Indirect Tax Reforms

Indirect tax reforms refer to changes or reforms made to the system of indirect taxes that are imposed on goods and services by the government.

This comprises customs fees paid on imports, excise fees paid on production, and value-added taxes on specific phases of the production and distribution of goods, among other taxes.

Indirect taxes are taxes that are levied on the consumption or sale of goods and services, such as GST in India.  In general, their goals are to encourage economic growth, improve public welfare, and increase the efficiency, effectiveness, and equity of the tax system.

Indirect Tax Reforms: Need

Simplification of Tax Laws:

• Over the years, India has always had an extremely complicated indirect tax system.
• These taxes were imposed by both the Central and state governments, which made it confusing and challenging for both businesses and regular people to comprehend the tax rules.
• Simplification and Reduction of Tax Laws can help reduce the burden on taxpayers and improve the efficiency of the tax system.

Elimination of Tax Exemptions:

• It is critical to locate and remove unnecessary tax exemptions since they lower the government’s revenue.
• These exclusions, which frequently favour certain businesses or individuals, can distort markets, provide certain parties unfair benefits, and impede economic progress.
• Government can extend its tax base and boost revenue collection by abolishing certain exemptions.

Increase in Tax Awareness:

• Improving tax awareness is crucial to increasing revenue collection and reducing tax evasion.
• For this reason, the government must make tax rules more straightforward, enhance enforcement mechanisms.
• Promote voluntary compliance via education and awareness programs.where people can get to know what are their tax duties.

Modernization:

• In order to keep up with the rest of the world’s economic condition, technical development and advance in time, we must employ technology in all aspects of our lives, even paying taxes.
• Online bill generation and tax payments are now also possible because of implementing digital tax solutions by the government which makes indirect taxes very transparent and efficient.
• Modernization can also help streamline the tax system, reduce administrative cost and increase revenue collection.
• The GST Payment Portal allows taxpayers to file GST returns, pay GST, examine their tax credit ledger, and keep track of the progress of both their payments and returns.
• A GST calculator and a GST rates finder are only two of the tools and resources the portal offers to aid taxpayers in adhering to GST laws.

Economic growth:

• By raising the cost of goods and services, indirect taxes can restrict demand and stabilize prices while also assisting in the control of inflation.
• Additionally, it promotes investments, which ultimately help to stabilize the economy and give it a boost.

Social cause:

• Increasing taxes on goods that are damaging to health or the environment is one way that indirect taxes can be used to promote responsible consumption.
• For instance, greater tobacco product taxes may deter consumers from smoking.

Indirect Tax Reforms: Chronology

India’s history with indirect taxes begins in the early 20th century, when the British Raj levied taxes on goods including opium, tea, and salt. These levies were used to pay for the military and administrative expenses of the British Raj.

There were several committees formed for India’s tax reforms. The Tax Reforms Committee (TRC), presided over by Raja Challah of both direct and indirect taxes, is the first. The Rekhi Committee, which reviews the indirect taxation system, was the next.

Both direct and indirect taxes were the subject of another committee that was established under the chairmanship of Dr. Vijay Kelkar.

• In 1860, with the passage of the Government of India Act, India implemented its first comprehensive taxation system.
  • A number of direct and indirect taxes were included in this act, which established a unified tax structure for India.
  • Excise duty, stamp duty, and customs duty were the three types of indirect taxes that were most prevalent.
• In 1954, after independence, indirect taxes continued to be very important to India’s fiscal strategy. FIRST Sales Tax Act was introduced, which imposed taxes on the sales of goods.
• In 1991, the Indian government established a new economic strategy with the goal of liberalising the domestic market after Economic reforms started in the early 1990s when the country began its road towards liberalisation, privatisation, and globalisation.
  • As a result, several taxes were combined and the Goods and Services Tax (GST) was put into place.The Tax Reforms Committee (TRC) was constituted in 1991 for both Direct and Indirect Taxes and submitted their report in 1992.
• In 1992, Rekhi Committee was constituted under the Chairmanship of K.L Rekhi on Indirect Taxes.
• In 1994 Service tax introduced in India
• In 1999 Centre announces decision to introduce VAT in India.
• In 2002, a Task force on Direct and Indirect Taxes was constituted under Dr. Vijay Kelkar.
• In 2007, the government passed the Constitution Amendment Bill, which gives the Central Government the ability to impose and collect GST in conjunction with State Governments. GST was first proposed in the budgets speech of the Finance Minister.
• In 2017, India finally started the transition to a single GST, which replaced the previous system of various taxes. The GST reform made the country’s indirect taxation system simpler and made it simpler for businesses to run efficiently.

