Rethinking Tax Reform: India’s Journey Towards Fiscal Stability and Economic Growth

Author: Anurag kumar, 3rd year Student at National University of study And research in law, ranchi Co – Author: Shristi sahu, 3rd year Student at National University of study And research in law, ranchi

Table of Contents

Introduction 

Indian taxation system also followed a dynamic transition in the post 1991 process of economic liberalization from a complicated regime comprising high merited tax rates. This change began with the economic crisis of 1991 which forced the government to start structural reforms relative to simplification of taxes and of the extension of the country’s tax base.

A major step in this process was the launch of the Goods and Services Tax (GST) in 2017 that flooded India with one indirect tax system. Despite reluctance from GST implementation caused by technological problems and compliance costs, it was a step towards a better improvement of the current tax system.The current tax system is still faced some problems especially with having dual burden where both central and state governments are involved in the administration of the tax laws. The overdependence on the indirect taxes briefed above has elicited criticism on the grounds of equity given that the recipients are inclined to affect the poor in the society.Most recent reforms for taxing policies include the mini budget provisions that seek to lower personal income tax rate for individuals earning up to 1.5 million rupees per year in the bid to stimulate consumption and growth. These ongoing changes reflect India’s commitment to balancing multiple objectives: revenue mobilization, efficiency, economic equality, and fiscal sustainability.

The Evolution of Indian Tax Policy

Background Information and the Creation of the Structural Premise

This Article examines strategic legal issues relating to tax structure in India and the way India’s tax system is law based and grounded in India’s Constitution’s distribution of tax powers. After independence tax policy was shaped by the socialist paradigm with concern for vertical equity, efficiency, and resource mobilization for state led development. Such, this approach yielded non-sustainable structures that were complex, highly – marginal tax rate – and laden with inefficiencies and exemptions. However, due to high administrative costs meant to achieve equity the outcomes of these strategies Vision diminished. Furthermore, the absence of the modern technological inventions for tax collection and enforcement deepen the problem of revenue loss and enforcement.

In Transition to Market-Based Reforms

The call for economic liberalization beginning with the economic crisis in 1991 brought about changes in the India’s tax policy. Main structural changes implemented during this period included those of simplification, more efficiency and enlargement of the tax base. The direct predecessor to the CRAR was the Tax Reforms Committee (TRC) set up in 1991 to consider measures for the revival of direct and indirect taxes for their restructuring: elimination of large gaps in rates of direct taxes; and curbing exemptions. These measures aimed at increasing the revenue mobilization-bum and efficiency and at ensuring a more equitable burden and less a business hostile environment. Low steady depreciation of the corporate tax and the simultaneous reforms of the structure of the personal income taxes demonstrated the change to market friendly policies. In addition to this, the change from the multiple point sales tax structure to the Value Added Tax this was in attempts to reduce on cascading effects and or inefface.

Key Trends in Tax Revenue

Phases of Growth and Decline

There are certain distinct phases which can be viewed in India’s tax- GDP ratio. In the period between 1950-51 and 1987-88, it increased by and large due to increase in economic activity and gradual enlargement of the tax base. But from that level, it has declined to the current level because of declines in customs tariffs and other measures of economic liberalization which reduced revenues, many of which have been replaced by internal indirect taxes and direct taxes. The Goods and Services Tax reform was launched in 2017, which brought structural changes in each state, that wanted to streamline the tax systems across the country and make them more compliant through the technological interventions. Early difficulties in adaptation led to fluctuating revenues, but overall optimisms about potential for increasing the revenue buoyancy are reasonable.

central as well as state-level dynamics 

Formerly, the collections for tax revenues were largely dominated by the central government especially through customs duties and excise taxes. Yet, recent declines in state-level revenues demonstrated that only a coordinated set of reforms could occur, such as the state implementation of the VAT in January 2005. After the GST adoption, the relations between the centre and the Indian states have shifted and features such as the GST Council, remain crucial in enhancing the policy coordination. This is a holistic model of working together to ensure that the pre determined fiscal resources are fairly shared across the region.

By these measures, the course of India’s tax policy maintains a fine balance between growth necessities, consolidation and redistribution in accordance to the socio-economic fabric of the country.India has obtained great feats and still struggling on some chronic issues of tax reforms include administrative interventions and equity aspect.

Administrative Complexities

The taxes are levied concurrently by the central and state authorities which have always posed a challenge to the development of a coherent system of taxation. Nevertheless, these different tax structures were disunified and in 2017 the Goods and Services Tax (GST) was introduced to deal with it. However, challenges were realised which include; Technology based to the GST Network (GSTN) which encountered various technical issues including technical breakdowns and downtimes of servers, making it difficult for organisations, especially the small businesses to adhere to. 

Moreover, some of the critical issues stated include difficulty in the manner return filing was performed, higher compliance costs. This surge in compliance costs arose from the business necessity to upgrade to new forms of IT systems and processes, which was felt acutely by SMEs. Some attempts to better tax administration via computerization and the creation of TINs have been made, but the change has not been quick, and new bodies and frameworks have been introduced gradually, and constantly adjusting to the change remains a challenge for both taxpayers and administrators.

