Are You Really Happy with India's Taxation System?

In the dynamic economic environment of India, the taxation system often becomes a subject of intense scrutiny. The system, while serving its intended purpose, has several issues that cast doubts on its fairness and efficiency. The constant pain of paying taxes can sometimes overshadow the tangible efforts made by the government to rectify these issues. Let's delve into the problems that still plague the current taxation framework in India.

Unfair Distribution of the Tax Burden

One of the most notable issues with the Indian taxation system is the unfair distribution of the tax burden. Ideally, taxes should be levied on an ability to pay basis, meaning the wealthiest should bear a higher tax burden. However, the current system is based on the convenience of levying taxes, leading to disparate consequences for different segments of society.

Formal vs. Informal Sector

The formal salaried class constitutes a tiny proportion of the population from whom taxes are most easily collectable but bear the brunt of the direct tax burden. In contrast, businessmen who report calculated profits and earn considerably more on average manage to evade most taxes through various mechanisms. This tax evasion allows those in the informal sector, who operate without proper documentation, to thrive without contributing to the tax system.

Agricultural Income Exemptions

Approximately two-thirds of the population is exempt from income taxes, a fact exacerbated by the exemption of agricultural income. This means that even rich farmers do not pay any income tax, while a small-time clerk is subject to it. The exemption is not justifiable as it can lead to a highly skewed distribution of tax liabilities.

Corporate Tax Irregularities

Corporate tax rates are levied at a flat rate, regardless of the company's size or maturity. This means that a well-funded company that is actively engaging in competitive practices by incurring losses may not pay any income tax. On the other hand, a start-up with limited capital and working capital suffers from the same tax rate as a well-established business, which is unfair and potentially detrimental to new businesses.

Indirect Taxes before GST

Before the implementation of the Goods and Services Tax (GST), there was a uniform rate of indirect taxes applied to all services. For instance, the exhibition of movies in a multiplex was taxed at the same rate as telephone services, a practice that does not reflect the nature of the services provided.

Abolition of Wealth Tax

With the abolition of wealth tax, there is no longer any disincentive for individuals to keep their capital idle. Even during the time when wealth tax was in force, it was levied at a flat rate for everyone above the exemption limit, irrespective of the amount of wealth they possessed. This lack of a progressive wealth tax regime may encourage individuals to hold onto capital without contributing to the broader economy.

Taxes on Capital Gains

Indian citizens pay a higher rate of tax on capital gains compared to foreign investors. Furthermore, the tax on foreign investors is not subject to a minimum commitment in terms of the years or sectors critical for the country's developmental needs. This disparity can undermine domestic investment and favor foreign entities, which is a concerning issue in the current global economic landscape.

Incentive to Cheat

The high rates of tax creation give a strong incentive to individuals to cheat on their tax obligations. Until recently, the government lacked a robust vigilance mechanism to track tax evaders, relying heavily on raids and scrutiny. Once an assessment year passes without scrutiny, the risk of being caught diminishes. Additionally, the application of income tax on individuals rather than families incentivizes income distribution among non-earning family members to maximize exemptions.

Double Taxation

There are multiple taxes levied at different levels of jurisdiction, leading to double taxation. This means that individuals pay income tax on earnings and then again pay indirect taxes when they spend the tax-paid money, leading to an inefficient and redundant system.

Archaic Taxation Framework

The Indian taxation framework and procedures are undeniably complex and inefficient. Preparing returns and forms to be filed with various government departments requires an immense amount of time. These procedures are outdated and do not cater to the current business models, particularly those involving internet businesses.

In conclusion, while the Indian taxation system has made progress since the inception of the Modi government, there are still significant issues that need to be addressed to ensure fairness, efficiency, and modernity in the system. Addressing these issues is crucial for promoting a more equitable and effective tax regime in India.