Indirect Tax Reforms: Challenges

Complicated:

• It may be necessary to streamline and simplify the tax code, which is a challenging and time-consuming procedure, in order to reform indirect tax system.
• Before the introduction of the Goods and Services Tax (GST), the indirect tax system in India was characterised by a complicated web of several taxes, including excise duty, service tax, and value-added tax (VAT), with various rates and rules for different items and services.
• Although the GST was implemented in 2017 with the intention of streamlining the tax system, there are still implementation issues.

Administrative capacity:

• The introduction of the GST necessitated a substantial investment in administrative capacity, which included modernizing IT systems and educating tax officials.
• The ability of tax officers to enforce the laws and collect the tax is crucial to the GST’s success.

Implementation:

• Implementing new tax laws and regulations can be difficult, particularly in nations with underdeveloped administrative systems or antiquated technology.
• It might necessitate a substantial investment in both infrastructure and labour.
• Lack of preparation, Technical and Transition Issues, and political oppositions are few of the implementation issues arising.

Compliance:

• Despite efforts to make the tax system simpler and compliance simpler, many small businesses in India still struggle with compliance because of things like low levels of literacy and outdated technology equipment.
• Anushka Sharma, a Bollywood actress, in 2023 came under fire from the Bombay High Court for having to pay service taxes, which she reportedly had no knowledge of as the original copyright owner.
• This has resulted in a high number of GST returns being filed with errors, leading to delays in refunds and increased compliance costs.
• The former tax structure, which included separate levies imposed by the federal and state governments, necessitated a considerable transition to the GST.
• Businesses have had a difficult time adjusting to the new system, and there is uncertainty over the rates and regulations for various products and services.

Technical difficulties:

• Goods and Services Tax (GST) implementation needed a large investment in information technology systems and tax officer training.
• The GST Network (GSTN), the IT foundation of the GST system, has, however, had technical issues,
• A properly-designed IT system aids in managing GST registrations, returns filing, and refunds, as well as aids in preventing tax evasion.
• However, building such an IT infrastructure can be expensive and time-consuming. Other than this classification of commodities, including a lack of IT specialists and cross-border transactions are few technical issues GST faces.

Indirect Tax Reforms: Positive Impact

Economy:

• The nation’s Gross Domestic Product (GDP) was impacted by the adoption of the GST. Since the country’s implementation of the GST, we have seen a huge increase in its GDP.
• Because more people are filing returns and there is more compliance, GST revenues are still increasing. This is made easier by the adoption of anti-tax evasion tools like the e-Way Bill.

Simpler:

• The GST has made our nation’s tax structure easier to understand. It is a single tax, making calculating simpler.
• The buyer is given a clear understanding of the tax that will be charged when buying particular products thanks to this tax.

Tax Revenue:

• The decrease in the overall amount taxable has been one of the effects of GST on the Indian economy.
• To increase production, this saved money can be reinvested in the production process.
• Due to the GST’s increased tax compliance and decreased tax evasion, the government has seen an increase in tax revenue.
• As a result, the government now has more money to spend on projects like social programs and infrastructure.

SME support:

• If a MSME is registered under the Composition Scheme established by GST, the amount of GST is based on the yearly turnover and size of the enterprise.
• Businesses with 50 Lakh rupee annual revenue must pay 6% GST, whereas businesses with a 1.5 Crore rupee annual turnover must pay 1% GST.

Increased foreign export:

• The customs charge on exporting goods has decreased when taking GST and its effect on the Indian economy into account.
• Therefore, production facilities are now more cost-effective both when creating and transporting goods.
• As a result of these savings on both sides, more industrial facilities are exporting their products.

Transparency:

• By giving consumers and companies a clear idea of the taxes they are paying and the rates at which they are being assessed, the GST has increased the transparency of the tax system.