All India Radio (AIR) : Structural Reforms in Taxation System

  • IASbaba
  • October 11, 2017
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All India Radio
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Structural Reforms in Taxation System


Search 3rd July 2017 http://www.newsonair.com/Main_Audio_Bulletins_Search.aspx

TOPIC: General Studies 2

  • Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

GST is going to be a game changer for India. Given that present taxation structure is such a complex tax system with tax registration, tax reform, and unprecedented in its scope and width and depth, complaints have not been much been able to solve in an easy manner.

There were many taxes and due to this, people were not ready to come into the network of indirect tax as well as direct tax. Out of 125 crore people, only 85 lakh people were registered into excise and VAT. But more number of people are doing business. When GST would be subsuming all the tax, then those persons who were hesitant to pay tax will also come in.

GST is now a law and all the stakeholders of B2B will have to comply with it. They have to understand that money is not going from their pocket, it is consumer who will be paying for it. And hence, it is necessary to pass on the benefits to the consumer.

Three specific areas which saw resistance in GST application are:

  1. Entertainment
  2. Textile
  3. Farm commodities

Tamil Nadu is resisting because the state government is charging their own entertainment tax. So the residents are being taxed twice and hence they are opposing GST.

The textile merchants and manufacturers were not taxed earlier, hence there is going to be a tax now under GST. The fact is despite higher GST or higher rate of tax on items not previously taxed, these producers and merchants will get input credit which they will can set off against tax they are paying.

Regarding the agricultural items- the farmers are not taxed, only when it is converted into saleable items the taxes are being levied. So the tax is now more on branded goods which are packed and sold under a brand name whereas the loose grains are not taxed.

Higher level of tax will be in telecom services, mobile bills, internet etc. from 15% to 18%. There will be some tax on financial services including insurance premium and possibly ATM transactions but no one does that many ATM transactions so that’s a negligible issue.

The service tax rates have been increased so there will be some impact. But slowly when they’ll get the input for their services and goods, so they would pass on the benefit.

This will be reviewed in later stages where the compliance is more. These rates are not final. After certain time, these rates may go down upon compliances, hence professionals request the businessmen to comply more for their benefit as well as their consumers.

Taxes for economic development

The government is the trustee. It’s the economy which runs from taxpayers’ money. If taxes are paid diligently, the systems in place will become better. If no money is paid, everybody will suffer. It is basic to know that infrastructure, education, health and sanitation, employment creation requires money.

The main comprehension with business community and service community is the over compliance. Initially it would seem that there would be lots of compliances, but once they go through it, they would find it easy as most compliances will be done online.

The chief economic advisor said that GST might add 2% to the GDP. The number of traders registered is expected to increase twice. So there should be revenue growth. Most of the trait which were not regulated earlier would come into regulation and there would be complete audit trail. If it is implemented with good intent by government, proper checks are done then it would be grand success. The moment the implementation sees weakness regarding the movement of goods, the main thing would be that. Earlier, the goods were moved without paying taxes. So that was link where people were taking maximum benefits of tax evasion.

Inspector raj will become less as it will be done online, the tax will not be paid on borders of states, the taxes can be paid beforehand and claim input tax credit and have seamless journey all through India.


Picture credit: http://www.livemint.com/r/LiveMint/Period1/2014/07/04/Photos/w_reforms.jpg

Challenges to implementation

The infrastructure related to IT, availability of bandwidth should be available throughout the country. There should not be any glitches. But some parts of India are experiencing bandwidth issue and digital connectivity is not present. This would be big challenge of government for which it should work extra hard to bring infrastructure into place ready for all electronics transfer, payment and transaction.

Many investors from abroad are eyeing India as a fastest growing market but they have been wary of committing too many funds here because

  1. India has strong labour laws which prevent money and investment from exiting from India.
  2. It is difficult to wind up industry.
  3. No hire and fire laws. If they are, then they are in favour of workers
  4. Sometimes tax structures are very inflexible – tax on Vodafone retrospectively. This has been taken care of that there shall be no such similar retrospective penalties.
  5. Time being taken to have the registration to start a business is lot. This backfires sometimes. Thus there has to be ease of doing business

Direct tax impact

GST would have impact on direct tax also as most of the people who are not into indirect tax they don’t have their direct taxes also. As their audit trail, sale purchase is there, there would have to have filing of ITR also.

The structural change in direct tax will have a long bearing. Currently the people are hesitant to pay flat rate of 30%. If that is brought down, there is high chance of increase in tax payers.

Possibly a relook at the reform of entire income tax structure is what government is trying to do.

  • During demonetisation, a special taxation amendment was brought in. it included opprotunities to people with black money to come clean by paying minimum penalties and revealing their unaccounted wealth.
  • More than 1 lakh companies are outside the purview of tax currently which are being brought into the system.
  • More than 1 lakh companies have been struck off from registrar of companies post demonetisation.

Thus, it is beneficial to comply whatever compliance is required by the regulators. Non-compliance will attract relevant penalties.


Till now, paying taxes voluntarily was not considered a smart thing to do and tax evasion was a normal way of conducting business. Economic greatness of a country cannot be built on such weak moral foundations and unethical business practices.

With the indirect tax reforms, the focus will be now on constantly monitoring the implementation of reforms and simultaneously amending when necessary to facilitate ease of taxation. Along with it, there is need to introduce direct tax reforms which will complement the indirect tax reforms.

Connecting the dots:

  • Structural reforms in taxation require cautioned approach. Do you agree? Explain the need of reforms with mention of recommendations by few committees.

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