Tax is a financial charge or other levy imposed upon a taxpayer i.e. an individual or legal entity by state or function equivalent of state to fund various public expenditures. The Objective of tax is always for the country's benefit. It is imposed to raise government revenue for the welfare of people and to maintain the economic situation by taxing on income earners. Growth and improvement of a country depends on tax structure of that country.
The Tax structure of India, US/UK, South Africa and China is compared for the better understanding.1 In India, the tax system is a 3 tier wherein the Central government, State Government and local bodies impose the taxes. The Power to impose taxes in India is derived from Article 2652 of Constitution of India.
U.S.A. has federal structure and taxes are imposed by State and Federal Government.3 In U.S.A., the tax system is a progressive system4 and direct taxes are more in number than indirect taxes. In United Kingdom, the taxes are imposed by Central government and local government. Taxes like Income tax, Fuel Duty, VAT5 , Corporate tax etc. are imposed by the Central government whereas the taxes like Business rates, Council rate6 etc. are imposed by local Government. The UK has higher administrative efficiency in taxation.7 South Africa has two level tax system and it's too a progressive taxation regime. China is very different in its arrangement as it is a communist country following the principles of Socialism and it depend largely on taxes. It is very important to note that tax is an important element of macroeconomics8 policy of China and highly impacting its socio-economic conditions. Reforms of 19949 in China brought 26 types of taxes which further divided in to 8 categories which are turnover tax, income tax, property tax, behaviour tax, Agriculture tax, Customs etc.
TAX TO GDP10 RATIO AND OTHER TAXES AFFECTING THE COUNTRY'S DEVELOPMENT
India ranked one of the lowest amongst other developing and developed countries pertaining to the difficulty in the execution of tax law. India ranked 147 in ease of doing business which itself shows the difficulty of foreign companies and India Companies in establishing their businesses in India. This is also a reason that the foreign direct investments are keeping low in the country.11
Fiscal Space for government in a country like India depends on overall magnitude of tax revenue, being a sustainable source of Government funding. Extent of government expenditure financed by taxes is comparatively lower in India as compared to other developed countries like Canada, UK, and USA etc. In India, particularly after liberalization there was a nosedive in gross central taxes due to the reduction in the rates of custom duties12 and excise duties (also known as inland tax).13 This fall was due to the Indian open economy to worldwide competition and enabling foreign countries to utilize the advantages of terms of trade in India.
During 2002-2003 to 2007-2008, the collections from direct taxes improved noticeably from 3.56% of the GDP to 5.7 % of the GDP., which was not only due to the improvement in tax administration of the country but also because of the skewed process of growth of the Indian economy that has generated more surplus for private corporate sector.14 The recent economic crisis of 2008 had a discharge impact on tax to GDP ratio of India, specifically on Central taxes while the state tax GDP ratio remained more or less unaffected.
Indian companies are subject to corporate tax between15 25% to 30%. In UK, corporate tax is around 19%.16 Effective federal rate of tax on corporate sector in Canada is 10% to 15%.17 USA is highly graduated system of corporate tax and the Tax Cuts and Jobs Act (TCJA) reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent. However, corporations operating in the United States face another layer of corporate income tax levied by states. As such, the statutory corporate income tax rate in the United States, including an average of state corporate income taxes is 25.7 percent.
Personal income tax is also a factor for the country's economy and overall development18. Approximately, the personal income tax regime in India is between 10- 30% whereas in UK, it's between 10-40%, Canada is between 15-29% and China has rates between 5-45%.19 Taxes form an integral part of a country's economic structure. These are important to run a country smoothly and without many road-blocks. Different taxes are imposed at various stages while selling different types of goods and services. One such type of widely consumed tax structure that has a global reach is Value Added Tax 20or VAT system. VAT is used in 160 countries around the world and is preferred over the sales tax. The US is notably the only Organization for Economic Co-operation and Development (OECD) member that does not use the VAT system. VAT is used worldwide as a way to tax the consumption of goods and not the taxpayer's income. It helps in increasing government revenues by collecting taxes on all goods, online and offline, and stop businesses from evading their taxes. Apart from UK, majority of the countries have lower rate of VAT. It taxes poor/rich alike leading to the regressive tax structure. Thus reducing the rates of VAT without hampering the macroeconomic stability will be beneficial for Indian Economy. USA has higher economy because there is no VAT in USA as it is a regressive tax.
