INTRODUCTION:
India’s tax structure comprises both direct and indirect taxes, with direct taxes being levied directly on individuals and corporations. Direct taxes include income tax, corporate tax, and capital gains tax, among others. These taxes are instrumental in funding government expenditure, social welfare programs, and infrastructure development. However, despite having relatively high tax rates, the yield from direct taxes in India often remains low compared to the potential revenue that could be generated[1]. This research project aims to explore the reasons behind this phenomenon, analyzing the factors contributing to the high rate and low yield of direct taxes in India. The Income Tax Act of 1961, governs the administration of income tax in India, encompassing various provisions related to tax rates, exemptions, deductions, and compliance procedures. The Act establishes a progressive tax system, wherein individuals and entities with higher incomes are subject to higher tax rates. This progressive structure is intended to ensure that the tax burden is distributed equitably, with those who can afford to pay more contributing a larger share of their income to government revenues. However, despite the progressive nature of the income tax system, the actual yield from income tax often falls short of expectations. for example, Tax evasion and avoidance practices are widespread in India, fueled by loopholes in tax laws, weak enforcement mechanisms, and corruption[2].
ISSUE
The issue under consideration of the research paper entitled “Analyze High Rate and Low Yield of Direct Taxes” are as follows:
1. What are the key factors contributing to the high rate and low yield of direct taxes in India i.e., including tax evasion, a narrow tax base, complexities in tax laws, and inefficiencies in tax administration.
2. what policy measures can be implemented to address these challenges and enhance tax collection efficiency?
RULES
Analyzing the various factors that contribute to the low yield of direct taxes in India despite high tax rates. These factors may include tax evasion, avoidance, administrative challenges, and inefficiencies in tax collection.
ANALYSIS
India’s progressive tax system is designed to ensure that individuals with higher incomes contribute a larger portion of their earnings to the government in the form of taxes. This system helps redistribute wealth and promote social equity by placing a heavier burden on those who can afford it most. In India, the tax rates for individuals are structured into different income slabs, with each slab taxed at a progressively higher rate. As, the highest tax rate for individuals is typically around 30%. However, it’s important to note that the actual tax rates and income slabs can vary depending on the Annual budget of each year. Additionally, individuals with very high incomes may be subject to additional surcharges and cesses on top of the regular tax rates. Despite of having high tax rate govt have limited fund to address certain social or economic challenges.
The factors contributing to the high rate and low yield of direct taxes in India
a. Complexity of tax structure-India’s tax structure is renowned for its complexity, characterized by numerous tax slabs and exemptions across various tax categories. This intricate system has evolved over decades through successive amendments, reforms, and policy interventions. While the intention behind such complexity may have been to achieve fairness, equity, and revenue generation, the unintended consequence has often been the inflation of effective tax rates and the hindrance of efficient tax collection[3]. In the case of direct taxes, such as income tax, individuals and businesses are subject to different tax rates based on their income levels. These tax slabs are often revised periodically, leading to a lack of stability and predictability for taxpayers.
b. Tax evasion– is a complex issue with deep-rooted causes and significant implications for both the economy and society.“Tax evasion, however is illegal and Chapter XXII of the Income Tax Act, 1961, is clear about penalties. For example, a company claims depreciation on a motor car, which is being used by a director for personal purposes. This is not allowed under Section 32[4] of the Income-tax Act, 1961 and is a case of tax evasion.”In India, tax evasion is prevalent across various sectors, including corporate entities, professionals, and politicians, driven by motives such as maintaining black money, saving for the future, or deriving income from illegal activities Studies suggest that significant portions of potential income tax collections remain uncollected due to tax evasion. i.e., essentially a main reason for low yields[5] despite having a high tax rate.
c. Narrow Tax Base: India’s tax base remains narrow, with a relatively small proportion of the population contributing to direct taxes. The large informal sector, agricultural income exemptions, and various loopholes contribute to this narrow tax base.
d. Administrative Inefficiencies: Inefficient tax administration, including delays in tax refunds, arbitrary tax assessments, and corruption, undermines tax compliance and revenue collection efforts.
e. Tax Exemption and Incentives-Extensive use of tax exemptions and incentives reduces the effective tax base, limiting revenue generation despite high tax rates[6].
To address the challenges posed by the high rate and low yield of direct taxes in India, a comprehensive policy approach is necessary. Firstly, improving tax administration is crucial. This involves enhancing the capacity and efficiency of tax authorities through better training, technological advancements, and streamlining administrative processes. Implementing robust monitoring mechanisms and leveraging data analytics can help identify tax evasion and enforce compliance effectively. Secondly, enhancing compliance among taxpayers is essential. Simplifying tax procedures and providing greater clarity on tax laws can reduce ambiguity and encourage voluntary compliance. Public awareness campaigns and taxpayer education initiatives can also promote a culture of tax compliance and deter tax evasion. Thirdly, simplifying tax laws is imperative to reduce compliance costs and enhance taxpayer confidence. Rationalizing tax rates, eliminating unnecessary exemptions, and harmonizing tax laws across different jurisdictions can create a more equitable and transparent tax regime. Finally, closing loopholes in the tax system is essential to prevent tax avoidance and ensure that all taxpayers contribute their fair share. Regular reviews of tax laws and regulations, along with proactive measures to address emerging tax evasion schemes, are necessary to maintain the integrity of the tax system. By implementing these policy interventions, India can strengthen its direct tax regime, enhance revenue collection, and promote economic growth and development.[7] Moreover, ensuring fairness and equity in the tax system is essential to foster trust between taxpayers and the government, ultimately contributing to a more robust and sustainable fiscal framework.
CONCLUSION
The high rate and low yield of direct taxes in India are complex issues that require multifaceted solutions. Reforms in the Income Tax Act,1961 coupled with administrative and policy measures, are necessary to enhance revenue generation, promote tax compliance, and ensure the efficiency and fairness of the tax system. By addressing the underlying factors contributing to tax evasion and avoidance, India can strengthen its tax collection and In conclusion, the effective management of direct taxes in India necessitates a holistic approach encompassing legal, administrative, and policy interventions. Regular reviews of tax laws and regulations, along with proactive measures to address emerging tax evasion schemes, are necessary to maintain the integrity of the tax system. Implementing reforms aimed at simplification, enforcement, and broadening of the tax base can pave the way for a more efficient and effective direct tax regime in India.
Notes:-
[1]. Ministry of Finance, Government of India. (2021). Economic Survey 2020-21. Retrieved from https://www.indiabudget.gov.in/economicsurvey.
[2]. Wadhwa, L. & Pal, Vikash, (2012), Tax evasion in India: Causes and remedies, 7, 2134-2138.
[3]. Kumar, Jitendra, Impact of Direct Tax Reforms on Tax Revenue in India. Ph.D. diss., Dayalbagh Educational Institute, Department of Accountancy and Law, 2021.Retrieved from http://hdl.handle.net/10603/411020.
[4]. The Income Tax Act, 1961 (Act No. 43 of 1961), s.32.
[5]. Arora R.S., & Rani Vaneeta, (2010), Tax evasion and corruption in the Indian Income Tax System: Causes and Remedies., Indian Journal of Finance, 4, 30-36.
[6]. Rao, Govinda, “Tax System Reform in India: Achievements and Challenges Ahead” Journal of Asian Economics 16 (2005): 993-1011.Retrieved from https://doi.org/10.1016/j.asieco.2005.10.003.
[7]. Neog, Y., & Gaur, A.K. (2020). Tax structure and economic growth: a study of selected Indian states. Economic Structures, 9(1), 38. https://doi.org/10.1186/s40008-020-00215-3
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