Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
4.1 INTRODUCTION
In the recent years, India has been viewed as an attractive and
dynamic investment destination, and has witnessed an increased presence
of multinational enterprises (MNEs) and a consequential increase in cross-
border trade. This has created an opportunity to the Government for
improving tax system of the country to treat the globalization benefits
effectively. In India, since the inception of globalization and liberalization
policies, a host of significant developments have taken place in the tax
system. On the other hand, the present status of tax reforms have their roots
in the past developments and history of taxes in ancient, medial and
modern India. The understanding of this sequential development gives us
an idea about where we stand and what should be our next course.
64
collective needs of public. “It has also to pay its own administration”1. The
government needs financial resources for these purposes and taxation is a
tool or method of transferring money from private to public hands.
“Taxation is necessary because what the government gives it must first take
away”.2
1
Sury, M.M (2006), Taxation in India 1925 to 2007, New Delhi, New Century Publications, p.3.
2
Ibid.
3
Sury, M.M (2006), Taxation in India 1925 to 2007, New Delhi, New Century Publications, p.3.
4
Rangarajan, L.N (1992), Kautilya”The Arthasastra” Penguin Books India Pvt. Ltd., New Delhi,
p. 262-265.
65
2. Transaction tax (Vyaji) including manavyaji (transaction tax for
crown goods).
3. Share of production (Bhaga) including 1/6th share (Shadbhaga).
4. Tax (Kara) in cash.
5. Taxes in Kind (Pratikara) including labour (Vishti) supply of
soldiers (Ayudhiya).
6. Countervailing duties or taxes (Vaidharana).
7. Road cess (Vartani).
8. Monopoly tax (Parigha).
9. Royalty (Prakriya).
10. Taxes paid in kind by villages (Pindakara).
11. Army maintenance tax (Senabhaktham).
12. Surcharges (Parsvam).
66
to trace historical developments of a subject to understand its present
features and trends, the changed circumstances noted above fail to provide
comparable data for the purpose. Therefore, only a brief account of the tax
system prevailing prior to Independence is presented here.5
67
vegetable products, and tobacco in 1943, mainly to meet the exigencies of
war finances. The year 1944 saw excise duties being imposed on coffee,
tea and betel nut. Cigarettes came within the excise net in 1948 and mill-
made cotton cloth in 1949. Before 1944, excise duties were levied under
separate enactment for different goods, e.g. tobacco levies were imposed
under the Tobacco (Excise Duty) Act, 1943. About 16 such separate laws
were consolidated into the Central Excises and Salt Act and the Central
Excise Rules, 1944.
Among the direct taxes, the only important source of revenue was
the income tax introduced in India by the British in 1860 to overcome the
financial difficulties created by the events of 1857. Out of a Central tax
revenue of Rs.73.90 crore in 1938-39, customs accounted for Rs.40.51
crorre, Central excises Rs.8.66 crore, and income tax Rs. 13.74 crore
(Table 4.1)
Table 4.1
(Rs. in crore)
Central tax revenue Provincial tax revenue*
Customs 40.51 Land revenue 25.40
Income tax 13.74 State excises 13.08
Corporation tax 2.04 Stamps 9.53
Central excise duties 8.66 Registration 1.09
Salt duty 8.12 Devolution of taxes from 3.98
centre
Total taxes 73.90 Total taxes 56.07
Note: Figures relate to undivided India.
*Data refer to nine Provinces including Sind and N.W.F.P. (now in Pakistan)
Source: Government of India, Ministry of Finance, Report of the Taxation Enquiry
Commission, 1953-54, Vol. I, Tables 4 (p. 20), 5 (p. 23), and 7 (p. 25).
68
As for the British Indian Provinces, the chief source of income was
land revenue followed by Provincial excises, mainly on liquor. Although
under the Government of India Act, 1935, Provincial Governments had
been authorized to levy sales tax, it formed a very low component of their
revenue till Independence. The Province of Bombay levied a tax on the sale
of tobacco in 1938. A retail sales tax on motor spirit and lubricants was
imposed by Central Provinces (now Madhya Pradesh) in the same year. A
multi-point general sales tax was levied in Madras Province at the rate of
half per cent in 1939 under the Madras General Sales Tax Act.
The Princely States did not form part of the structure of public
finance of British India. They had separate budgets and separate source of
revenue. The maritime States imposed their own customs duties.
69
A) Distribution of Taxation Powers: Article 265 of the Constitution
makes clear that no tax shall be operated without the authority of
law. Entries 82 to 92B of List I in the Seventh Schedule to the
Constitution refer to the taxation powers of the Union Government
(Table 4.2). Entries 45 to 63 of List II in the same Schedule mention
the fiscal powers of the State Governments (Table 4.3). List III does
not deal with taxation. So the Center and the States have no
concurrent powers of taxation. The residual powers of taxation,
belong to the Center vide entry 97 of List I in the Seventh Schedule.
For instance, gift tax (abolished in 1998) was imposed by the Union
Government under these residual powers. Similarly, prior to the
Constitution (Eighty-eighth Amendment) Act, 2003, service tax was
imposed under these residual powers.
The Constitution does not provide for any taxation powers to local
governments. However, the implication of Article 276 is that the taxes on
professions, trades, callings or employment are for the benefit of a State or
of a municipality, district board, local board or any other local authority.
The States on their own may assign any of the taxes in the State list to the
local bodies. The taxes generally assigned to local governments are
property taxes, octroi, and taxes on vehicles7.
7
Sury, M.M (2006), Taxation in India 1925 to 2007, New Delhi: New Century Publications, p.
12.
70
Table – 4.2
Taxes within Union Jurisdiction as Specified in List I in the Seventh
Schedule of the Indian Constitution
Entry
Sl.
No. in Description of the duty/tax
No.
List-I
4 85 Corporation tax.
71
Table – 4.2 (Contd...)
Entry
Sl.
No. in Description of the duty/tax
No.
List-I
Table 4.3
Taxes within the State Jurisdiction as Specified in List II in the
Seventh Schedule of the Indian Constitution
Entry
Sl.
No. in Description of the duty/tax
No.
List-II
1 45 Land revenue.
2 46 Taxes on agricultural income.
3 47 Duties in respect of succession to agricultural land.
4 48 Estate duty in respect of agricultural land.
5 49 Taxes on lands and buildings.
72
Table – 4.3 (Contd...)
Entry
Sl.
No. in Description of the duty/tax
No.
List-I
6 50 Taxes on mineral rights subject to any limitations imposed
by Parliament by law relating to mineral development.
7 51 Duties of excise on alcoholic liquors and narcotics
manufactured or produced in the State but not including
medicinal and toilet preparations containing alcohol.
8 52 Taxes on the entry of goods into a local area for
consumption, use or sale therein.
9 53 Taxes on the consumption or sale of electricity.
10 54* Taxes on the sale or purchase of goods other than
newspapers, subject to the provisions of Entry 92A of List
I.
11 55** Taxes on advertisements other than advertisements
published in the newspapers (and advertisements broadcast
by radio or television).
12 56 Taxes on goods and passengers carried by road or on
inland waterways.
13 57 Taxes on vehicles, whether mechanically propelled or not,
suitable for use on toads, including tram-cars subject to the
provisions of Entry 35 of List III.
14 58 Taxes on animals and boats.
15 59 Tolls.
16 60*** Taxes on professions, trades, callings and employment.
17 61 Capitation taxes.
18 62 Taxes on luxuries, including taxes on entertainment,
amusements, betting and gambling.
19 63 Rates of stamp duty in respect of documents other than
those specified in the provisions of List I with regard to
rates of stamp duty.
* Substituted by the Constitution (Sixth Amendment) Act, 1956: ** The words ‘and
advertisements broadcast by radio or television’ inserted by the Constitution (Forty-
second Amendment) Act, 1976: *** The scope of these taxes is spelt out in Article 276,
the clause (2) of which fixes the amount payable by a person on account of these taxes.
Source: Government of India, Ministry of Law, Justice and Company Affairs, The
Constitution of India, Seventh Schedule, List II.
73
B) Restrictions on the Taxation Powers of the States8: Constitution
also imposes certain restrictions on the taxation powers of the
States. Although a State legislature enjoys the power to levy any of
the taxes mentioned in List II, in the case of certain taxes, this power
is subject to restrictions imposed by substantive provisions of the
Constitution. Some examples of these restrictions are as follows.
8
Sury, M.M (2006), Taxation in India 1925 to 2007, New Delhi: New Century Publications, p.
10.
74
2. A state legislature is empowered to levy a tax on professions, trade,
calling or employment vide entry 60 of List II. However, the total
amount payable in respect of any one person to the Stated by way of
such tax is not to exceed Rs. 2,500 per annum [Article 276(2)].
1. Division of powers to levy taxes between the Centre and the States
is quite unambiguous. In other words, there is no tax which can be
levied by both the Centre and the States. Before the constitutional
(Eightieth Amendment) Act was passed in March 2000, the customs
duties and the corporation tax were within the purview of the
Central government and they accounted for about 50 per cent of its
tax revenue. Now revenues from these taxes are to be shared
between the Centre and the States along with other Central taxes and
duties. The States have power to levy some other taxes and the
revenue collection from them may be spent on their activities. The
important taxes falling in this category are value added tax (VAT),
State excise duties, land revenue, agricultural income tax and
entertainment tax.
2. Some taxes were earlier levied by the Central government but their
proceeds were divided between the Centre and the States. Union
excise duties and taxes on income other than agricultural income
belonged to this category. The basis on which these taxes were
divided between the Centre and the States was recommended by the
9
Misra, S.K and Puri, V.K. (2012) Indian Economy, Mumbai: Himalay Publishing House, p. 653.
75
Finance Commission. Now these taxes do not constitute a separate
category. Together with other Central taxes and duties they
constitute a Central pool of tax revenue which is shared between the
Centre and the States in accordance with the recommendations of
the Finance Commission.
3. The power to levy and collect certain taxes is vested in the Centre,
whereas their revenue proceeds are to be distributed among the
States. Estate duty on property other than agricultural land, duty on
railway freights and fares, terminal tax on goods and passengers
carried by railways, sea or air, taxes on sale or purchase of
newspapers and on advertisements therein belong to this category.
76
4.6.1 Personal Income Tax
Personal income tax is levied on the incomes of individuals, Hindu
undivided families, unregistered firms and other associations of persons.
For taxation purpose income from all sources is aggregated. However,
apart from the deduction of necessary qualified expenditures, rebate on
account of life insurance premium, provident fund, etc., was earlier
allowed. This rebate was, however, abolished in the Budget 2005-06. Now,
out of gross total income of an individual a host of deductions are allowed
prominent among them are deductions for savings and pensions, medical
insurance premium and interest on educational loans.
