Challenges to Indian Model of Taxation System and Effects of Technology

Introduction:

Taxation is the method of enforcing or levying a tax on the citizens and corporate companies by a government or taxing authority. From income tax to Goods and Services Tax (hereinafter referred to as GST), all levels are subject to taxes. In deciding India’s taxes, the central and state governments play an important role.

Over the last few years, the state and central governments have pursued numerous policy reforms to streamline the taxation process and ensure accountability in the region.[1] The GST, which relaxed the tax regime on the selling and distribution of goods and services in the region, was one such reform. This article focuses on the Indian model of taxation and also analyses the contribution of GST to overcome the challenges of the Indian Taxation system.

Indian Model of Taxation System

Article 256 of the Indian Constitution states that “no tax shall be levied or collected except by the authority of law”,[2] so each tax collected shall be backed by law. In India taxes are levied by the Central and State government. However, some minor taxes are also levied by the local authorities like municipalities and the local government. So, the tax system in India is a three-tier federal structure.

Direct Tax

Direct tax is levied on individuals and corporate and is non-transferable to any other person. Income tax, Wealth tax, Gift tax, and Capital gains tax are some examples of direct tax. Income tax is the most popular tax within this section. Income tax is proportional to the income of the person paying the tax.

It is levied on the income of individuals with distinct tax slabs for various income levels. Hindu Undivided Family, Company, Firm, Co-operative Societies, Trusts are all included in the term ‘individual’. Income tax is charged by the Central government on the income of an individual, which may include-

1. Salary of a person;
2. Income from house property;
3. Capital gains;
4. Tax on profit and gains from business;
5. Other incomes.[3]

Indirect Tax

Indirect taxes are levied on goods and services and collected by intermediaries selling goods or services. These are taxes imposed indirectly on the public by means of goods and services. The sellers of goods and services collect the tax that the government bodies then collect. Examples of indirect tax includes-

1. Value Added Tax was a tax on the sales of goods sold in the state.
2. Octroi Tax was levied on goods moving from one state to another.
3. Service Tax was the tax levied on service providers.
4. Customs Duty is a tax levied on anything which is imported into India from a foreign nation.

GST

GST has eliminated indirect taxes, since its implementation on 1 July 2017. It is the 101^st Amendment to the Indian Constitution. GST is a multi-stage, designation based comprehensive tax imposed at each value addition stage. The replacement of multiple indirect taxes in the country has helped India’s Government achieve its “One Nation One Tax” program. However, India has adopted a dual GST model, which means that GST is administered by both the Central Government and the State Government.

Multi-stage because it is levied right from the purchase of raw material to the sale of the finished product to the end consumer i.e. on each stage of the supply chain whenever there is added value and each transfer of ownership. Destination based since the location where the government obtains GST is the final place of purchase. The government of Maharashtra earns GST if a fridge is manufactured in Delhi but sold in Mumbai. A significant advantage of GST is the simplification of taxes for government agencies in India.

Types of GST

Central Goods and Services Tax (CGST)

CGST is a tax imposed by the central government on sales of goods and services transported within the state, i.e. intra-state transactions. The tax collected under CGST is payable to the treasury of the central government.

State Goods and Services Tax (SGCT)

SGST is levied by the government of the state and is levied on sales concerning the interstate selling of goods and services, i.e. where the sale takes place within two or more states. Under the SGST, tax revenue is allocated to the Treasury of the state government or the qualifying Union Territory.

Integrated Goods and Services Tax (IGST)

IGST is a tax levied on the inter-state supply of goods and services by the central government, i.e. where the sale is made outside the state. This refers both to supplies made outside the state and to supplies made outside the nation.

GST Slabs in India

There are five slabs in the prevalent GST system-

1. Tax-exempt slab or 0% tax slab: Essential household items including food and certain services are included under this category like fruits, vegetables, newspaper, bread, flour, eggs, milk, etc.
2. 5% tax slab: Common use items including goods and services are included under this category like skimmed milk powder, coffee, teas, sugar, coal, fertilizer, ayurvedic medicine, etc.
3. 12% tax slab: Standard rate for goods and services like butter, mobile phone, fruit juice, food served at non-ac restaurants etc.
4. 18% tax slab: Standard rate for goods and services like pasta, flavored refined sugar, pastries, cakes, detergents, sanitary ware, clothing, hotels which charge tariffs in excess of Rs. 7,500 and movie tickets costing above Rs. 100.
5.  28% tax slab: Luxury and sin goods such as tobacco, pan masala, high-end luxury goods and services like automobile, cement, sunscreen, fridge, washing machine, and 5-star hotels, where the billing amount of the hotel stay is above Rs. 7,500 per night.

