How The Tax Reforms Are Shaping India? The Need, Role of History and Status Quo

In any country, the taxation system and tax reforms are a certainty that can neither be denied nor ignored. It is the pillar for establishing and flourishing the social and economic structure.

The taxation system is not a new concept. It’s been existential for ages. Even then, the idea was clear – to systematize the rules governing a rational taxation system.

For example – In the 18th century, a famous economist named Adam Smith came up with four important ideas about taxes

1. Everyone in a country should pay taxes based on their income. If someone has more money, they should pay more taxes.
2. Taxes should be clear and certain. People should know exactly how much they have to pay, when they have to pay it, and how to pay it.
3. Taxes should be collected at a time and in a way that’s easy for people to pay.
4. Taxes should be designed to take as little money as possible from people while still bringing in enough money for the government.

So, what has been the government’s precise aim – to simplify the tax reforms for the people.

In the same light, the Indian government brought the GST mandate, a game-changing tax reform. Designed to deal with the Indian indirect tax system, the GST unified the tax regime, replacing a complex web of indirect taxes levied by the central and state governments.

But What Brought the Need for This Tax Reform?

Tax systems have undergone significant changes worldwide over the last twenty years. Many countries, regardless of their ideological spectrum or development stage, have undertaken tax reforms.

The wave of tax reforms worldwide that began in the mid-1980s accelerated in the 1990s, motivated by several factors. In many developing countries, pressing fiscal imbalance was the driving force. The other big reason was the severe budgetary pressures.

In others, the transition from plan to market called for wide-ranging tax reforms. Besides efficiency considerations, these tax reforms had to address the issue of replacing public enterprise profits. The solution was to use taxes as a principal source of revenue. Of Course, the tax policy had to align well with the development strategy.

Another motivation was provided by the internationalisation of economic activities arising from increasing globalisation.

In the Indian context, history and institutions played an important role in shaping the country’s tax system.

The major reasons for building a tax reform like GST were:

1. The nature of our federal structure
2. Uneven assignment of tax powers
3. Tax sharing arrangements
4. Lack of revenue mobilization and structure
5. Overlapping tax systems followed in Center and State

These factors made it difficult to have encompassing, comprehensive, and coordinated tax system reforms.

When did the tax reforms in the Indian tax system Start?

Systematic and comprehensive attempts to reform the tax system at the Central level started only after market-based economic reforms were initiated in 1991. The Tax Reforms Committee laid out a framework and a roadmap for a new tax system, both direct and indirect.

The analytical groundwork for reform in the new millennium stemmed from task force reports on both direct and indirect taxes. Additionally, the task force report on implementing the Fiscal Responsibility of Budget Management Act 2003, played a crucial role in shaping these reforms.

The Central Government, in the recent past, introduced and implemented various policy measures by way of legislation and executive orders. The intention was to simplify the tax structure and make compliance easier for the citizens.

Shift To Self-Assessment

Self-assessment is one notable reform that applies to both direct and indirect taxation space. Under the administrative assessment system, the onus was on the tax administration. The authorities had to examine tax returns and financial statements, calculate the amount of tax payable, and notify the taxpayers of the tax liability.

The emphasis was placed on the self-assessment system. Here, the verification process shifts from pre- to post-filing.

This shift from administrative assessment to self-assessment in the Indian taxation structure has seen a constant rise in the tax base and revenue.

The Impact of Tax Reforms on Indirect Tax System

When it comes to the Indirect Tax side, a significant reform is the introduction of Goods and Service Tax w.e.f. July 01, 2017. The idea of a nationwide Goods and Service Tax in India was first proposed by the Kelkar Task Force on Indirect Taxes in 2000.

The objective was to replace the prevailing complex and fragmented tax structure with a unified system to simplify compliance, reduce tax cascading, and promote economic integration.

Goods and Services Tax is a liberal indirect tax levied on India’s supply of goods and services.

Some of the salient features are:

(i) One Nation, One Tax

It replaces multiple indirect taxes levied by the Central and State Governments, such as excise duty, service tax, and value-added tax. It also brings uniformity in the tax structure across India, eliminating the cascading effect of taxes.

(ii) Dual Structure

It operates under a dual structure, comprising the Central Goods and Service Tax levied by the Central Government and the State Goods and Service Tax levied by the State Governments.

In the case of Interstate transactions, Integrated Goods and Service Tax is applicable, which is collected by the Central Government and apportioned to the respective States. Importing goods or services is treated as inter-state supplies and subject to integrated goods and service tax, in addition to the applicable customs duties.

(iii) Destination-based Tax

It is a destination-based tax levied at each stage of the supply chain, from the manufacturer to the consumer. It applies to the value added at each stage, allowing for the seamless flow of credits and reducing the tax burden on the end consumer.

