Tax Reforms

IMPACT OF TAX REFORMS SINCE 1991
Tax reform since 1991 was initiated as a part of the structural reform process, following the economic crisis of 1991.

Direct Tax Reforms:
1. As per the recommendations of the TRC the personal tax brackets were only three, of 20, 30, and 40% starting in 1992–93. Financial assets were excluded from the wealth tax, and the maximum marginal rate was reduced to 1%.
2. Further reductions came in 1997–98, when the three rates were brought down further to 10, 20, and 30 %. In subsequent years, exigencies of revenue have led to adding surcharge and a 2% primary education cess on all taxes.

3. In the case of corporate taxation too, the basic rate was brought down to 50%, and rates applicable to different categories of closely held companies were unified at 55%.The distinction between closely held and widely held companies was done away with and the tax rates were unified at 40% in 1993–1994.

4. In 1997–1998, when personal income tax rates were reduced, the company rate was brought down to 35% and the levy of 10% dividend tax was shifted from individuals to companies

5. The dividends tax rate was increased to 20% in 2000–2001, reduced again to 10% in 2001–2002 along with taxing it in the hands of the shareholders and the policy was reversed once again in 2003–2004 with the levy of the tax on the company.

Direct Tax Code 2009

The new tax code proposes to change the regime to a tax based on the value of the assets in the case of the MAT and proposed sunk cost rather than advance tax. The rate is 2% of the value of the assets and the rate for firms in banking sector is .25%. A reduction in the corporate tax rate from 30% to 25%. In computing taxable profit of an enterprise assets of the enterprise are segregated in to business and investment assets. The exemption limit has been kept unchanged; it is propose to levy the tax at 10% up to 10 lakh, 20% between 10 lakh to 25 lakh and the above that 30%. In the case of wealth tax exception limits as higher as Rs 50 crores and levies the tax at .25% on the wealth above that.

Recent Structure of Personal Income Tax

The below mentioned table provides information about the different slabs for the imposition of income tax:
Sl. No. Total Personal Income Rate of Personal Income Tax
1 Up to INR. 50, 000 0.00%
2 INR. 50, 000 to INR. 60, 000 10.00%
3 INR. 60, 000 to INR. 1, 50, 000 20.00%
4 Above INR. 1, 50, 000 30.00%

Recent Structure of Corporate Income Tax

The imposition of such a tax varies from a domestic company to a foreign organization. Given below are the rates of corporate tax, which is levied on different companies:

a. Domestic Companies: Corporate Income Tax is levied at the rate of 35 % with an additional 5 % surcharge.

b. Foreign Organization (Including project offices or branch offices): Corporate Tax is calculated at the rate of 40 % with a 5 % surcharge

Reform of indirect taxes

Reform impetus on Excise duties came with the implementation of the recommendations of the TRC. The measures included gradual unification of rates, greater reliance on account based administration

1. In 1999–2000, almost 11 tax rates were merged into three with a handful of ‘‘luxury’’ items subject to two non-vatable additional rates (6 and 16%).

2. These were further merged into a single rate in 2000–2001 to be called a central VAT (CenVAT), along with three special additional excises (8, 16 and 24%) for a few commodities.

Reform in Customs duties

By 1990–1991, the tariff structure was highly complex varying from 0 to 400%, Over 10% of imports were subject to more than 120%.

The TRC recommended reduction in the number and level of tariffs to 5, 10, 15, 20, 25, 30 and 50% to be achieved by 1997–1998. The reform that followed resulted in the reduction in the peak rate from over 400 to 50% by 1995–1996.

Recent Basic Custom Duty rates vary in between 0 % to 30 %.

Reforms in Service tax

The introduction of tax on services at the central level began in 1994–1995 with three services namely, non-life insurance, stock brokerage and telecommunications. The list was expanded in succeeding years to include over 80 services at present. Although initially taxed at 7% the rate was increased to 10% in 2002–2003. The Expert Group on Taxation of Services recommended the extension of the tax to all services along with the provision of input tax credit for both goods and services and subsequently, integration with the central VAT on goods. However, the government is yet to implement general taxation of services though, input tax credit for goods entering into services and vice versa has been extended.

State level tax reforms

The pace of tax reforms in the States accelerated in the latter half of the 1990s with increasing pressures on their budgets. The major landmark in tax reform at the state level was in simplifying and rationalising the sales tax system the introduction of value added tax in 21 states from 1 April 2005. Governed by the tax legislation of respective states of the India Republic, Local Sales Tax or L. S. T. gets levied on any kind of sale, which takes place in a state. This tax generally goes up to 15 %.

Trends in Indian tax revenues:

The trends in tax revenue in India show distinct phases.

In the first, there was a steady increase in the tax–GDP ratio from 6.3% in 1950–1951 to 16.1% in 1987–1988.

The second phase started with the economic recession following the severe draught of 1987 and was marked by stagnancy in revenues until 1992–1993. However, triggered by the pay revision of government employees, expenditure-GDP ratio increased significantly after 1988–1989 and this caused serious fiscal imbalances leading to the unprecedented economic crisis in 1991 (Table 2). The subsequent adoption of stabilisation of structural adjustment program led to sharp reduction in import duties.

Thus, in the third phase, the tax ratio declined from 15.8% in 1991–1992 to the lowest level of 13.4% in 1997–1998 and fluctuated around 13–14% until 2001–2002 even as the deficits continued to be high. The subsequent period has seen attempts to increase the tax ratio to mainly to contain the level of deficits. Thus, tax–GDP ratio increased by over one percentage point in the tax ratio to 15.2% in 2003–2004 (revised estimates for the Centre and budget estimates for the states). The aggregate tax–GDP ratio is yet to reach the levels that prevailed before systematic tax reforms were initiated in 1991.

Interestingly, the trends in tax ratios of direct and indirect taxes follow different paths. In the case of the former, the tax ratio remained virtually stagnant throughout the 40-year period from 1950 to 1990 at a little over 2% of GDP. Thereafter, coinciding with the reforms marked by significant reduction in the tax rates and simplification of the tax structure, the direct taxes increased sharply to over 4% in 2003–2004 and expected to be at about 4.5% in 2004–2005. In contrast, much of the increase in the tax ratio during the first 40 years of planned development in India came from indirect taxes, which as a proportion of GDP increased by over three times from 4% in 1950–1951 to 13.5% in 1991–1992. However, in the subsequent period, it declined to about 10.6% before recovering to a little over 11%. The decline in the tax ratio in recent years was mainly due to lower buoyancy of indirect taxes.

Interestingly, fluctuations in the tax ratio are seen mainly at the central level. Central revenues constitute about 60% of the total tax revenues and therefore, fluctuations in central tax ratio impacts significantly on the aggregate tax ratio. The tax ratios at both central and state levels increased sharply during the period from 1950–1951 to 1985–1986. Thereafter, the tax ratio at the state level was stagnant at about 5.5%until 2001–2002 and then increased marginally to 6% in 2003–2004. In contrast, the central tax ratio continued to increase and peaked in 1987–1988 to remain at that level until the fiscal crisis of 1991–1992. In subsequent years, there was a sharp decline until 2001–2002 followed by recovery to the pre-1991 level in 2004–2005 (revised estimates). Within the central level, the share of direct taxes increased from 20% in 1990–1991 to over 43% in 2004–2005. As mentioned earlier, the increase in the tax ratio until the end of the 1980s was due to indirect taxes, but in subsequent years increase in direct taxes arrested the sharp decline indirect taxes.