TAXATION AND INDIAN ECONOMY

India is a developing country.  The government plays an active role in promoting economic growth & development because private ownership & capital are limited. Fiscal policy or budget is considered to be an important instrument in promoting development & growth of the economy .Taxation is most important part of fiscal policy which can be used productively by the government. India has a well developed tax structure. The three tiers of Government, in accordance with the provisions of the Indian Constitution are empowered to impose tax. Also the tax structure of Indian economy consists of:  Direct and Indirect taxes. Income Tax, Corporate and Wealth Tax are one of the major direct taxes whereas Custom duty, Sales Tax, VAT, Excise Duty and upcoming (proposed) GST are indirect taxes.

So many changes have taken place in Indian Taxation structure due to liberalization and Economic Reforms. Some of the changes are:- rationalization of tax structure; progressive decrease in peak rates of customs duty ; decrease in corporate tax rate; customs duties to be aligned with ASEAN levels; widening of the tax base ; introduction of value added tax ; tax laws have been simplified to ensure better compliance. GST if implemented will going to prove a major improvement in the field of indirect taxation.

Taxation enables the government to stimulate a significant amount of revenue. During the financial year 2006-07, it is estimated that the tax revenue of the India was 81% of the total revenue receipts, whereas, non tax revenue was only 19%. Taxation in India follows the principle of equity. The direct taxes are progressive in nature. Also certain indirect taxes, such as taxes on luxury goods are also progressive in nature. This means the higher income group has to bear the higher burden of taxes, whereas, the lower income group is either exempted from tax (direct taxes) or has to pay lower rate of taxes. Taxation improves the distribution of income and wealth. It also foster the social welfare growth. The social welfare originates due to certain unwanted products like alcoholic products, tobacco products and such other products are heavily taxed, which restricts their consumption, which in turn facilitates social welfare. A part of the tax revenue is employed for social development activities, such as education, health and family welfare, which also improve social welfare as well as social order in the society. Taxation promotes exports and limit imports. Generally, developing countries and even the developed countries do not levy taxes on export items.  In India, exports are exempted from excise duty, VAT, customs duty and other duties. However, there is customs duty on imported goods.

Taxation helps to: Earn foreign exchange through the promotion of exports. It is also used as a tool of controlling inflation. Through taxation, the Government can control inflation in the following ways: - Inflation due to high rise in prices of essential items can be controlled by reducing the rate of indirect taxes. Inflation due to increase in demand can be controlled by discouraging the demand through increase in taxation/duty. Increase in tax rate may restrict consumption, which may reduce demand, and subsequently inflation may be controlled. Taxation induces regional development; Tax incentives such as tax holiday for setting up industries in backward regions, which induces business firms to set up industries in such regions, Tax revenue collected by government is also used for development of infrastructure in backward regions. Indirect taxes provides adequate source of development funds. These taxes are found to be better suited in developing countries because they have much wider coverage as compared to direct taxes. Both rich and poor pay indirect taxes in form of commodity price. In India collection of direct taxes is not very significant. Only a small proportion of population pays such taxes. Direct taxes are primary used in such to reduce unequal distribution of income  High degree of progression used in direct taxes discourages savings done by high income group and adversely effects investment and capital formation. Indirect taxes are used to divert resources from less desired use to more desired one in developing countries. 

Individual resident aged below 60 years (i.e. born on or after 1st April 1956)

Income Slabs		Tax Rates
i.	Where the taxable income does not exceed Rs. 2,50,000/-.	NIL
ii.	Where the taxable income exceeds Rs. 2,50,000/- but does not exceed Rs. 5,00,000/-.	10% of amount by which the taxable income exceeds Rs. 2,50,000/-. Less : Tax Credit u/s 87A - 10% of taxable income upto a maximum of Rs. 2000/-.
iii.	Where the taxable income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-.	Rs. 25,000/- + 20% of the amount by which the taxable income exceeds Rs. 5,00,000/-.
iv.	Where the taxable income exceeds Rs. 10,00,000/-.	Rs. 125,000/- + 30% of the amount by which the taxable income exceeds Rs. 10,00,000/-.

Surcharge : 12% of the Income Tax, where taxable income is more than Rs. 1 crore. , if applicable)

Education Cess : 3% of the total of Income Tax and Surcharge.

Senior Citizen (Individual resident who is of the age of 60 years or more but below the age of 80 years i.e. born on or after 1st April 1936 but before 1st April 1956:

Income Slabs		Tax Rates
i.	Where the taxable income does not exceed Rs. 3,00,000/-.	NIL
ii.	Where the taxable income exceeds Rs. 3,00,000/- but does not exceed Rs. 5,00,000/-	10% of the amount by which the taxable income exceeds Rs. 3,00,000/-. Less : Tax Credit u/s 87A - 10% of taxable income upto a maximum of Rs. 2000/-.
iii.	Where the taxable income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-	Rs. 20,000/- + 20% of the amount by which the taxable income exceeds Rs. 5,00,000/-.
iv.	Where the taxable income exceeds Rs. 10,00,000/-	Rs. 120,000/- + 30% of the amount by which the taxable income exceeds Rs. 10,00,000/-.

Surcharge : 12% of the Income Tax, where taxable income is more than Rs. 1 crore. , if applicable)

Education Cess : 3% of the total of Income Tax and Surcharge.

Super Senior Citizen (Individual resident who is of the age of 80 years or more i.e. born before 1st April 1936):

Income Slabs		Tax Rates
i.	Where the taxable income does not exceed Rs. 5,00,000/-.	NIL
ii.	Where the taxable income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-	20% of the amount by which the taxable income exceeds Rs. 5,00,000/-.
iii.	Where the taxable income exceeds Rs. 10,00,000/-	Rs. 100,000/- + 30% of the amount by which the taxable income exceeds Rs. 10,00,000/-.

Surcharge : 12% of the Income Tax, where taxable income is more than Rs. 1 crore. , if applicable)

Education Cess : 3% of the total of Income Tax and Surcharge.

CONCLUSION : Both direct and indirect taxes are essential to generate sufficient revenue to the state for meeting the increasing public expenditure. Both taxes are essential to foster the economic growth, fill employment and economic stability. Direct and indirect taxes should go side by side & balance each other.A well oriented system of taxation requires combination of direct & indirect taxes in different proportions.

 Ms. Meenakshi Chopra

Assistant Professor

Dept. of Management Studies