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Evaluation of the Indian tax system

  • Direct taxes were 2.1% of the GDP in 1950-51. It has increased to 7% in 2011-12. Though the national income is increased, the tax yields(including direct taxes) have not increased at a rate that is high enough to show a high degree of income elasticity
  • While urban incomes constitute a majority of tax, agricultural incomes are left under the ambit of direct taxes. Though the national income rises, with about one-fifth of it from the agricultural sector, the tax system fails to tap the rising income fully, thus exhibiting inelasticity in indirect tax system as well
  • While the service sector accounts for more than 56% of GDP, service tax contributes to just 11% towards tax revenues and 1.2% towards GDP
  • Income tax returns have been simplified. The simplification and rationalisation of the tax system was recommended by Booth Lingam Committee and Chelliah Committee. The proposed Direct Taxes Code (DTC) and Goods and Services Tax (GST) also aim for simplification of tax laws
  • The cost of collection of tax has increased from 543 crores in 1990-91 (Central Government) to more than 7,100 crores in 2011-12.
  • For every 100 collected as tax, the cost of tax collection is just 60 paise in India and is considered to be lowest in the world.
  • The Indian tax system is accused of evasion and tax avoidance which accumulates black money. This black money is further invested in business via diverse means and this multiplies the black money
  • It discourages employment as high income earners have to pay higher taxes
  • Distorting prices
  • Adversely affecting savings

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