77
total income exceeded Rs.8.5 lakh. “Extraordinarily high tax rates in the
past were highly unrealistic. They failed to reduce economic disparities. On
the contrary, they put a high premium on tax evasion and, in practice,
became a major factor in the growth of black money”.11 Raja Chelliah
Committee (1991) had also favoured significant reductions in tax rates at
all levels. This approach seems to be influenced by the Laffer Effect which
implies that a reduction in the rate of taxation leads to more than
proportionate increase in tax yield.12
11
Misra, S.K and Puri, V.K. (2012) Indian Economy, Mumbai: Himalay Publishing House, p.
656.
12
However, there is little empirical evidence to support the Laffar proposition.
78
to people who invested in infrastructure bonds. A separate section 80CCF
was introduced under which this benefit was granted to the investor. The
budget 2011-12 raised the exemption limit from Rs. 1.60 lakh to Rs. 1.80
lakh. The exemption limit for senior citizens was raised from Rs. 2.40 lakh
to Rs. 2.50 lakh while for women, it was kept unchanged at Rs. 1.90 lakh.
The age for senior citizens was reduced from 65 years to 60 years and new
category of very senior citizens (above 80 years age) was introduced. The
basic exemption limit for ‘very senior’ citizens was kept at Rs. 5 lakh. The
Union Budget for 2012-13 raised the exemption limit from Rs. 1.80 lakh to
Rs. 2.0 lakh (from Rs. 1.90 lakh in 2011-12). The threshold for incidence
of the peak income tax rate of 30 per cent was increased to Rs. 10 lakh
from Rs. 8 lakh.
In the Union Budget for 2013-14, the income tax rates and slabs are
the same as it was during 2012-13, except two changes (which affects only
a limited number of assesses). First, as per Finance Act, 2013 section 87A
of the Income Tax Act, 1961, an additional rebate of Rs.2000/- has been
given to the individual tax payer whose total income does not exceed Rs. 5
lakh. Second, there is a surcharge of 10% on persons whose taxable income
exceeds Rs 1 crore per year. This will apply to individuals, HUFs, firms
and entities with similar tax status.
79
61, corporations are being treated as independent entities and shareholders
are no longer allowed any credit against their individual tax liabilities.
Though corporate incomes are being taxed at a flat rate, there were
provisions for various kinds of rebates and exemptions. In order to give
incentive to development activity in the industrial sector, a system of
development rebate was introduced in 1955 in place of initial depreciation
allowance. Between 1974 and 1976 development rebate was withdrawn
and the system of initial depreciation allowance was reintroduced. This
arrangement was, however, short lived, as in the Budget for 1976-77 a
system of investment allowance on the pattern of development rebate was
provided. Subsequently, investment deposit account scheme was
introduced. Over the years, corporate tax base remained eroded on account
of various rebates, exemptions and allowances. In the Budget for 1990-91
the investment allowance and the Investment Deposit Account Scheme
were withdrawn but the corporate enterprises were compensated by
lowering down the rate of corporate tax. However, in Budget for 1991-92
the rates of corporate tax were raised. Raja Chelliah Committee (1991) had
recommended that the corporation tax rate should be brought down to 40
per cent. This was implemented in the Budget for 1994-95. The Budget for
1997-98 reduced the rate of corporate tax to 35 per cent. In the Budget for
2005-06, the tax rate was reduced from 35 to 30 per cent while the
surcharge was raised from 5 to 10 per cent to align it with marginal
personal income tax rate. The Union Budget 2010-11 reduced the
surcharge from 10 to 7.5 per cent. This was reduced further to 5 per cent in
the Union Budget 2011-12.
80
devoid of any sound principle”.13 He had approvingly quoted Nocholas
Kaldor, “The company taxation in provisions of India (perhaps even more
than that of other countries) are apt to strike a detached observer as a
perfect maze of unnecessary complications, the accretion over years of
futile endeavour to reconcile fundamentally contradictory objectives.”14
This situation has persisted over the years. Certain provisions of the
corporate tax were providing incentives to investors, whereas some others
were nullifying their effects. Further, if some provisions exercised checks
on companies which make attempts to evade the tax, they also adversely
affected capital formation in the private corporate sector.
13
Raja J. Chelliah (1969), Fiscal Plicy in Underdeveloped Countries, London: Routledge (Taylor
& Francis Group), p. 122.
14
Ibid.
15
Amaresh Bagchi (1995), “Strengthening Direct Taxes – Some Suggestions”, Economic and
Political Weekly, February 18, p.384.
81
of book profits. However, this is one instrument which nullifies the effects
of MAT to some extent.
82
role to play GAARs play the role. Provisions dealing with Relief for
Avoidance of Double Taxation, Transfer Pricing, Advance Pricing
Agreements (APAs) and Safe Harbour Rules have been introduced and
amended to suit to the contemporary needs. So, the corporate taxation in
India has been subject to modification and restructuring with the intention
of providing tax relief to business and industry on the one hand and
plugging the loopholes leading to the avoidance of tax on the other. In the
Finance Act 2014 (Budget – 2014) the Government has come out with new
schemes for corporate undertakings, including new Investment Allowance
Scheme.
Estate Duty was first introduced in India in the year 1953. It was
levied on property passing on the death of a person. The property of the
deceased considered as the estate was subject to levy of estate duty.
Agricultural land in States which had agreed to a legislation to this effect
was included in the estate and was subject to this duty. Agricultural land in
other States was not subject to estate duty, its value, however, was added to
the value of the estate for determining the rate of estate duty to be levied on
other property.
83
Estate Duty Act, 1953, contained a provision whereby all property
transferred in anticipation of death could be treated as part of the estate
passing on death. From the point of view of proceeds, the estate duty was a
minor source of revenue and administratively it was disproportionately
burdensome. Hence, the Central government decided to abolish it with
effect from April 1, 1985.
Gift Tax was first introduced in the year 1958. It was treated as
complementary to the estate duty and tax on wealth. The gift tax was
leviable on all donations except the ones given by the charitable
institutions, government companies and private companies. Certain
exemptions were allowed. Notable among these were donations to
recognized charitable institutions, gifts to women dependents at the time of
their marriage and gifts to wife. Gift tax has been abolished on gifts made
on or after October 1, 1998 due to its inability to collect sound amount of
revenue and possibility for incorporating similar levy under income tax.
84
4.7 INDIRECT TAXATION – REFORMS AND DEVELOPMENTS
The most crucial indirect taxes, in India, are Customs Duties, Excise
Duties, Service Tax and Sales Tax/ Value Added Tax (VAT). In colonial
India till the beginning of World War II Customs Duties were prominent
indirect taxes. After independence Central Excise Duties became important
source of revenue. In the recent past Service Tax has been gaining
importance from the point of view of revenue generation. Customs, Excise
(CENVAT) and Service Tax are levied and administered by the Central
Government. For State Governments Sales Tax/ VAT is the most important
revenue source. A brief discussion on pre and post-globalization
developments pertaining to these taxes is presented below.
85
Customs duties perform two major functions. First, like any other tax
they raise revenue needed by the government, and second they regulate
foreign trade of the country, more particularly the imports. In pursuance of
these objectives during the pre-tax reform period, India had become a country
with the highest level of customs tariff in the world, with basic duties
supplemented by ‘auxiliary’ and additional or countervailing duties. The
maximum rate of duty was as high as 300 per cent. Remarking on the
structure of customs duties Amaresh Bagchi writes, “the rate structure was
marked also by wide dispersal among commodities and numerous exemptions
rendering the system of foreign trade taxes extremely complex and
economically irrational. In many instances, similar products were taxed at
different rates, and even the same product was subjected to varying rates
depending on its use. The effective rates of protection (ERP) also varied
widely across industries (often effected through administrative modifications),
and some sectors enjoyed unduly high levels of protection while for some like
capital goods industries the ERP was low or even negative.”16 Therefore, the
structure of customs duties was dictated not by revenue considerations alone.
It was without doubt irrational and constituted an impediment to growth and
thus called for drastic reform.
16
Amaresh Bagchi, “Taxation of Goods and Services in India: An Overview” in Sudipto Mundle,
Public Finance – Policy Issues for India (Delhi, 1997), p.113-114.
17
Government of India, Long Term Fiscal Policy, (Delhi,1985) p.40.
86
considered it necessary to distinguish between the broad categories of imports,
such as (a) Capital goods, (b) Raw materials, (c) Other intermediate goods
(including components and so called ‘universal intermediates’, (d) Essential
consumer goods and (e) Non-essential consumer goods.
87
Presently, excise duties are levied by the central government in
number of forms. This obviously complicates the tax structure and makes it
difficult to assess the final burden. In view of this problem the government
has not only converted many of the specific duties into ad valorem rates
but the number of rate categories for Central excise duties has also been
reduced. Over the past few years, the number of exemption notifications
have been brought down drastically. The government has also decided not
to grant special or ad hoc exemptions in future except under very special
circumstances.
The Budget for 1994-95 introduced major reforms in the excise tax
structure as part of the government’s programme of modernizing the
country’s tax system. The principal features of this restructuring as pointed
out by Misra and Puri were: (i) Expansion of MODVAT to capital goods
88
and petroleum products, (ii) Shift in the bulk of excise taxation from
specific to ad valorem rates which assured much greater built-in buoyancy
of revenues, (iii) reduction in total number of ad valorem tax rates to about
half the existing number which was a major step towards simplicity and
transparency, (iv) continuing the process of lowering rates when they were
unduly high, (v) application of uniform rates for similar commodities to the
extent possible with a view to reduce classification problems, scope for
misuse and widespread litigation, (vi) removal of complicated price list
procedure, and (vii) reduction of the number of special exemption
notifications.18
89
4.7.2.1 State Excise Duties
The States have exclusive jurisdiction over the excise duties on opium,
alcohol and narcotics. It is an easy source of revenue and possible revenue
proceeds from this source are high. In some States, heavy excise duty on
alcohol has been used to discourage its consumption. In some other States
policy of prohibition has been adopted and the governments have preferred to
bear the loss of revenue for realizing a socially desirable purpose. Prohibition
has always been a controversial subject in India. Its criticism is made not
because its merit as a measure of social welfare are not recognized, but
because its implementation has been found rather difficult. Wherever
prohibition has been introduced, illegal production of liquor has continued
under the patronage of corrupt administration, while the government has
suffered heavy loss of revenue. Mainly due to these reasons, some States have
not introduced prohibition.
