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Day 19 – Q 5.Critically evaluate the status of tax administration in India. What measures would you suggest to make tax administration citizen friendly? Discuss.

5. Critically evaluate the status of tax administration in India. What measures would you suggest to make tax administration citizen friendly? Discuss. 

भारत में कर प्रशासन की स्थिति का समालोचनात्मक मूल्यांकन करें। कर प्रशासन नागरिक के अनुकूल बनाने के लिए आप क्या उपाय सुझाएंगे? चर्चा करें।


It is said that Fiscal Strength is the driving force of any economy. It is necessary to have efficient, equitable and convenient taxation. Tax administration is a process of managing, directing and supervising the government related tax laws. In India, the tax structure transiting from suppressing Zamindari and Ryotwari Systems during the British rule to current measures like GST and Digital empowered taxation has come a long way, but still the tax structure is ever evolving and moving towards the citizen with each reform.

Current Status of Taxation in India (According to Economic Survey 2017-2018) 

  • Only about 3-4% of the total population of India pay Income tax.
  • Economic Survey 2017-2018 has found 50% surge in the indirect taxes in India.
  •  The tax exemption bracket in India is 2.5 lakhs, which is about 2.5 times of the Per Capital Income (PCI) – in countries like China it is just 1.5 times of PCI ; making India a low tax paying economy.

Positive of Tax Administration in India

  • India follows a Progressive Taxation system, which is against the “One Size Fits All’ policy and slabs of income tax change with rise in Income.
  • Indirect Tax is Quantity based tax i.e. it generally depends on the quantity of purchase.
  • GST – a path-breaking reform, to ensure abiding by the Principle of “One Market, One tax” and reduce the cascading effect , will go a long way to improve Tax Administration in India.

 The tax structure in India can be broadly divided into- 

  • Direct – wherein citizens are directly liable to pay taxes – Eg – Income tax
  • Indirect – where liability arises indirectly upon use of a service. Eg – GST 

Direct Taxation 

Issues and Need for Reforms

  1. The taxation system is complicated and there is a urgent need for rationalization and simplification.
  2. The Income Tax contains certain provisions that have become superfluous, outdated or inconsistent with the objectives of these provisions.
  3. There is problem of potential revenue loss due to lower tax base.
  4. There is lack of clarity with respect to complex taxation framework.
  5. Indian corporate tax rate is several points higher that even the median countries from OECD which acts as a incentive to carry out Transfer Pricing.
  6. A clean tax code is necessary for more efficient capital allocation in a growing economy.

Easwar Panel Recommendations

  1.  Income from Sale of Shares and Securities
    • It has recommended that to counter the uncertainty in Taxation, Capital Gains Tax should be applied on
      • Shares that are held for more than one year by the taxpayer.
      • Shares that are held for amount up to 5 lakhs
  2. Expenditure on Exempt incomes –
    • CBDT should make provisions to simplify the provisions, this lack of clarity at present consists of 15 % of total Income tax litigants
  3. Tax Deductions at Source: 
    • It recommended that TDS thresholds needs changes.
    • It noted that TDS rates for individuals should be reduced from 10% to 5%

Indirect Taxation

Recently, In India – GST replaced various indirect central government taxes like Sales Tax, Excise Duty, Customs Duty, Surcharges etc. and State Government levies like – VAT, Entry tax etc. It has unified a by and large fragmented Indian Indirect Tax structure into a “One Tax, One country” form.

Issues and Need for Reform 

  1. To unify India’s fragmented Indirect tax regime.
  2. To encourage cooperative federalism.
  3. To reduce human interface and leading to speedy decisions.
  4. To improve revenue buoyancy and widening tax base.
  5. To Eliminate the Cascading Effect
  6. To increase the Ease of Doing Business by Tax harmonization.
  7. To Reduce Tax Evasion by – 
    • Elimination of Rate Arbitrage – across different states.
    • Reduction in Compliance costs.

Steps taken 

  1. Exemptions to small businesses.
  2. Communication and Awareness Programs- like Suvidha Kendras in Government offices.
  3. Mandatory Registration – if a business has to be started
  4. Anti- Profiteering laws –  to make it compulsory to pass on the benefits to the consumers

Other Issues with Taxation

  1. Tax Terrorism – especially fear among small businesses  with no insurance cover, setting of unrealistic revenue collection targets.
  2. Rampant Corruption  (especially at the lower level) 
  3. High levels of Exemptions ( like in Agricultural income ) 
  4. Lack of Alternative Dispute Resolution Mechanism.
  5. Crony capitalism – by nexus between – Tax Officials and Industry bigwigs 
  6. Base Erosion and Profit Shifting.
  7. High Levels of Tax Evasions.     

However, it is necessary to ensure that irrespective of numerous issues with the Tax administration in India, it should be ever evolving and moving towards the Citizens. It is necessary to uphold the principles of taxation like Equity, Efficiency, Equity and Compliance. This can be done by the following steps – 

  1. Increasing the Digital Infrastructure – 
  2. Ensuring Data Privacy-  by increasing more government contribution in GSTN and reducing the influence of private players on it.
  3. Federalism – both center and state needs to work together or it would create workspace challenge.
  4. Need to Celebrate good financial behavior.
  5. Tax simplification and Stability
  6. Capacity building of lesser endowed stakeholders. 
  7. Ensuring Openness, Transparency and Accountability in Taxation in India.
  8. Giving Incentives and Rewards – for firms complying by the set norms and standards.

Therefore, we need to ensure that prudent fiscal policies and tax administration helps us strengthen the pillar of Indian Economy- however, at the same time fiscal system remains loyal to its principles of ensuring the “Citizen” remains at the core of the entire taxation structure.All the tax administration and fiscal policies move in a direction of providing a better life for a normal common Indian Citizen.

Best Answer :  Mona

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