NAME: YATHARTHA KUMAR

ROLL NO.: 1305016654

A
Synopsis on
TRENDS AND ISSUES IN TAX POLICY IN INDIA

Introduction:-
World over, tax systems have undergone significant changes during the last 20
years as many countries across different ideological spectrum and varying levels of
development have undertaken reforms. The wave of tax reforms across the world
that began in the mid 1980s actually accelerated in the 1990s motivated by a
number of factors. Tax policy was employed as a principal instrument to correct
severe budgetary pressures. Besides efficiency considerations, these tax reforms
had to address the issue of replacing public enterprise profits with taxes as a
principal source of revenue and aligning tax policy to change the development
strategy. Another motivation was provided by the internationalisation of economic
activities arising from increasing globalization. Tax policy has evolved in the
country in response to changing development strategy over the years. In the initial
years, the tax policy was guided by a large number of demands placed on the
government. They can be summarised into the need to increase the level of savings
and investment in the economy and hence stimulate growth and the need to ensure
a fair distribution of incomes. These meant an effort to raise taxes from those with
an ability to pay, with little regard for the efficiency implications of the chosen
instruments for the purpose. The role of history and institutions was also important
in shaping the tax system in the country. This project undertakes the analysis of
Indian tax System.

Trends and Issues in Indian Tax Revenues:-
The trends in tax revenue in India show four distinct phases. In the first, there was
a steady increase in the tax-GDP ratio from 6.3 percent in 1950-51 to 16.1 percent
in 1987-88. In the initial years of planning, increase in tax ratio was necessitated
by the need to finance large public sector plans. The second phase began with the
recession caused by the severe drought of 1987 and was marked by stagnation in
revenues. This was followed by a decline in the tax ratio following the economic
crisis of 1991 and the subsequent reforms in the tax system, particularly, reduction
in tariffs.
Thus, in the third phase, the tax ratio declined from 15.8 percent in 1991-92
to the lowest level of 13.4 percent in 1997-98 and fluctuated around 13-14 percent
until 2001-02. The subsequent period has seen increase by over one percentage
point in the tax ratio to 15.2 percent in 2003-04 (revised estimates for the centre
and budget estimates for the states). The aggregate tax GDP ratio is yet to reach
the levels that prevailed before systematic tax reforms were initiated in 1991.
However, in the subsequent period, it declined to about 10.6 percent before
recovering to a little over 11 percent. The decline in the tax ratio in recent years
was mainly due to lower buoyancy of indirect taxes.
Further, analysis of various trends and issues is done which is explained in
project report.
Conclusion:-
The foregoing analysis shows that there has been significant progress in tax
reforms particularly in tax administration in recent years that has helped in the
recovery of tax-GDP ratio close to the levels that prevailed prior to significant
reduction in customs. It is important to note that the reforms should be undertaken
at central, state as well as local levels. A major objective should be to minimise
distortions and compliance cost. In fact, the sub-national tax system should be
evolved such that the principles of common market are not violated. It is also
necessary that domestic trade taxes on goods and services should be calibrated in a
coordinated manner in the spirit of cooperative federalism. Coordinated calibration
of domestic and external trade taxes to ensure the desired degree of protection to
domestic industry and the desired burden of consumption taxes to the community
is also necessary. Although the customs duties have been significantly reduced,
India is still one of the highly protected economies.