90
the service tax net except a negative list of specified services provided under
Section 66D.
Table - 4.4
Revenue from Service Tax in India
No. of Growth
Revenue Revenue
Services No. of in
Year (Rs. in Growth (in
under Assessees Assessee
Crore) per cent)
tax net base
1994-95 3 3943 5 407 Base Year
1995-96 6 4866 5 862 112
1996-97 6 13982 5 1059 23
1997-98 18 45991 5 1586 50
1998-99 26 107479 5 1957 23
1999-00 26 115495 5 2128 9
2000-01 26 122326 5 2613 23
2001-02 41 187577 5 3302 26
2002-03 52 232048 5 4122 25
1
2003-04 62 403856 8 7891 91
2004-05 75 774988 102 14200 80
2005-06 84 846155 10 23055 62
2006-07 99 940641 123 37598 63
2007-08 100 1073075 12 51301 36
4
2008-09 106 1204570 10 60941 19
2009-10 109 1307286 10 58422 -4.13
2010-11 117 1372274 10 71016 22
2011-12 119 1535570 10 97509 37
2012- Negative 1712617 125 132518 36
13(P) List
regime
Note: Tax rates excluding cess. 2012-13 (P) – Provisional.
Source: Revenue as reported receipt budget document/CGA and Number of assesses
reported by various zones published in website (http://www.servicetax.gov.in)
1. Effective from 14.5.2003. 2. Effective from 10.09.2004.
3. Effective from 11.05.2007. 4. Effective from 24.02.2009.
5. Effective from 01.07.2012
91
The main reasons for the imposition of service tax have been
presented below.
1. As the services presently form more than 55% of the GDP and are
expected to grow further, they should also bear the burden of tax.
Another reason that, both goods and services satisfy consumption
needs and hence, deserve to be treated equally in the matter of
taxation. The growth in the service sector during liberalization
period has been spectacular. Now services account for nearly 60 per
cent of GDP. At the same time, their contribution to the government
exchequer has not at all been commensurate. In 2012-13, revenue
from service tax accounted for 7.08 per cent of total tax revenue.
2. Consumption-basket comprises of goods and services. The practice
prevalent so far is to tax goods only. Strictly, from the equity view
point, both goods and services should be taxed. There will be a
distortion in the relative prices of goods and services when only
goods are taxed and services are excluded. This also leads to
distortion on the allocation of resources.19 Consequently efficiency
and equity in resource allocation is sacrificed. It is also well known
that services constitute a larger proportion of the consumption of the
rich rather than of the poor as the demand for services is mainly
income-elastic.
3. From the viewpoint of comprehensive taxation, it can be said that
the exclusion of services narrows the tax base. A narrow tax base
has its own economic costs. If it is required to raise a given amount
of revenue, the tax rate on goods needs to be high. The inclusion of
services broadens tax base and a broad tax base has its own
economic advantages. It enables tax authorities to collect a given
amount of revenue with low rates. Thus, in the context of (1) rapidly
19
Sayed Afzal Peerzade (2010), Economics of Taxation, New Delhi: Atlantic Publications p.186-
187.
92
changing occupational structure. (2) need to mobilize additional
revenue to finance ever-increasing public expenditure, and (3) in the
interest of equity, it is necessary to bring the provision of services in
to the tax net.20
4. If services are kept out of the tax net, traders cannot claim VAT on
their service inputs. This is likely to cause cascading effect and
encourage business to develop in-house services.
93
and long-term measures for transforming and improving indirect taxation
system. However, the proposal of levying tax by the Central Government
and division of proceeds between the Centre and the States did not find
favour with the States as the States are fully autonomous in levying sales
tax and acceptance of this proposal would have meant surrender of their
right to the Center.
Since sales tax / VAT is a State’s subject, the role of the Central
government is just as a facilitator to ensure successful implementation of
22
Parthasarathi Shome (2002), India’s Fiscal Matters, New Delhi: Oxford University Press, p.
154.
94
VAT. In consultation with the States, a compensation formula was worked
out to compensate the revenue loss during 2005-06, 2006-07 and 2007-08
on account of VAT introduction and the same was released to the States.
Through its deliberations over the years, the Empowered Committee
finalised a design (white paper) of VAT, which seeks to retain essential
features commonly across the States while, at the same time, providing a
measure of flexibility to the States to enable them to meet their local
requirements.
23
Government of India (2008), Economic Survey, 2007-08, Box 3.4, p.55
95
only and does not cover inter-State sale transactions, the ITC will
not be available on inter-State purchases.
• Exports will be zero-rated, and at the same time, credit will be given
for all taxes on inputs/purchases, related to such exports.
• There are provisions to make the system more business-friendly.
These include provision for self-assessment by the dealers,
provision of a threshold limit for registration of dealers in terms of
annual turnover of Rs. 5 lakh, and provision for composition of tax
liability up to annual turnover limit of Rs. 50 lakh.
• States have been allowed to continue with the existing industrial
incentives, without breaking the VAT chain. However, no fresh
sales tax/VAT-based incentives are permitted.
96
activities. Due to increased cross-border trade, services, and investment the
need for formulating proper mechanism to tax such international
transactions has enhanced in recent years. Apart from this, the concept of
MNC/MNE has gained prominence and been influencing the framing of
tax laws to deal with various issues at international level.
25
Nandini N. Math & Basavaraj C.S., 2013 “Indian Tax Treaties in Liberalised Era”,
Prabhanveshana – Journal of Commerce and Economics, Vol.03, Issue No.02. July-Dec-2013,
p.2
97
the necessity for such agreements with many other countries and hence,
between 1991 to 2014 such agreements were signed with about 70
countries. Meanwhile, renegotiation and updation of existing agreements is
also going on. India has signed both comprehensive and limited
agreements, however, most of the agreements are comprehensive in nature.
These agreements spread across the continents of the world. In recent years
the agreements have been signed with a few significant countries for
information exchange and tax collection. This is expected to reduce the
stashing of black money in foreign land. The agreements for information
exchange and tax collection are being pursued with many other countries
and they are at different stages.
26
White Paper on Black Money, 2012, Presented by the then Finance Minister of India. Shri
Pranab Mukherjee. Pp,34
98
Table - 4.5
Number of DTAAs Signed by India during
Pre and Post Globalization Period (1965 -2014)
Number of Number of Cumulative
Year
agreements signed agreements
Pre- Globalization
1965 1 1
1969 2 3
1982 3 6
1985 3 9
1986 1 10
1987 2 12
1988 1 13
1989 5 18
Post– Globalization
1991 1 19
1992 3 22
1993 5 27
1994 7 34
1995 2 36
1996 6 42
1997 7 49
1998 4 53
1999 5 58
2000 1 59
2001 1 60
2003 4 64
2004 1 65
2006 5 70
2007 2 72
2008 4 76
2010 2 78
2011 7 85
2013 1 86
2014 2 88
Source: Compiled from.
1) www.incometaxindiagov.in
2) Press information bureau, Govt. of India, (http://www.pib.nic.in/newsite/erelease.aspx?relid=92981.)
99
Chart - 4.1
Year wise and Cumulative DTAAs signed during Pre and Post-
Globalization period
88
100 100
86
85
78
90
76
72
70
80 80
65
64
60
59
58
70
53
49
60 60
42
50
36
34
40 40
27
22
19
30 18 18
12 13
20 6 9 10 20
10 1 3
0 0
1965
1969
1982
1985
1986
1987
1988
1989
1990
1991
1993
1995
1997
1999
2001
2004
2007
2010
2013
4.8.1.1 Tax Information Exchange Agreements (TIEAs):
One of the objectives of DTAAs is to facilitate tax information of
persons who are perceived to be liable to pay tax in the requesting state.
For this purpose DTAAs signed in recent years have a clause dealing with
exchange of information (EOI). On the insistence of India the G-20 Meet,
held in 2010 at Seol, agreed for TIEAs. Now, India is renegotiating with all
the contracting states under DTAA to include the clause relating EOI in
line with paragraph 5 of article 26 of the OECD Model Tax Convention
2010. Because of India’s aggressive attempt to sign TIEAs, now it has such
agreements with more than 30 countries. Table 4.7 below highlights the
outcome of TIEAs.
100
Table-4.6
Information requests between India and other countries
2006-07 02
2007-08 13
2008-09 17
2009-10 46
2010-11 67
2011-12 46
Source: Aseem Chawla (India – Branch Reporter), 2013 “Cahiers de droit Fiscal
International – International Fiscal Association 2013” Vol.986, p.345.
101
4.8.2 TRANSFER PRICING
The term ‘transfer pricing’ can be attributed the meaning and
defined as “A division, branch, department or any other component of an
entity may transfer goods or services to other subdivisions of the same
entity. Transfer may be of tangible property like raw material, unfinished
components, ready to sell items or services like marketing and distribution,
and research and development. The amount used to record such transfer
between divisions is known as transfer pricing”.27
102
price fixing in different geographical jurisdictions. This results in the
worldwide reduction of tax payments, and the purpose of effective and
correct allocation of taxes to different tax jurisdictions is badly served. In
order to curb this, most of the countries have legislation/ provisions in the
form of transfer pricing regulations for preventing the perceived erosion of
the tax base. Even after the incorporation of transfer pricing provisions
within the tax laws of over 70 countries, transfer pricing is still being
extensively used to transfer income/ profit and avoid taxes at will across
countries.29
29
Aseem Chawla (India – Branch Reporter) Cahiers de droit Fiscal International – International
Fiscal Association 2013 Vol.986, p.339.
30
ibid.
103
gave opportunities for unrestricted adjustments thereby encouraging tax
evasion. Further, as there were no rules regarding documentation, the entire
burden of proof fell on the assessing officer. With a view to provide a
detailed statutory framework for the computation of fair and equitable
profits of multinational enterprises, the Finance Act 2001, based on the
recommendation of the Expert Group under the Chairmanship of Mr. Raj
Narain, substituted Section 92 with a new section and introduced new
Section 92A to 92F in the Income Tax Act relating to computation of
income from an international transaction having regard to the arm’s length
price.31
Table – 4.7 gives the details of sections and rules that are structured
under the Income Tax Act 1961 to deal with transfer pricing issues and
scheme.
Table - 4.7
Transfer Pricing Provisions and Rules under Indian Income Tax Act
and Rules
Sections Issues Covered
92 Computation of Income from International transactions having
regard to arm’s length price.
92A Meaning of Associated Enterprises.
92B Meaning of international transaction.
92C Computation of arm’s length price.
92CA Reference to Transfer Pricing Officer.