Fairness and Economic Consideration Pondering

It was mentioned that the structure of taxes themselves that formed the basis of the Indian taxes has always disproportionately depended on indirect taxes which are generally unkind to the poor. Despite the reforms type, the goal of improving equity has been pursued, the degree of indirect taxation remains high. This attempted to close loopholes especially for taxation adding a layer of Minimum Alternative Tax (MAT) to check systemic evasion by large corporate players. MAT has especially been criticised for having compound the matters, and though the improvements brought by it are valid, the question of equity has not been given a grand boost.

Under direct taxes namely the Individual and companies tax, there were major cuts on the rates of tax after 1991 aiming at compliance. The government sought to reduce the long standing distortion in the structure of personal income taxes through rationalization. Nonetheless, there are several difficulties in the further extension of the tax base with an aim to guarantee the actual fulfillment of obligations in proportion to income levels. 

Some of the measures that were undertaken to fight the parallel economy and Tax evasion and inclusion of new currency notes, promotion of cashless economy were the part of the overall measures to improve the equity and efficiency of the tax system. 

Major Reforms and Their Consequences

Direct Taxes

After 1991 the rates of personal and corporate income tax were cut down and the main emphasis was made upon voluntary compliance. TDS helped in increasing the level of transparency and formation of TIN made it easier to capture tax sources. These measures were intended to rationalize and decentralize the tax administration and to aspire to voluntary compliance. But there are several areas that need to be worked on in order to make the system of taxation more progressive and explain why high-income people should pay more. The last few debates on the ways to additional cut the personal income tax rates with the purpose to stimulate the consumption demonstrate how the equilibrium between efficiency and fairness is being negotiated in the field of direct taxes. 

Indirect Taxes

Change in the structure of the excise duties aimed at its shift to the stage of creation of Value Added Tax orVAT with a minimum of extensions. In the same way, the liberalization of customs duties brought India’s trade policies into conformity with the trend, despite the fact that the effective rates of protection afforded specific industries were still questionable. The GST was another revolutionary measure intended to centralize the system of indirect taxes in the country. Though there was quite some idea in implementing it, its practical experience called several problems; technological issues, rigid system of return filing, and compliance expenses especially for small scale industries. Measures to counter them are being taken to date with emphasis on bringing down the GST compliance cost and improving the functioning of the system. 

GST: A Game Changer

The introduction of the latest indirect tax regime referred to as the Goods and Services Tax (GST) was the most recent in 2017. With the implementation of GST which integrates various indirect taxes, India sought to abolishing the cascading effect, creating common market and ease in compliance. However, its delivery as a concept was not without its gaping holes. Complex GST return filing processes and technological problems related to GSTN portal, and raised compliance costs were a headwind, and H1 2022 projections were negatively impacted by small and medium enterprises. However, GST has been a big step in the direction of trying to make Indian taxes more cohesive and efficient. Efforts to deal with the problem of implementation challenges and rationalizing compliance requirements are still defining GST in India. 

Thus, summing up, after the start India has observed some progress on its way to enhance and implement the efficient and fair tax reforms but there are still certain weaknesses related to tasks’ implementation, the administration of the tax system, and its fairness. Sustaining the efforts to overcome these challenge is pertinent to actualizing the potentials of the reforms in the desired SE impacts.

Conclusion

The Indian experience of tax reforms represents a consistent and evident policy determination towards fiscal consolidation and economic revival. A lot of progress has been made in terms of eradicating the complexities of taxes, encouraging and promoting complicity and taxing fairly and equitably. Most importantly, GST in the year 2017 has a landmark change to the unification of the indirect tax structure to avoid the cascading effect and to develop a common set of markets.

Nevertheless, there remain issues as regards administrative issues and equity. The federal structure of the polity with overlapping tax sovereignty between the centre and the states has been one major factor that restricted early formation of integrated taxation framework. The implementation of the GST to merge all these different tax structures to one faced challenges, for instance the GST Network portal (GSTN) through which most of the compliance is now carried has been plagued with technical problems such as technical blackouts and slow servers in its early months and especially was difficult for the small business to deal with.

Despite India’s effective centralization and digitization through the Tax Information Network, new systems are troublesome for SMEs.New problems of equity arise from the tax’s use of indirect taxes, burdening the lowest income classes; base broadening and evasion remains an issue with modern measures like demonetization and digital payments.

The ongoing debate regarding further cuts of personal income tax rates as a means to stimulate consumer spending reveal continuing attempts at striking the proper mixes between equity and efficiency considerations in direct taxation. For instance, India planning to cut the current income tax rate on individuals with an annual income of up to 1.5 million Rupees in the forthcoming budget to help the middle class bear lesser expenses and to boost consumption when the economy is on a low. 

Rethinking Tax Reform: India’s Journey Towards Fiscal Stability and Economic Growth
Rethinking Tax Reform: India’s Journey Towards Fiscal Stability and Economic Growth

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