Given below is a list of taxes included under GST

Central Taxes (Pre GST, now under CGST/IGST)

• Indirect Taxes GST
• Central Excise Duty (CENVAT)
• Additional Excise Duties and the Excise

Duty Levied under the Medicinal and                                              

Toiletries Preparations Act, 1955                                                      

• Service Tax
• Additional Customs Duty (CVD)
• Special Additional Duty of Customs (SAD)
• Surcharges and Cesses levied by the Centre
• Central Sales Tax

State Taxes (Pre GST, now under SGST)

• VAT/ sales tax
• Octroi and Entry Tax
• Purchase Tax
• Luxury tax
• Taxes on lottery, gambling, and betting                             
• Entertainment tax (unless levied by the local bodies)
• Surcharges & State Cesses (related to the supply of goods and services)

How GST tackled the challenges of the Indian Model of Taxation System?

Easier and Consumer Friendly

Former tax regimes were filled with numerous types of state taxes like value-added tax, entertainment tax, luxury tax, state cesses, surcharges, etc. Additionally, there was central excise duty, service tax, etc levied by the Centre.

These multiplicities confused the consumer and it was difficult to keep account of all such charges. With the coming of GST, these complexities have been reduced and the taxation system has been rationalized.

Electronic Way Bill (E-way Bill)

E-way Bill is an online document created under the GST system when goods are transported with a value greater than Rs. 50,000. This is a required online document provided by government servers that specifies the place of origin and destination for any other movement of products involving value and tax. The introduction of the E-way bill has lowered the scope of the country’s rampant tax evasion, thus increasing exchequer revenue and lowering the fiscal deficit.

Decrease in Logistic Cost

The cost of logistics is attributed to costs for different modes of transport, like rail travel, trucking, air travel, and ocean transport. Additional logistics costs include fuel, warehousing space, packaging, security, materials handling, tariffs, and duties.

Heavy transports like truck since the launch of the E-way bill and GST, Compared to the previous regime, trucks now travel 10-15 percent more distances. In the previous regime, trucks were running about 300-350 kilometers per day, but this distance increased to 400-410 kilometers per day after the GST introduction. GST has assisted in lowering the logistics prices.[4]

Anti-Profiteering Measures

Anti-profiteering initiatives in GST ensure that the gain is passed on to customers if there is a change in GST prices resulting in rationalization of tax rates. Profiteering occurs because, to build a larger profit margin, you unfairly inflate your sales costs. The GST scheme however provides profiteering opportunities.

Imagine that you were paying Excise at the rate of 12% before GST, but after GST you are now moved to 5%. Your profit margin would grow if you kept your rates the same.  However, as one of the priorities of GST is to achieve lower prices for buyers, so the government considers this profiteering. Therefore, the key purpose of India’s anti-profiteering provision is to prohibit manufacturers from allowing excessive use of GST by carrying on the “commensurate price reduction” to the final customers.[5]

Real Estate

Homebuyers were forced to pay multiple taxes on real-estate buys in the pre-GST regime, and in the post-GST regime, they were forced to pay full taxes without the benefit of Input Tax Credit being passed to the consumers. Thereby commodities were always overpriced. With this new tax regime consumers are ensured that they are bound to pay a realistic price with the full benefit of Input tax credit flowing to them without any discretion of suppliers.[6]

Conclusions

Thus it can be concluded that for a long time, India’s tax system was complicated, given the size and dynamic of India. The mechanism has now become simpler since the introduction of GST which is one of India’s major tax reforms. It serves as an all-inclusive indirect tax that has helped to eliminate the entire tax’s cascading impact. It is simplified in design and has increased the output of logistics.  GST has also introduced major technological reforms like E-way bills which have benefited in lowering the scope of tax avoidance.

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References:

[1] Vishnu, Taxation- Definition, What is Taxation, and Steps for Filing Tax, Clear Tax,  (Jan 21, 2021, 10:09 AM) https://cleartax.in/g/terms/taxation#:~:text=Taxation%20is%20the%20means%20by,taxation%20applies%20to%20all%20levels.

[2] INDIA CONSTI. Art. 256.

[3] Invest India, Report on Taxation, National Investment Promotion and Facilitation Agency (publishes on Aug 2020) .

[4] Rajat Mohan, How GST changes the face of Indian tax system: here are six benefits to society, Financial Express, (Jan 21,2021, 07:09 PM) https://www.financialexpress.com/economy/how-gst-changed-the-face-of-indian-tax-system-here-are-six-benefits-to-society/1909166/.

[5] Id.

[6] Rajat Mohan, How GST changes the face of Indian tax system: here are six benefits to society, Financial Express, (Jan 21,2021, 07:09 PM) https://www.financialexpress.com/economy/how-gst-changed-the-face-of-indian-tax-system-here-are-six-benefits-to-society/1909166/.