92CB Power of Board to make Safe Harbour Rules.
92CC Advance Pricing Agreement.
92CD Effect of Advance Pricing Agreement.
92D Maintenance, keeping of information and documents by persons
entering into an international transaction or specified domestic
transaction.
31
Debasish Dutt, 2009, “Transfer Pricing – A Study’ The Management Accountant Journal, p.636.
104
Table – 4.7 (Contd...)
105
2) Transactional Profit Methods
d) Profit Split Method (PSM).
e) Transactional Net Margin Method (TNMM)
106
4.8.2.4 Documentation for Transfer Pricing
There is an inevitable requirement of providing enormous reliable
data for deciding arm’s length price by applying deserving Transfer Pricing
Method. Tax jurisdictions worldwide have been grappling with this
problem. Some countries have smoothened the system to the best of their
ability. In India the following documentation requirements (Table 4.8) are
to be fulfilled in the process.
Table - 4.8
Documentation for Transfer Pricing in India
Rule Required Documents
10D(1)(a) Description of ownership structure of the assessee with details of
shares held in it by other enterprises.
10D(1)(b) Profile of the Multinational Group of which assessee is part:
Particulars of each enterprise of the group.
Ownership linkages among group enterprises.
10D(1)(c) A broad description of :
Assessee’s business.
Assessee’s industry.
AEs with whom assessee transacted business.
10D(1)(d) Register/ list of individual international transactions or SDTs as the
case may be, entered into by the assessee with each of its associated
enterprises.
10D(1)(e) Functional Analysis/ Functions Assets Risks (FAR) Analysis
10D(1)(f) Records of the economic and market analysis, forecasts, budgets or
any other financial estimates prepared by the assessee for the
business as a whole and for each division or product separately,
which may have a bearing on the international transactions or the
SDTs entered into by the assessee.
10D(1)(g) Records of un controlled transactions.
10D(1)(h) Records of comparability analysis.
10D(1)(i) Description of methods considered for determining ALP. The
method selected as the most appropriate method along-with
explanations as to why such method was selected and how such
method was applied in each case.
10D(1)(j) Records of actual workings for determining ALPs.
10D(1)(k) The assumptions, policies, negotiations, if any, which have critically
affected the determination of the arm’s length price.
10D(1)(l) Details of adjustments to transfer prices to align them to ALPs and
consequent adjustments to total income
Source: CA. Srinivasan Anand G (2012), ‘Transfer Pricing Audit’, Taxmanns Corporate
Professionals Today, Vol.25, p.339-340.
107
4.8.3 OPERATIONAL STATISTICS OF TRANSFER PRICING IN
INDIA
Table – 4.9 provides data of transfer pricing audits from 2005-06 to
2013-14. During the period under consideration nine rounds of audits have
been completed. There is a steady increase in the number of TP audits.
Numbers of adjustment cases are also significantly increasing from 23 per
cent in 2005-06 to 53 per cent in 2013-14. The amount adjusted, has
increased from Rs. 1,220 crore in 2005-06 to Rs. 59,602 crore in 2013-14.
Table - 4.9
Transfer pricing audits and amount adjusted in India
108
Table-4.10 deals with the transfer pricing adjustment as a
percentage of corporate tax revenue collected in India from FY 2002-03 to
2013-14. The revenue collected from transfer pricing adjustments as a
percentage of the total corporate tax revenue collected has gone up from
2.97 per cent in 2002-03 to 15.1 per cent in 2013-14. This rise in
proportion of transfer pricing adjustments reveals the significance attached
to the issue. The transfer pricing adjustments between 2010-11 and 2013-
14 have been much higher in percentage as well as in absolute terms.
Table - 4.10
Transfer pricing adjustment as a percent of corporate tax revenue
collection in India
Transfer Pricing
Transfer Pricing Revenue from
Financial adjustments as a
Adjustments corporate taxes
Year % of corporate
(Rs. in crores) (Rs. in crores)
tax revenue
2002-03 1,373 46,172 2.97
2003-04 2,575 63,562 4.05
2004-05 1,220 82,680 1.48
2005-06 2,287 1,01,277 2.26
2006-07 3,432 1,44,318 2.38
2007-08 1,614 1,92,911 0.84
2008-09 6,140 2,13,395 2.88
2009-10 10,908 2,44,725 4.46
2010-11 23,237 2,98,688 7.78
2011-12 44,531 3,22,816 13.79
2012-13 70,016 3,56,326 19.65
2013-14 59,602 3,94,677 15.10
Source: 1. www.finmin.nic.in/department of revenue/www.corporatetax
2. Govt. of India - Annual Report 2013-14, Ministry of Finance (Budget Division).
109
Chart - 4.2
Transfer pricing revenue as a percentage of corporate tax revenue
collection in India
25.00
19.65
20.00
Percentage of TP to CTR
15.10
15.00 13.79
10.00
7.78
4.05 4.46
5.00
2.97 2.88
2.26 2.38
1.48
0.84
0.00
110
Table: 4.11
Comparison between Revenue from International Transactions &
Transfer Pricing adjustments in Indian context
Table 4.11 also reveals that, the India’s revenue from international
transactions has been steadily increasing during said period of ten years.
There is an increase by twenty five times in the revenue from international
transactions. However, revenue from transfer pricing adjustments has
increased from Rs. 1,373 crore in 2002-03 to Rs. 59,602 crore in 2013-14.
111
The above figures prove that the transfer pricing is becoming a key concept
in international taxation. The table also shows transfer pricing adjustments
adjustme
as a percentage of revenue from international transactions, which is
continuously increasing but the growth rate is more volatile as compared to
the growth rate of revenue from international transactions.
Chart - 4.3
Tax Revenue from International Transactions
Transactions and TP Adjustments
75000
70000
Tax revenue amount in rupees in crores
65000
60000
55000
50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
112
4.8.4 AUTHORITY FOR ADVANCE RULING (AAR)
The Authority for Advance Ruling was introduced in India, in 1993
by the Finance Act through Chapter xix-B of Indian Income Tax Act. It
came into force with effect from 1st June, 1993. Accordingly, a high level
body headed by a retired judge of the Supreme Court has been set up. The
authority is mainly engaged in determining the outcome of an issue in
advance and it is to facilitate non-resident assessees in computing the
income tax liability in advance. The authority helps in avoiding long drawn
and more expensive litigations of taxpayers. The Authority for Advance
Ruling will not entertain applications which seek determination of ALP.
Finance Act 2012 has introduced a mechanism to determine the
methodology of ALP in advance through ‘Advance Pricing Agreements’
(APAs).
While introducing the Finance Bill 2001, the then Finance Minister
stated that transfer pricing regulations are needed to ensure that profits are
not shifted out of India. The regulations, for the first time, introduced
internationally accepted arm’s length principle and methodologies for
determining the arm’s length price which were aimed at protecting India’s
tax base. Since the introduction of the transfer pricing regulations, nine
rounds of transfer pricing audits have been completed. During the initial
32
Basavaraj C. S. & Jabiulla (2013) Advance Pricing Agreement in India and Abroad, paper
presented at ‘66th All India Commerce Conference’ held in Bangalore (India) on 5-7 December,
2013.
113
years, the percentage of cases suffering transfer pricing adjustments was in
line with global experience. However, in the last four years not only the
percentage of cases suffering adjustments has gone up, but the volume of
adjustments has been doubling every year.33
Chart - 4.4
Percentage of TP cases adjusted in India (2002-03 to 2013-14)
60 53 53
49 51
50 44
Percentage of Cases
38 39
40
27
30 23 23 22
22
20
10
Year
33
S.P.Singh (2013), “Safe Harbour, Advance Pricing Agreement and Normal Audit Process in
India: Analysis of the Emerging Scenario”, International Taxation Vol.9, October 2013, p.380.
114
Chart - 4.5
Analysis of the recent 781 judgments of the Income Tax Appellate
Tribunals (ITAT)
Rulings in favour
of tax authorities
14%
Rulings partly in
favour of Ruling in favour
taxpayers and of taxpayers
partly in favour of 47%
tax authorities
15%
case remanded
back for fresh
adjudication
24%
Source: S.P. Singh (2013) “Safe Harbour, Advance Pricing Agreement and Normal
Audit Process in India: Analysis of the Emerging Scenario”, International
Taxation.Vol.9. October 2013 p.381.
34
Freddy R Daruwala (2012), “Advance Pricing Agreements” International Taxation, Vol.6,
p.514.
115
4.8.5.1 Types and Process of APAs
There are three types of APAs-Unilateral,
APAs Bilateral
eral and Multilateral.
While unilateral APA is an agreement between the tax payer and tax
authority of one tax jurisdiction, bilateral APA is an agreement between the
tax payer and tax authorities of two tax jurisdictions and multilateral
agreement is the agreement between the tax payer and tax authorities of
more than two tax jurisdictions. Unilateral APAs are more popular in
practice. While unilateral APA ensures certainty to the assessee, it does not
ensure avoidance of double taxation. However, the bilateral
bila and
multilateral APAs ensure certainty and help to avoid double taxation. At
the same time signing multilateral and bilateral APA is time taking and
difficult when compared to unilateral APA.
116
The tax payer submits an application for pre-filing consultation in
Form – 3CEC. Thereafter, between the taxpayer and the authority pre-
filing deliberations will be held. Based on the consultations, if found
acceptable, the application will be proceeded with. The taxpayer needs to
file APA application in Form – 3CED along with the necessary fees. The
application will be processed to remove deficiencies, if any, in the
application. Then detailed analysis of the case by way of calling for
relevant documents, visiting the taxpayer’s premises and making necessary
enquiries will be undertaken. This process will end with the draft APA
acceptable to both the parties. Once the Central Government approves
mutually consented draft the APA will come into existence and force.
35
Shanto Ghosh (2012), “APAs in India: The Last Frontier in Disputes Resolution”, International
Taxation, Vol.6, p.490.
117
• Assessments/reassessments that are pending or completed for the
years to which the APA applies would have to be completed or
reassessed by the tax authorities in accordance with the APA; and
• The process and procedures of the APA would be prescribed by the
Board.
• The applicant is required to pay fee which is to be computed as
under :
Amount of International Transaction Fee (in Rs.)
Amount not exceeding Rs. 100 crores Rs.10 Lakh
Amount not exceeding Rs. 200 crores Rs.15 Lakh
Amount exceeding Rs. 200 crores Rs.20 Lakh
36
Deloitte (2014), “India successfully concludes first batch of Advance Pricing Agreements
(APAs)” Transfer pricing – Insight with information, p.2.
