

which is expected to reduce to 3% by

2016-17. It is worth noting that fiscal deficit was 5.7% in 2011-12, www.ssarsc.org Page 4

Scientific Society of Advanced Research and Social Change SSARSC International Journal of Management Volume 3 Issue 1, January-June 2017, ISSN 2349-6975

dropped down to 4.8% in 2012-13 2. Even though Government of India and to 4.5% in 2013-14. Thus, from has taken initiatives for simplifying high peak it is dropping down the tax procedures, a lot is still considerably. However, this required to be done in this behalf reduction in earlier year was 3. The taxation policy of the basically due to curtailing down the Government is doing very little in Government expenditure rather than bringing the inflation down. Still it is increasing Government Revenue. required to provide more avenues for  More excise duty on Cold drinks and tax reliefs through investments. tobacco products 4. High tax evasions, particularly in  Reduction in excise duty on Business class packaged food, footwear, LCD/LED 5. Multiple taxes and multiple rates has TV sets, rendered the taxation system a  Deduction for housing loan interest complex one raised from 1.5 lakhs to 2 lakhs 6. The government is increasing  limit raised from 2 disproportionately the regime of lakhs to 2.5 lakhs and for senior indirect taxes. Now almost all the citizens up to 3 lakhs individuals are covered by indirect  Investment limit under section 80C taxes, however only 10% to 15% of rose from 1 lakh to 1.5 lakhs. the individuals of the total  PPF limit has been raised to 1.5 population are covered by direct lakhs taxes.  No changes have been made in the 7. Our national income is increasing tax rates. without proportionate increase in  The advance ruling Authority has taxes; this is enlarging the income been strengthened inequality gap in India.  The scope of Income tax settlement 8. In India, it is very unfortunate that commission has been enlarged urban mass is taxed more than the  It has estimated that net loss due to rural mass. direct tax amendment will be 22,200 9. High corruption in tax department is crores. encouraging the people to adopt tax  Introduction of GST has been given evasion and . preference 10. Due to low level of education and awareness, people feel shy while Problem Areas paying indirect taxes, particularly 1. There is no provision for minimum service tax. taxes for persons other than Company

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Scientific Society of Advanced Research and Social Change SSARSC International Journal of Management Volume 3 Issue 1, January-June 2017, ISSN 2349-6975

Conclusion and suggestions more indirect taxes should be imposed on rich class to reduce income inequality gap. 1. Government of India is required to 9. Today there is no separate tax open more investment options in provision for limited liability Income tax law to increase capital partnership firm. It is treated like formation in the Country. other partnership firm. Due to its 2. There is high need to consolidate peculiar feature and being an entity and simplify the tax laws. entirely different from partnership 3. should run firm, separate provisions are needed tax payers awareness programme so to tax this entity that a common person may 10. Today there are two separate boards understand the tax law and for direct tax and indirect tax. procedures. Central board of direct taxes looks 4. Provision for minimum taxes should after direct tax and Central board of also be incorporated for persons Excise and customs looks after other than company except for indirect tax. There is lack of individuals like for Societies, Firms, coordination between these two and LLPs etc. departments and thus it is highly 5. It should reduce tax rates on edibles needed that these two departments so that inflation rate may be brought are consolidated into one. down on food items. 6. Government should enlarge the tax

regime to capture effectively the middle and lower business class. 7. The area of wealth tax needs to be enlarged to cover more people in its regime. 8. The poor people should be tried to be freed from indirect tax regime while

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Scientific Society of Advanced Research and Social Change SSARSC International Journal of Management Volume 3 Issue 1, January-June 2017, ISSN 2349-6975

Tables Table-I Pattern for Gross tax collection in India

Table-II Pattern for Indirect tax collection in India

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Scientific Society of Advanced Research and Social Change SSARSC International Journal of Management Volume 3 Issue 1, January-June 2017, ISSN 2349-6975

References 11) Nishita Gupta, (2014), Goods and service tax: its impact on Indian 1) How to save income income tax through Economy, CASIRJ, Volume:5, issue:3, tax planning, R. N. Lakhotia and 10-13 Subhash Lakhotia, vision books Delhi, 27th edition, 1 – 24 2) Students guide to income tax, Dr Monica SinghaniaDr. Vinod K Singhania, Taxmann, 47th edition, 200 – 213 3) A practical approach to income tax, Ravi Gupta, Girish Ahuja, Bharat Law House, 47th edition, 98 – 107 4) The income tax root of all evils, Frank Chodorov, Literary Licensing, Llc, 123- 130 5) Administration of income tax in India, Rekha Mehta, Neha Publishers & Distributors, 12 – 17 6) Compendium of Indian taxes, K L Chandak, Sanjau , Young Global Publications, 70 – 81 7) Income Design and Implementation in India—Individual Assessees AttitudeGlobal Business Review June 2010, 135-152, 8) Direct tax reforms and various schemes of income tax in India, Asia pacific Journal of Research in Business Management, year 2010, Volume: 1, issue: 3, 131-140 9) R.V. Deshpandey, (2012), Tax reforms in India, Indian Streams Research Journal, Vol.II, Issue VII, 1-2 10) Syed Mohd Ali Taqvi, Amit kumar Srivastava, Ravindra Kumar Srivastava Challenges and Opportunities of Goods and Service tax (GST) in India Indian Journal of Applied Research, Vol. III, Issue V May 2013, 413-415 www.ssarsc.org Page 8