(iv) Input Tax Credit

Goods and Service Tax allows for the use of input tax credits. Businesses can claim credit for the tax paid on inputs used in the production or provision of goods and services. This helps to avoid double taxation and reduces the overall tax liability.

(v) Exemptions Under Goods and Service Tax

It applies to all goods and services except Alcohol for human consumption. Goods and Service Tax on five specified petroleum products (Crude, Petrol, Diesel, ATF, and Natural Gas) will be applicable from a date to be recommended by the Goods and Service Tax Council.

Tobacco and tobacco products are subject to Goods and Service Tax. The Centre also has the power to levy Central Excise duty on these products.

Exports are zero-rated supplies. Thus, exported goods or services do not suffer input taxes or taxes on finished products.

(vi) Increased Compliance and Transparency

It aims to enhance tax compliance by bringing more businesses into the formal economy. The transparent nature of the tax system, with the digitization of processes and electronic records, helps in curbing tax evasion and increasing transparency.

Significant Changes in Direct Taxes

Similarly, the government has taken measures to simplify the direct taxation regime. Some of these decisions include:

1. Reduction of Corporate Tax from 30% to 25% for midsized companies.
2. Domestic companies can opt for a concessional tax regime @ 22% (effective tax rate: 25.3% inclusive of surcharge and cess). Such a company cannot claim any income tax incentive or exemption. Such companies are not liable to pay the Minimum Alternate Tax;
3. The tax rate for new domestic manufacturing companies is now 15% (17.01% inclusive of surcharge and cess). Companies that have been incorporated on or after October 01, 2019, making fresh investments in manufacturing and commencing production on or before March 31, 2023, may opt for such a concessional tax regime.

Faceless Assessment Scheme –A Revolutionary Move by Government

One of the most recent and notable tax reforms introduced in the recent past is the Faceless Assessment Scheme. The Scheme was introduced in India on August 13, 2020. It is part of the initiative taken by the Government of India to reduce the interface between taxpayers and tax officials.

The scheme aims to reduce taxpayers’ compliance burden and make the tax system more efficient and transparent.

Under the Scheme, all assessment proceedings occur electronically without any physical interface between the taxpayer and the tax official. The taxpayer submits the required documents and information online. The tax official then reviews the documents and information and passes the assessment order electronically.

Taxpayers can gain access to faster and more efficient tax assessments. Faceless tax assessment helps to ensure better tax compliance and reduce evasion. It provides taxpayers with transparency and certainty in the tax assessment process. Therefore, there is no interference of tax officials or third parties in the tax assessment process and it helps to reduce discretion.

Faceless Assessment in Indirect Tax Management of Customs

The other most significant reform on the Indirect Tax side is the introduction of a Faceless Assessment System on the customs side. Faceless Assessment virtually connects customs assessment officers from different jurisdictions into a Faceless Assessment Group(s).

It provides for the assignment of import clearance documents not facilitated by the Customs Automated System to the Faceless Assessment Groups officers regardless of the port of import of the goods.

The key benefits of Faceless Assessment are:

1. Eliminates Face-to-Face Interactions

Besides reducing the need for the trade to interact face-to-face with customs officials for customs assessment purposes, Faceless Assessment promotes specialisation and uniformity in assessments.

2. Balances Workload

Further, by allowing flexibility in balancing workload between various Faceless Assessment Groups located in different customs locations.

3. Improves Operational Speed

This initiative enhances the efficiency and speed of customs assessments.

4. Promotes Local Set-up

The institutional setup for the Faceless Customs initiative provides for a local setup at the import port. The port of import is the customs station for importing goods, and the importer must enter Bills of Entry for home consumption or warehousing.

How Does Faceless Assessment Work

The Port Assessment Group, Turant Seva Kendra, and Import Shed officers at each import port support faceless assessment. The virtual setup consists first of National Assessment Centres, which promote specialisation and uniformity. Customs Commissionerates have been partially re-organised as National Assessment Centres with all-India jurisdiction.

The second setup is Faceless Assessment Groups, which consist of officers from different jurisdictions. They connect virtually on a technology platform to form various Faceless Assessment Groups to assess Bills of Entry falling under National Assessment Centres.

The Customs Automated System electronically assigns a Bill of Entry to the Faceless Assessment Group officers for verifying the assessment. Each Faceless Assessment Group has an all-India jurisdiction.

With the introduction of the Faceless Assessment Group, the assessment function has been delinked with the geographical location where the goods are available for examination.

Indian Taxation – A Structure Reform

To conclude, the Indian Taxation system has seen significant structural reforms over the years, some of which have been described above. However, tax reforms must be constant and dynamic with changing times.