118
4.8.6 SAFE HARBOUR RULES (SHRs)
The post-transfer pricing regulations era, in India, has witnessed a
continuous rise in litigations (vis-à-vis transfer pricing) and the
uncertainties involved in the transfer pricing audit. To tackle this situation
the Government of India had constituted a Committee under the
Chairmanship of Sri N. Rangachary (former Chairman CBDT and
Insurance Regulatory and Development Authority) on 30th July 2012 to
make recommendations on safe harbour rules for the following areas/
activity:
37
Para 4.97 of OECD Guidelines
119
2) Providing assurance to a category of tax payers that the price
charged or received on controlled transactions will be accepted by
the tax administration without further review;
3) Relieving the tax administration from the task of conducting further
examination and audit of such tax payers with respect to their
transfer pricing.
38
Para 4.94, Page 160 of the ‘OECD Transfer Pricing Guidelines for Multinational Enterprises
and Tax Administrations’.
120
Table – 4.12 (Contd...)
4. Advancing of intra-group loans The Interest rate declared is not less than
(where the amount of loan exceeds the base rate of State Bank of India as on
fifty crore rupees). 30th June of the relevant previous year
plus 300 basis points.
5. Providing corporate guarantee to The commission or fee declared is not
Wholly Owned Subsidiary (WOS) less than 2 per cent per annum on the
for an amount of guarantee ≤ INR amount guaranteed.
100 crores.
6. Providing corporate guarantee to The commission or fee declared is not
WOS where guarantee amount > less than 1.75 per cent per annum on the
100 crores. Credit rating of the AE amount guaranteed.
done by agency registered with
SEBI is of adequate to highest
safety.
7. Provision of contract research and Operating profit margin is not less than
development services wholly or 30 per cent.
partly relating to software
development.
8. Provision of contract research and Operating profit margin declared is not
development services wholly or less than 29 per cent.
partly relating to generic
pharmaceutical drugs.
9. Manufacture and export of core Operating profit margin declared is not
auto components. less than 12 per cent.
10. Manufacture and export of non- Operating profit margin declared is not
core auto components. less than 8.5 per cent.
Source: SHRs notified by CBDT on 18.09.2013.
121
international transactions will be accepted by the tax department and in
effect, overrule the requirement in Section 92 that income from
international transaction will have to be computed by determining its
arm’s length price.39
If safe harbour gets wide acceptance, the number of cases for audit
will be reduced substantially. The transfer pricing officers will be relieved
of over burden and can concentrate on other high value transactions. Safe
harbour rules would reduce possibility of objections by the reviewing
authorities.40
• The SHRs are applicable for the Assessment Year 2013-14 and
2014-15.
• The SHRs are in respect of eligible international transactions.
• SHRs draft is broadly divided into two types i.e. Sector-Specific
SHRs and Non-Sector Specific SHRs.
• SHRs in respect of international transactions, mainly, relate to
software and research & development, pharmaceutical sector,
outbound loans, corporate guarantee and auto ancillaries.
• The margins are prescribed for each of the activity.
39
Vijay Krishnamurthy (2013), “Indian Safe Harbour Rules”, International Taxation, Vol.9, p.368.
40
S.P.Singh (2013), “Safe harbour, Advance Pricing Agreement and Normal Audit in India;
Analysis of the Emerging Scenario”, International Taxation, Vol.9, p.384.
122
4.9.1 The tax burden in India
The simple way to understand the tax burden is to find out the tax-
GDP ratio. When the process of economic planning began in India in 1950-
51, the tax-GDP ratio was as low as 6.22 per cent. Since then it rose
steadily up to 1990-91 and thereafter declined. Against 7.76 per cent in
1960-61, it was 10.27 per cent in 1970-71, 13.65 per cent in 1980-81, 15.4
per cent in 1990-91, 14.52 per cent in 2000-01 and 16.31 per cent in 2010-
11. Until 1970-71, the tax burden in India was not higher than that in other
developing countries. However, during 1980s tax burden substantially
increased. This was due to increased interest expenditure, subsidies,
defense expenditure and budgetary support to growing public enterprises.
During 1990s tax-GDP ratio had declined approximately by 1 per cent
point, particularly due to tax rates reductions. According to M. Govind Rao
“the available evidence shows that the tax-GDP ratio in India is lower than
the level it should be for its per capita GDP growth by at least 2.5 per cent
per annum”41.
41
M. Govind Rao (2005), Should India Pay More in Taxes, Business Standard, February 12-13,
p.15.
42
Om Prakash and A S Sidhu (2011), Direct Tax Reforms in India: A comparative Study of Pre-
and Post-Liberalization Periods, The IUP Journal of Public Finance, Vol.IX, No.1, p57.
43
http://www.investopedia.com/ browsed on 25.03.2014 at 14:24 IST.
123
There are various problems associated with the definitions of
numerator and denominator of tax-GDP ratio. For instance, should profit/
losses of public monopolies form part of the numerator? Should social
security contributions be included in tax receipts? The denominator of the
ratio suffers from more ambiguities because there are various measures of
national income. Among the alternative measures of national income, the
important ones are: Gross Domestic Product (GDP), Gross National
Product (GNP) and Net National Product (NNP)44. Should taxes be related
to GDP or GNP or NNP, and whether at market prices or at factor cost?
44
GDP includes income produced locally including income accruing to non-residents but
excluding foreign income of residents. GNP on the other hand, excludes local income of non-
residents but includes foreign income of residents. NNP excludes depreciation (capital
consumption) and signifies a measure of output available for private and government
consumption and investment without reducing the capital stock.
124
receipts and GDP, any significant revision in GDP figures will affect the
ratio.
Table - 4.13
Tax-GDP Ratio of Central Governments (Top 15 GDP Economies)
Tax-GDP Ratio (per
GDP Tax-GDP
Country/Economy cent)
Rank Rank
2005 2011
1 United States 10.8 9.7 13
2 China 8.7 10.5 10
3 Japan 10.5 9.8 12
4 Germany 10.8 11.7 8
5 France 22.4 21.3 3
6 Brazil 16.7 15.7 5
7 United Kingdom 26.8 27.0 1
8 Italy 21.1 22.5 2
9 Russia 16.6 15.0 7
10 India 9.9 10.4 11
11 Canada 13.7 11.6 9
12 Spain 12.9 9.6 14
13 Australia 24.9 20.5 4
14 Mexico N/A N/A N/A
15 South Korea 14.7 15.6 6
World 14.6 14.6
Low Income 10.7 11.7 --
Middle Income 12.4 13.2 --
South Asia 9.9 10.3 --
East Asia & Pacific 10.0 10.9 --
High Income 15.0 14.4 --
Euro Area 18.0 17.6 --
Note: GDP rank based on GDP current in US$ of the world (listing by World Bank
2008-2011).
Source: Data compiled from World Bank: World Development Indicators – 2013 (Table
– 5.6).
125
higher than 0.1 per cent point. Some people argue that the higher tax-GDP
ratio transforms into better infrastructure etc. by taxing the rich through
direct taxes but in the globalized scenario things have become increasingly
complex. For example, increasing corporate taxes could have repercussions
through business moving out of the country.
Chart - 4.6
Tax GDP Ratio of India vis-à-vis World (2011)
Tax-GDP Ratio (%) - 2011 (Central Govt.)
20
18 17.6
16 14.6
14
12 10.4 10.3
10
8
6
4
2
0
European Area World India South Asia
45
Jain, Anil Kumar (2001), Direct Taxation in India - Some Aspects, Jaipur, RBSA Publishers,
p.15.
126
Table - 4.14
Tax-GDP Ratios: 1950-51 to 2012-13 - All India
(Per cent)
Year Direct Indirect Total
Pre-liberalization period
1950-51 2.29 3.93 6.22
1955-56 2.35 4.61 6.96
1960-61 2.31 5.45 7.76
1965-66 2.62 7.81 10.43
1970-71 2.18 8.09 10.27
1975-76 2.96 10.32 13.28
1980-81 2.25 11.40 13.65
1985-86 2.22 13.16 15.38
1990-91 2.15 13.25 15.40
Post-liberalization period
1991-92 2.54 13.22 15.76
1993-94 2.51 11.58 14.09
1995-96 3.00 11.70 14.71
1997-98 3.31 11.14 14.45
1999-2000 3.12 10.95 14.07
2001-02 3.11 10.28 13.39
2003-04 3.86 10.73 14.59
2005-06 4.54 11.37 15.91
2007-08 6.39 11.06 17.45
2009-10 5.82 9.63 15.45
2010-11 5.78 10.53 16.31
2011-12 (R.E) 5.66 10.78 16.43
2012-13 (B.E) 5.69 11.54 17.24
Notes: 1) GDP at current market prices based on CSO’s National Accounts 2004-05
series is used. 2) Figures reflect for both State & Centre’s tax.
Source: Government of India, Indian Public Finance Statistics: 2012-2013.(Table
No.1.8).
127
The share of direct taxes to GDP was 2.54 per cent in 1991-92. It
increased to 3 per cent in 1995-96, to 3.12 per cent in 1999-2000, to 3.86
per cent in 2003-04 and further increased to 6.39 per cent in 2007-08. After
2007-08 it has shown sharp decreasing trend. At the same time, the share
of indirect taxes to GDP was 13.22 per cent in 1991-92. It decreased year
on year and reached at 10.28 per cent 2001-02. Thereafter it has increased
to 10.53 per cent in 2010-11. During 2009-10 a sharp fall was seen due to
global economic crisis, however it has picked up from 2010-11.
Table - 4.15
Tax-GDP Ratios (Center and States Combined) – Pre-Liberalized
Period
(In percent)
Year Direct Indirect Total
1950-51 2.29 3.93 6.22
1951-52 2.28 4.62 6.89
1952-53 2.39 4.05 6.44
1953-54 2.11 3.75 5.87
1954-55 2.22 4.43 6.65
1955-56 2.35 4.61 6.96
1956-57 2.19 4.58 6.77
1957-58 2.42 5.30 7.72
1958-59 2.28 4.94 7.22
1959-60 2.38 5.27 7.65
1960-61 2.31 5.45 7.76
128
Table – 4.15 (Contd...)
It is clear from the Table 4.15 that direct tax-GDP ratio was almost
stagnant fluctuating within one percentage point and it was only indirect
tax-GDP ratio which has shown an upward trend and contributed to the
growth of tax-GDP ratio during pre-liberalization period.