While arguing on the efficiency of tax system, there are 2 parameters to be considered that are Compliance Cost21 and Tax collection charges.22 Comparison of tax structure reflects that the developing countries depends primarily on the revenue accrued from indirect taxes for function of economy. Social security cost in Japan is the highest which accounts for regressive element in its tax structure. Whereas USA, UK and Canada most of the revenue is ensued from direct taxes which are 60%. 52 % and 58.3% respectively.23 Because of the liberalization, India is dependable on Direct taxes and it steadily increased in comparison to indirect taxes.
India has a low level in collection of direct taxes and gains higher revenue from indirect taxes. India has majority of young population between 20-24 years of age who are not availing the benefits of income tax and have lower income. It is also pertinent to mention that India has lower population at higher end of age who are earning much more which further ending up in paying less taxes. Economic problem of income inequality is aggravated by regressive tax structure of India. India loses huge volume of tax revenue due to the low corporate tax base and difficulty in ease of doing business which decreases the motivation of the private sector to establish the business. India is in need to increase the GDP ratio for adequate mobilization. Efficiency of tax administration is an application judged by the trend of cost of tax collection per unit of the tax revenue.
1. Worlddirecttax 2015
2. Taxes not to be imposed save by authority of law No tax shall be levied or collected except by authority of law
3. The 10th Amendment to the Constitution outlines the structure of federalism in just 28 words: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."
4. Progressive tax is a tax that imposes a lower tax rate on low-income earners compared to those with a higher income, making it based on the taxpayer:s ability to pay. That means it takes a larger percentage from high-income earners than it does from low-income individuals
5. Every commodity passes through different stages of production and distribution before finally reaching the consumer. Some value is added at each stage of the production and distribution chain. Value Added Tax (VAT) is a tax on this value addition at each stage. In India, VAT was introduced as an indirect tax in the Indian taxation system to replace the existing general sales tax.
6. Council Tax is a local taxation system used in England, Scotland and Wales. It is a tax on domestic property which was introduced in 1993 by the Local Government Finance Act 1992, replacing the short lived Community Charge, which in turn replaced the domestic rates.
7. R.Sinha "An international comparison of tax regime" Centre for Budjet and Governance accountability, 2010.
8. Macroeconomics is a branch of economics that studies how an overall economy—the market systems that operate on a large scale—behaves. Macroeconomics studies economy-wide phenomena such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment.
9. China's Tax-Sharing Reform in 1994 was a fiscal and taxation system reform initiated by the Chinese government in 1992, prepared and promulgated in 1993, and finally implemented in 1994. The reform was a large-scale adjustment of the tax distribution system and tax structure between the central and local governments, which was regarded as a milestone in the transition of China's fiscal system from planned economy to market economy.
10. Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period. GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth rate
11. PWC Report 2015
12. Custom duty is a variant of Indirect Tax and is applicable on all goods imported and a few goods exported out of the country. It is a consumption tax.
13. Excise duty refers to the taxes levied on the manufacture of goods within the country, as opposed to custom duty that is levied on goods coming from outside the country. Readers should note that GST has now subsumed a number of indirect taxes including excise duty. This means excise duty, technically, does not exist in India except on a few items such as liquor and petroleum. The information given below pertains to the functioning of Excise Duty in India before the implementation of GST regime
14. H.Poison "Tax System In India :Could reform spur growth", international monetary Fund, 2006
15. Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period. GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth rate.
16. From 1 April 2015 there is a single Corporation Tax rate of 19% for non-ring fence profits. At Summer Budget 2015, the government announced legislation setting the Corporation Tax main rate (for all profits except ring fence profits) at 19% for the years starting 1 April 2017, 2018 and 2019 and at 18% for the year starting 1 April 2020. At Budget 2016, the government announced a further reduction to the Corporation Tax main rate (for all profits except ring fence profits) for the year starting 1 April 2020, setting the rate at 17%.
17. For Canadian-controlled private corporations claiming the Small Business Deduction, the net tax rate is 10% (2018). For other types of corporations in Canada, the corporate tax rate is 15% (as of January 1, 2018) after the general tax reduction. Without the general tax reduction, the basic rate of Part I tax is 38%.
18. Income tax is a tax imposed on individuals or entities (taxpayers) that varies with respective income or profits (taxable income). Income tax generally is computed as the product of a tax rate time's taxable income. and the burden is not shared by others.
19. Bird. M. Richard & Eric M Zolt, International tax policy and development
20. The concept of VAT is brought in India in 2005 to eliminate the cascading effect of multiple sales tax.
21. Compliance cost is the expenditure of time/money in conforming to the government requirements such as legislation.
22. Cost borne by the Government in collecting the taxes
23. Gorden, Roger & Wei Li 2005 Tax structure in developed countries. Many puzzles and possible explanations (University of Virginia)
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