129
Table 4.16
Tax-GDP Ratios (Center and States Combined) – Post-Liberalized
Period
(In percent)
Year Direct Indirect Total
1991-92 2.54 13.22 15.76
1992-93 2.58 12.59 15.17
1993-94 2.51 11.58 14.09
1994-95 2.84 11.71 14.56
1995-96 3.00 11.70 14.71
1996-97 2.98 11.61 14.58
1997-98 3.31 11.14 14.45
1998-99 2.80 10.50 13.31
1999-2000 3.12 10.95 14.07
2000-01 3.41 11.11 14.52
2001-02 3.11 10.28 13.39
2002-03 3.45 10.63 14.08
2003-04 3.86 10.73 14.59
2004-05 4.23 11.02 15.25
2005-06 4.54 11.37 15.91
2006-07 5.39 11.77 17.15
2007-08 6.39 11.06 17.45
2008-09 5.83 10.43 16.26
2009-10 5.82 9.63 15.45
2010-11 5.78 10.53 16.31
2011-12 (R.E) 5.66 10.78 16.43
2012-13 (B.E) 5.69 11.54 17.24
Source: Indian Public Finance Statistics – 2012-13.
Table 4.16 reveals that the tax collection as a percentage of GDP has
increased from 15.76 per cent in 1991-92 to 17.24 per cent in 2012-13.
Similarly, direct tax-GDP ratio has also increased from 2.54 per cent in
1991-92 to 5.69 per cent in 2012-13. Whereas, indirect tax-GDP ratio has
decreased from 13.22 per cent in 1991-92 to 11.54 per cent in 2012-13.
130
Chart - 4.7
Combined Tax-GDP Ratio of Center and States
40.00
35.00
30.00
25.00
Percentage
20.00
15.00
10.00
5.00
0.00
Year
However, it is clear from table 4.15, 4.16 and chart 4.7 that it is only
during the post-liberalization period the direct tax-GDP ratio picked up. It
has increased by 2.24 times during the post-liberalization period, as
compared to decreasing indirect tax-GDP ratio. But direct tax contribution
to GDP in India is far from satisfactory in comparison to the other
developed economies. Indirect taxes still continue to dominate despite the
governments’ continuous effort to widen the direct tax net. Further, the
overall tax-GDP ratio is also low as compared to other developed
countries.
131
4.9.3 Tax Revenue as Percentage of GDP of Selected Countries Vis-à-
vis India
The tax-GDP ratio of countries in the EU zone and India are
presented in Table 4.17. The table reveals, in the year 2011, countries like
Belgium, Denmark, Italy, Finland, Sweden, United Kingdom, Norway and
Iceland have tax-GDP ratio much higher than that of India. Denmark has a
tax-GDP ratio of 46.7 percent followed by Sweden (37.3 per cent) and
Norway (33.0 per cent).
Table - 4.17
Tax-GDP Ratio of Selected Countries Vis-à-vis India (1995-2011)
(In percent)
Direct Tax to Indirect Tax to Total Tax to
Country/
GDP GDP GDP
Year
1995 2011 1995 2011 1995 2011
Belgium 16.7 16.8 12.8 13.1 29.5 29.8
Bulgaria 9.0 5.2 12.3 14.8 21.3 19.9
Czech Republic 9.2 7.3 11.7 11.8 20.8 19.1
Denmark 31.0 29.9 17.0 17.0 47.7 46.7
Germany 12.1 11.6 10.8 11.5 22.9 23.1
Estonia 10.9 6.6 13.1 14.2 24.0 20.7
Ireland 13.5 12.5 14.3 11.4 27.8 23.9
Greece 6.9 8.8 12.8 13.0 19.8 21.8
Spain 10.3 9.9 10.7 10.2 20.3 19.3
France 8.4 11.8 16.0 15.5 24.1 27.0
Italy 14.9 14.8 12.4 14.4 27.3 29.1
Cyprus 8.9 11.7 11.5 14.7 20.4 26.5
Latvia 7.1 7.4 14.0 11.6 21.1 19.0
Lithuania 8.4 4.4 12.0 11.9 20.4 16.2
Luxembourg 15.4 14.1 11.8 12.0 27.3 26.1
Hungary 8.7 6.9 17.5 17.0 26.2 23.9
Malta 8.2 13.2 12.1 14.2 20.3 27.4
Netherlands 12.5 11.7 11.8 12.0 24.3 23.6
Austria 11.7 13.0 14.8 14.6 26.5 27.5
132
Table – 4.17 (Contd...)
Direct Tax to Indirect Tax to Total Tax to
Country/
GDP GDP GDP
Year
1995 2011 1995 2011 1995 2011
Poland 11.7 7.1 14.2 14.0 25.8 21.0
Portugal 8.3 9.9 13.5 13.9 21.7 23.9
Romania 10.6 6.0 9.3 13.2 19.9 19.2
Slovenia 6.9 7.9 15.4 14.4 22.2 22.2
Slovakia 10.8 5.4 14.5 10.8 25.3 16.3
Finland 17.4 16.5 14.1 14.4 31.6 30.9
Sweden 19.8 18.7 15.9 18.6 35.7 37.3
United 15.0 15.9 13.3 13.6 28.3 29.5
Kingdom
Norway 16.2 21.5 16.0 11.6 32.2 33.0
Iceland 12.9 17.5 17.9 14.4 30.8 31.8
India 3.0 5.7 11.7 10.8 14.7 16.4
Note: Calendar year end slightly differs in case of India.
Source: (1) European Commission Report on Taxation Trends in European Union
(2013), (2) Data for India from Government of India, Public Finance Statistics 2012-13
(Table No. 1.8) is used.
Chart - 4.8
Tax-GDP Ratio of Selected Countries (2011)
46.7
50.0
37.3
40.0
33.0
31.8
30.9
29.8
29.5
29.1
27.5
27.4
27.0
26.5
26.1
30.0
23.9
23.9
23.9
23.6
23.1
22.2
21.8
21.0
20.7
19.9
19.3
19.2
19.1
19.0
16.4
16.2
16.3
20.0
10.0
0.0
Greece
Belgium
Ireland
Spain
Italy
Hungary
Poland
Portugal
Bulgaria
Czech Republic
Estonia
France
Malta
Slovenia
Slovakia
India
Germany
Sweden
United Kingdom
Norway
Iceland
Cyprus
Netherlands
Latvia
Lithuania
Austria
Romania
Denmark
Luxembourg
Finland
133
Table 4.17 and chart 4.8 show that India is lagging far behind in
revenue mobilization through tax sources as compared to the countries
presented above. The key reason for lower tax collection is that the
proportion of direct tax in total taxes is very low in India as compared to
other countries. In spite of reasonable efforts by the Indian government,
revenue through direct taxes could not be mobilized in desired way. This is
the reason why indirect taxes, in India, still continue to dominate the Indian
tax structure.
46
Jain, Anil Kumar (2001), Direct Taxation in India - Some Aspects, Jaipur: RBSA Publishers,
p.13.
134
These violations, together with inefficient administration of both
Union and State taxes, reduced progressivity of the Indian tax system, led
to serious problems of avoidance and evasion, arrears of assessment and
collection and multiple taxation of commodities, leading to serious
cascading effects and inflationary pressures”.47
47
Jain, Anil Kumar (2001), Direct Taxation in India - Some Aspects, Jaipur, RBSA Publishers,
p.13-14.
135
Chart - 4.9
Combined Tax Revenue (Pre-liberalization Period)
100000
90000
80000
70000
Revenue
60000
50000
40000
30000
20000
10000
0
Period
Chart - 4.9(a)
Share of Direct and Indirect Taxes in Combined Tax Revenue
(Pre-liberalization Period)
100.00
90.00
80.00
Revenue Share
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1950-511955-561960-611965-661970-711975-761980-811985-861990-91
Period
Share of Direct Tax Share of Indirect Tax
136
Chart - 4.10
Combined Tax Revenue (Post-liberalization Period)
2,000,000.00
1,750,000.00
1,500,000.00
1,250,000.00
Revenue
1,000,000.00
750,000.00
500,000.00
250,000.00
0.00
Period
Total Tax Direct Tax
Chart - 4.10(a)
Share of Direct and Indirect Taxes in Combined Tax Revenue
(Post-liberalization Period)
90.00
80.00
70.00
Revenue Share
60.00
50.00
40.00
30.00
20.00
10.00
0.00
Period
Share of Direct Tax Share of Indirect Tax
137
During post-liberalization period though indirect taxes have been
contributing a larger share but this share has decreased over the years. The
share of indirect taxes in total tax revenue was 83.9 per cent in 1991-92. It
declined to 79.6 per cent in 1995-96, to 76.5 per cent in 2000-01, to 71.5
per cent in 2005-06 and further to 64.6 per cent in 2010-11 (Table – 4.19).
Consequently, the share of direct taxes in the total tax revenue has
increased during post-liberalization period. It was 16.1 per cent in 1991-92
and increased to 20.4 per cent in 1995-96, to 23.5 per cent in 2000-01, to
28.5 per cent in 2005-06 and further to 35.45 per cent in 2010-11.
Table - 4.19
Combined Tax Revenue of Central and State Governments in India
(Post-liberalization period)
(Rs. Crores)
Share of
Indirect Share of
Total Tax Direct Indirect
Year Tax Direct Tax
Revenue Tax Tax
Revenue (percent)
(percent)
138
Table – 4.19 (Contd...)
Share of
Indirect Share of
Total Tax Direct Indirect
Year
Revenue Tax
Tax Direct Tax
Revenue Tax
(percent)
(percent)
2003-04 414,085 109,547 304,538 26.46 73.54
2004-05 494,370 137,093 357,277 27.73 72.27
2005-06 587,688 167,635 420,053 28.52 71.48
2006-07 736,708 231,376 505,331 31.41 68.59
2007-08 870,329 318,840 551,489 36.63 63.37
2008-09 915,450 327,981 587,469 35.83 64.17
2009-10 1,000,844 376,995 623,849 37.67 62.33
2010-11 1,271,665 450,822 820,843 35.45 64.55
2011-12 1,475,032 507,888 967,144 34.43 65.57
(RE)
2012-13 1,751,124 578,364 1,172,759 33.03 66.97
(BE)
Note: Figures reflects both State & Centre’s tax collection.
Source: Data compiled from Indian Public Finance Statistics of various years.
139
Table - 4.20
Share of Direct and Indirect Taxes in Total Taxes in India
(Center and States)
(Pre-liberalization Period)
Rs. in Crore In Per cent
Year
Direct Indirect Total Direct Indirect
1950-51 231 396 627 36.84 63.16
1951-52 244 495 739 33.02 66.98
1952-53 252 426 678 37.17 62.83
1953-54 242 430 672 36.01 63.99
1954-55 240 480 720 33.33 66.67
1955-56 259 509 768 33.72 66.28
1956-57 288 602 890 32.36 67.64
1957-58 327 718 1045 31.29 68.71
1958-59 344 745 1089 31.59 68.41
1959-60 378 838 1216 31.09 68.91
1960-61 402 948 1350 29.78 70.22
1961-62 449 1094 1543 29.10 70.90
1962-63 560 1305 1865 30.03 69.97
1963-64 693 1632 2325 29.81 70.19
1964-65 743 1856 2599 28.59 71.41
1965-66 734 2188 2922 25.12 74.88
1966-67 767 2494 3261 23.52 76.48
1967-68 780 2676 3456 22.57 77.43
1968-69 840 2919 3759 22.35 77.65
1969-70 963 3237 4200 22.93 77.07
1970-71 1009 3743 4752 21.23 78.77
1971-72 1171 4404 5575 21.00 79.00
1972-73 1346 5090 6436 20.91 79.09
1973-74 1552 5837 7389 21.00 79.00
1974-75 1834 7389 9223 19.89 80.11
1975-76 2493 8689 11182 22.29 77.71
1976-77 2585 9747 12332 20.96 79.04
1977-78 2680 10557 13237 20.25 79.75
1978-79 2851 12677 15528 18.36 81.64
1979-80 3096 14587 17683 17.51 82.49
1980-81 3268 16576 19844 16.47 83.53
1981-82 4133 20009 24142 17.12 82.88
1982-83 4492 22750 27242 16.49 83.51
1983-84 4907 26618 31525 15.57 84.43
1984-85 5330 30484 35814 14.88 85.12
1985-86 6252 37015 43267 14.45 85.55
1986-87 6889 42650 49539 13.91 86.09
1987-88 7483 49493 56976 13.13 86.87
1988-89 9758 57168 66926 14.58 85.42
1989-90 11165 66528 77693 14.37 85.63
1990-91 12260 75462 87722 13.98 86.02
Source: Indian Public Finance Statistics – 2012-13.
140
Table - 4.21
Share of Direct and Indirect Taxes in Total Taxes in India
(Center and States)
(Post-liberalization Period)
Table 4.21 shows the share of direct and indirect taxes in total tax
revenue of India during post-liberalization period. It reveals that the share
of direct taxes was 16.14 per cent in 1991-92 as compared to 83.86 per cent
of indirect taxes. The share of direct taxes has increased during liberalized
era and reached as high as 37.67 per cent in 2009-10 and declined to 33.03
141
per cent in 2012-13. In contrast the performance of indirect taxes declined
to 66.97 per cent in 2012-13 from 83.86 per cent in 1991-92. The post-
liberalization picture shows that the share of direct taxes in the total tax
revenue has been continuously increasing. However, India still lags behind
developed countries and OECD countries where direct taxes constitute
two-third of the total taxes.
Table - 4.22
Growth Rate of Various Taxes (Center and States) in Pre-
Liberalization Period
(In per cent)
Year Direct Taxes Indirect Taxes Total Tax
1951-52 5.63 25.00 17.86
1952-53 3.28 -13.94 -8.25
1953-54 -3.97 0.94 -0.88
1954-55 -0.83 11.63 7.14
1955-56 7.92 6.04 6.67
1956-57 11.20 18.27 15.89
1957-58 13.54 19.27 17.42
1958-59 5.20 3.76 4.21
1959-60 9.88 12.48 11.66
1960-61 6.35 13.13 11.02
142
Table – 4.22 (Contd...)
143
Table - 4.23
Growth Rate of Various Taxes (Center and States)
in Post-Liberalization Period
(In per cent)
Year Direct Taxes Indirect Taxes Total Tax
1991-92 35.86 14.68 17.64
1992-93 16.39 9.52 10.63
1993-94 12.00 5.77 6.83
1994-95 33.00 18.68 21.23
1995-96 23.89 17.24 18.54
1996-97 14.77 14.71 14.72
1997-98 23.08 6.33 9.75
1998-99 -2.81 8.10 5.60
1999-2000 23.91 16.22 17.84
2000-01 17.91 9.28 11.19
2001-02 1.88 3.37 3.02
2002-03 19.50 11.38 13.27
2003-04 25.39 13.25 16.23
2004-05 25.15 17.32 19.39
2005-06 22.28 17.57 18.88
2006-07 38.02 20.30 25.36
2007-08 37.80 9.13 18.14
2008-09 2.87 6.52 5.18
2009-10 14.94 6.19 9.33
2010-11 19.58 31.58 27.06
2011-12 (R.E) 12.66 17.82 15.99
2012-13 (B.E) 13.88 21.26 18.72
Source: Estimated from Indian Public Finance Statistics, 2012-13.
144
The growth rate of direct and indirect taxes during post-
globalization period is positive with an exception of direct taxes during the
year 1998-99 in which year it is negative by 2.81 per cent. However, the
percentage growth rate of total tax is positive all along and it is in double
digits except the six different years in which the growth rate is less than 10
per cent. One thing what can be noticed is the growth rate is not steady, it
is volatile all along. This is due to number of reasons like change in rate,
tax structure, and volatile economic situation.
Tables 4.24 and 4.25 reveal that the growth rate of Personal Income
Tax (PIT) was more volatile in the pre-liberalization period, and was also
negative in few years. However, the same trend continued in the post-
liberalization period. The growth rates of other taxes like Corporate Tax,
Customs Duty, Excise Duty and other Indirect Taxes (majority portion
being Service Tax from its introduction in 1994), etc., were less volatile.
145
Table - 4.24
Growth Rate of Various Taxes (Net of States Share) in Pre-
Liberalization Period
(In percent)
Personal Other Total
Direct Corporat Indirect Excise Customs
Year income Indirect Tax
tax ion tax tax duties duties
tax Tax revenue
1971-72 14.68 -34.21 27.22 20.72 15.85 32.63 29.79 19.46
1972-73 28.33 82.67 18.22 14.90 10.78 23.31 26.23 17.59
1973-74 12.77 55.47 4.48 13.42 12.18 16.22 10.39 13.27
1974-75 34.67 69.95 21.61 29.62 28.26 33.84 11.76 30.69
1975-76 29.60 32.60 21.58 14.51 18.20 6.45 29.47 17.91
1976-77 13.92 12.92 14.15 8.06 6.86 9.51 20.33 9.50
1977-78 3.32 -39.67 24.09 8.66 4.45 17.37 8.11 7.28
1978-79 5.74 44.04 2.87 26.45 23.78 32.89 8.75 21.36
1979-80 5.86 0.85 10.83 -1.62 -15.67 20.63 21.84 -0.01
1980-81 -2.92 -7.79 -5.82 12.82 6.95 16.59 57.08 9.23
1981-82 33.02 4.79 50.27 20.88 12.30 26.14 63.06 23.34
1982-83 8.14 -4.58 10.91 14.07 9.23 19.05 11.97 12.78
1983-84 14.98 20.32 14.10 19.58 34.99 9.06 -7.57 18.62
1984-85 7.79 32.26 2.53 15.97 7.46 26.11 8.54 14.31
1985-86 9.57 -4.59 12.09 22.18 10.66 35.29 -4.10 19.77
1986-87 8.79 8.12 10.30 16.36 11.36 20.46 12.31 15.04
1987-88 1.91 -16.13 8.64 17.83 15.42 19.41 20.24 15.20
1988-89 46.85 147.43 28.37 15.95 15.91 15.35 26.96 20.47
1989-90 0.12 -27.08 7.31 16.56 19.90 14.12 18.54 13.62
1990-91 14.52 14.89 12.81 11.61 7.67 14.46 11.94 12.07
AAGR 14.58 19.61 14.83 15.93 12.83 20.44 19.28 15.58
Note: Net of State Governments’ share and amount assigned to National Calamity
Contingency Fund (NCCF).
Source: Reserve Bank of India (2013)
146
Table - 4.25
Growth Rate of Various Taxes (Net of States Share) in Post-
Liberalization Period
(In percent)
Personal Other Total
Direct Corporation Indirect Excise Customs
Year income Indirect Tax
tax tax tax duties duties
tax Tax revenue
1991-92 46.36 30.16 47.20 10.79 13.60 7.81 27.12 16.50
1992-93 19.52 12.54 13.32 5.01 2.19 6.82 7.92 7.94
1993-94 3.70 -26.00 13.05 -2.48 5.24 -6.66 -17.31 -1.10
2012-13
15.74 20.95 10.95 20.36 18.58 9.31 41.61 17.84
(R.E)
2013-14
19.01 21.06 18.54 19.27 14.08 13.55 34.32 19.13
(B.E)
AAGR 20.85 29.81 20.07 11.66 11.57 9.98 25.59 14.44
Note: Net of State Governments’ share and amount assigned to National Calamity
Contingency Fund (NCCF).
Source: Reserve Bank of India (2013).
147
One thing what we notice is the annual average growth rate of Total
Tax Revenue which was low during post-liberalization period compared to
pre-liberalization period. It shows that the growth of direct taxes was not
sufficient enough to compensate the loss arising on reduction of indirect
tax rates during post-liberalization period.
Table 4.26 reveals the buoyancy ratios of direct and indirect taxes
for pre-globalization period from 1971-72 to 1990-91. It reveals that, the
direct tax revenue is not so buoyant as its values are equal to or less than
one in most of the years. Whereas, the indirect tax buoyancy ratio shows a
little better performance when compared to the direct tax.
Table - 4.26
Tax Buoyancy Ratio (Pre – globalization period)
(Center and States Combined)
Year Direct Tax Indirect Tax Total Tax
1971-72 2.27 2.49 2.45
1972-73 1.46 1.52 1.51
1973-74 0.71 0.68 0.68
1974-75 1.01 1.47 1.37
1975-76 4.86 2.68 2.87
148
Table – 4.26 (Contd...)
149
Table - 4.27
Tax Buoyancy Ratio (Post – globalization period)
(Center and States Combined)
Year Direct Tax Indirect Tax Total Tax
1991-92 2.40 0.98 1.18
1992-93 1.10 0.64 0.71
1993-94 0.80 0.38 0.45
1994-95 1.91 1.08 1.23
1995-96 1.38 0.99 1.07
1996-97 0.94 0.94 0.94
1997-98 2.14 0.59 0.90
1998-99 -0.19 0.55 0.38
1999-2000 2.08 1.41 1.56
2000-01 2.33 1.21 1.45
2001-02 0.22 0.40 0.36
2002-03 2.53 1.48 1.72
2003-04 2.08 1.08 1.33
2004-05 1.75 1.21 1.35
2005-06 1.60 1.27 1.36
2006-07 2.51 1.34 1.68
2007-08 1.82 0.44 0.87
2008-09 0.22 0.51 0.40
2009-10 0.99 0.41 0.62
2010-11 0.96 1.55 1.33
2011-12 0.72 1.14 0.99
2012-13 (RE) 1.29 1.70 1.56
2013-14 (BE) 1.36 1.30 1.32
AAGR 1.43 0.98 1.08
Source: Estimated from (1) Indian Public Finance Statistics 2008-09 till FY 2006-07.
(2) Indian Public Finance Statistics 2013-14 from FY 2007-08.
150
4.10.5 Profile of Non-Corporate Assessees
Widening the direct tax base was one of the prime objectives of tax
reforms in India in recent years. As a result of regular efforts of the Indian
government, the number of non-corporate income tax assessees increased
by more than three times between 1996-97 and 2011-12. The profile of
such non-corporate assessees in terms of the income group is presented in
Table 4.28.
Table - 4.28
Profile of Non-Corporate Assessees
Number of Assessees (in lakhs)
Income
Income
Year Income up Between Search and
Above
to Rs.2 Rs. 2 Seizure Total
Rs. 10
Lakh Lakh- Assessments
Lakh
10 Lakh
110.02 3.57 0.31 0.24 114.16
1996-97
(96.37) (3.15) (0.27) (0.21) (100)
123.70 4.63 0.41 0.19 128.93
1997-98
(95.94) (3.59) (0.32) (0.15) (100)
163.39 5.46 0.48 0.26 169.59
1998-99
(96.34) (3.23) (0.28) (0.15) (100)
187.45 7.49 0.58 0.15 195.67
1999-2000
(95.80) (3.82) (0.30) (0.08) (100)
216.07 9.72 0.73 0.16 226.68
2000-01
(95.32) (4.29) (0.32) (0.07) (100)
243.50 14.15 0.79 0.33 258.77
2001-02
(94.09) (5.47) (0.31) (0.13) (100)
255.25 21.89 0.88 2.98 281.00
2002-03
(90.84) (7.79) (0.31) (1.06) (100)
265.46 21.67 1.05 0.12 288.30
2003-04
(92.08) (7.52) (0.36) (0.04) (100)
151
Table – 4.28 (Contd...)
The numbers show that majority of the income tax assessees fall in
the income group of Rs. 2 lakh or less. Although the proportion of other
groups has been steadily increasing, yet 74.85 per cent assessees report
their income less than Rs.2 lakh, 22.79 per cent assessees report their
income between Rs.2 and Rs. 10 lakh. Whereas, only 1.84 per cent of
assessees report more than Rs.10 lakh of income. The analysis indicates
that there is a slow decline in the per cent share of assessees with less than
Rs. 2 lakh income and as a consequent a slow rise in the per cent share of
assessees belonging to higher income brackets. Further analysis is required
152
to conclude whether assessees in higher income brackets are escaping tax
net by declaring lesser income and hence the trend is slow.
Table - 4.29
Profile of Corporate Assessees
Number of Assessees (in lakhs)
Income
Year Income up Income Search and
Between
to Rs. Above Rs. Seizure Total
50,000 and
50000 10 Lakh Assessments
10 Lakh
1.28 0.69 0.27 0.03 2.27
1996-97
(56.39) (30.32) (11.86) (1.43) (100)
1.61 0.86 0.25 0.02 2.74
1997-98
(58.68) (31.42) (9.28) (0.62) (100)
1.73 0.91 0.29 0.02 2.95
1998-99
(58.64) (17.97) (12.88) (0.83) (100)
1.82 0.92 0.33 0.03 3.10
1999-2000
(58.71) (29.67) (10.65) (0.97) (100)
1.95 0.96 0.41 0.02 3.34
2000-01
(58.38) (28.75) (12.27) (0.60) (100)
1.91 1.22 0.34 0.02 3.49
2001-02
(54.73) (34.96 (9.74) (0.57) (100)
1.83 1.29 0.39 0.14 3.65
2002-03
(50.14) (35.84) (10.68) (3.84) (100)
153
Table – 4.29 (Contd...)
154
Table - 4.30
Number of Assessees in Central Excise during last 10 years
155
Table - 4.31
Tax Base and Number of Assessees in Service Tax
156
4.11 ADMINISTRATIVE EFFECTIVENESS AND CHALLENGES:
Post-Globalization
The following section reveals the administrative effectiveness of
Tax Department in India, based on the comments in audit reports of the
Comptroller and Auditor General of India (CAG) with respect to certain
selected key indicators of tax administration.
157
“Out of total pending demand, the Department indicated that more
than 94 per cent is difficult to recover in FY 2012. The Department
indicated various factors viz. inadequate assets for recovery, cases under
liquidation/BIFR (Board for Industrial and Financial Reconstruction).
Assessee not traceable, demand stayed by various authority etc. leading to
demand difficult to recover.”48
Table - 4.33
Disposal of Scrutiny Assessments – Direct Taxes
(Number)
Assessments
Assessments Assessments Pendency in
Year due for
completed pending percentage
disposal
48
Report no.-15 of 2013-Union Government - Report of the Comptroller and Auditor General of
India on Department of Revenue-Direct Taxes, p.10.
158
Table – 4.33 (Contd...)
Assessments
Assessments Assessments Pendency in
Year due for
completed pending percentage
disposal
159
Table - 4.34
Disposal of Appeal Cases by CIT (A) – Direct Taxes
Appeals Amount
Appeals Appeals
due for locked up
disposed of pending
Year disposal in Appeals
Rs. in
Number
Crore
63645 130358
2007-08 194003 -
(32.8) (67.2)
66351 158031
2008-09 224382 199101
(29.6) (70.4)
79709 180991
2009-10 260700 220148
(30.6) (69.4)
70474 187182
2010-11 257656 293548
(27.4) (72.6)
75518 230616
2011-12 306134 242182
(24.7) (75.3)
Note: Figures presented in parentheses indicate percentage.
Source: Comptroller and Auditor General of India’s Report on Direct Tax 2013.
Table 4.35
Demand raised and pending – Direct Taxes
(Rs. in Crore)
Item FY09 FY10 FY11 FY12
Total demand pending 201276 229032 291629 408418
at end of the year
Demand Collectible 13701 16274 20486 20804
Disputed Demand 53810 66534 152996 208343
Demand not under 39330 42950 51331 48980
Dispute
Source: Comptroller and Auditor General of India’s Report on Direct Tax 2013.
160
Table 4.36
Age-wise analysis of demand not under dispute – Direct Taxes
(Rs. in Crore)
Age FY09 FY10 FY11 FY12
1 to 2 year 14868 18530 26814 20022
2 to 5 year 12133 12941 12443 11302
5 to 10 year 10464 9990 10648 14424
More than 10 years 1865 1488 1425 3232
Total 39330 42950 51331 48980
Source: Comptroller and Auditor General of India’s Report on Direct Tax 2013.
Table 4.35 gives the picture that, the pending demands at the end of
the year has increased more than twice and the demand under dispute
increased by about four times in a span of four years from 2008-09 to
2011-12. Demand not under dispute (Table 4.36) has increased 1.2 times
during the same period. This indicates that, the lower satisfaction of
assessees towards scrutiny assessments completed by Assessing Officers.
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Table 4.38
Scrutiny of Service Tax Returns
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of Service Tax Returns prescribes detailed scrutiny of only 2 per cent of
Service Tax returns. Similarly, the norm in respect of Central Excise
returns is only 5 per cent. This implies that a very small proportion of
assessments are required to be scrutinized in detail, hence, the Ministry’s
response that completion of detailed scrutiny of returns has not been
possible owing to staff shortage is not acceptable. Neglect of detailed
scrutiny of assessments could imply a serious threat to revenue collection.50
Table 4.39
Refunds in Central Excise
(Rs. in Crore)
Central Refunds as % of
Year Excise Refunds Central Excise
Receipts revenues
2002-03 82310 5182 6.30
2003-04 90774 5216 5.75
2004-05 99125 5902 5.95
2005-06 111226 6930 6.23
2006-07 117613 6183 5.26
2007-08 123611 12736 10.3
2008-09 108613 16881 15.54
2009-10 102991 14988 14.55
2010-11 137701 12102 8.79
2011-12 144901 16748 11.56
Average 111887 10287 9.02
Source: Comptroller and Auditor General of India 2013.
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Table 4.40 reveals that, during the five year period described, the
total amount of Service Tax refunds sanctioned was within 2 per cent of
total receipts and 0.69 per cent on an average basis.
Table 4.40
Refunds in Service Tax
(Rs. in Crore)
Refunds as %
Service Tax
Year Refunds of Service
Receipts
Tax revenues
2007-08 51301 17.64 0.03
2008-09 60941 169.04 0.28
2009-10 58422 606.56 1.04
2010-11 71016 520.12 0.73
2011-12 97356 1326.87 1.36
Average 67807 528.05 0.69
Source: Comptroller and Auditor General of India 2013.
4.12 CONCLUSION
Historical and recent developments presented above reveal the
journey of Indian tax system. To suit to the requirement of the economic
and social developments tax rates, tax structure, tax administration have
been changed from time to time, this process is on. Two monumental and
all-time significant changes – DTC and GST are waiting to be
implemented. The international tax front too fast developments have been
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taking place in the process of integration of national tax structure with
world tax structure.
The MNCs/ MNEs demand not only lower tax for their enterprises
but also removal of double taxation, certainty in tax, simplicity in tax
determination and above all free from litigation. India has been adopting
measures to fulfill the wishes of the MNCs/ MNEs and other assessees
with international transactions, in recent years. However, after unveiling
economic globalization policy in 1991, it took ten long years for India to
understand the loss of revenue in related party international transactions
and then came with a set of provisions and rules to handle transfer pricing
issues in 2001-02. It took further ten years (2012-13) to recognize the need
and unveil APA scheme for the benefit of tax payers with related party
international transactions to ensure certainty in tax aspects. However,
within a short span of further two years (in 2014-15) the Government has
notified SHRs to provide simplicity and certainty in taxing certain related
party international transactions.
The transfer pricing provisions and the APA regulations have been
amended and modified almost every year to finetune them to meet the
needs of taxpayer and tax collector, this may also become the case for
SHRs. This makes clear that the Government is improving the tax
environment for assessees with related party international transactions.
There are still demands and requirements to be addressed which are
presented in the “Findings and Suggestions” chapter.
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