Journal Press India^®

Prior to Independence in 1947, Indian tax system reflected characteristics of a traditional agricultural economy. Revenues of the Central Government were dominated by customs duties as domestic requirements for manufactured goods were met mostly by imports, chiefly from Britain and other Commonwealth countries. Import duties were levied on almost all items of imports whereas major items subject to export duties were jute and tea in which India enjoyed near-monopoly in the world market.

The Princely States did not form part of the structure of public finance of British India. They had separate budgets and separate sources of revenue. The maritime States imposed their own customs duties. Consequent upon the financial difficulties created by the events of 1857, income tax was introduced in India for the first time by the British in the year 1860. However, the imposition of income tax remained irregular till the year 1886 when a systematic legislation was enacted for its operation on a permanent basis. Since then the form of income tax has undergone a series of changes to meet the changing requirements of Government finances and economic policy.

During British rule, excise taxation in India was selective in terms of commodity coverage and modest from revenue angle. Excise duties were not important as a source of revenue due to the narrow production base of the Indian economy. The selected commodities on which excise duties were imposed included cotton textiles, salt, motor spirit, and kerosene. A commodity-wise history of excise taxation is as follows:

Before 1857, the regulation of customs duties in India was haphazard and lacked all-India uniformity due to unstable political and economic conditions. Rates of import duty, though not uniform, were relatively low, ranging from 3 to 5 percent ad valorem on raw materials and manufactured articles. These rates were doubled in the case of goods imported from countries other than Britain. Having consolidated political power after the disturbances of 1857, the British Indian Government introduced in 1859 a uniform all-India customs tariff which replaced separate provincial rates of duty.

The Government of the Central Provinces (now Madhya Pradesh) was the first to levy a retail sales tax on motor spirit and lubricants in 1938. This so-called petrol tax was a selective sales tax imposed through the Central Provinces and Berar Sales of Motor Spirit and Lubrication Taxation Act, 1938. In 1939, Madras levied a general multi-point sales tax through the Madras General Sales Tax Act, 1939. The tax levied at the rate of half percent was ostensibly meant to compensate the loss of revenue resulting from the policy of prohibition.

Post-Independence, the Indian tax system has undergone major structural changes. It has become comprehensive and complicated over the years. It has successfully mobilised resources to finance administrative and developmental activities of public authorities. Besides being the main source of revenue, both for the Central and State Governments, it is an effective instrument to realise various socio-economic objectives of national policies. However, it has been relying heavily on indirect taxes and suffering extensively from fiscal malady called tax evasion.

Restructuring of the tax system has constituted a major component of fiscal reforms initiated since 1991. The main focus of the tax reforms has been on simplification and rationalisation of both direct and indirect taxes with the objective of augmenting revenues and removing anomalies in the tax structure. Tax reforms since 1991 have brought the tax system much closer to international tax practices. Government’s concern with tax reforms is reflected in the appointment of a number of committees in recent years to review the tax system. These have, inter alia, included:

• Tax Reforms Committee (Chairman: Raja Chelliah), 1991.
• Advisory Group on Tax Policy and Tax Administration for the Tenth Plan (Chairman: Parthasarathi Shome), 2001
• Inter-ministerial Working Group on Customs Tariff (Chairman: Arvind Virmani), 2002.
• Task Force on Direct Taxes (Chairman: Vijay Kelkar), 2002.
• Task Force on Indirect Taxes (Chairman: Vijay Kelkar), 2002.
• White Paper on State-Level Value Added Tax (Chairman: Asim Kumar Dasgupta), 2005.
• Rationalisation of Customs and Excise Duties on Edible Oils and Oilseeds (Chairman: Ashok Lahiri), 2006.

In fact, tax reforms are a part of the package to liberalise and globalise the Indian economy. The post-1991 period has witnessed a sharp decline in the rates of income tax, excise duty and customs tariff. The theory that high rates of duty lead to higher revenue collection has been discarded in favour of lower rates with fewer exemptions and concessions.

            Tax reforms undertaken by the Government in tandem with economic reforms since 1991 have helped to rationalise and simplify the tax system considerably. The rates have been moderated and many exemptions and concessions have been weeded out. 

Goods and Services Tax (GST) is a part of the proposed tax reforms to evolve an efficient and harmonised consumption tax system in the country. Presently, there are parallel systems of indirect taxation at the central and state levels. Each of the systems needs to be reformed to eventually harmonise them.

GST is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at the national level. GST would give India a world class tax system and improve tax collections. It would end the long standing distortions of differential treatment of manufacturing and service sector. The introduction of GST will lead to the abolition of various central and state indirect taxes and eliminate the cascading effects of multiple layers of taxation. It is claimed that GST will facilitate seamless credit across the entire supply chain and across all states under a common tax base.

The changeover to GST will be a game-changing tax reform measure which will significantly contribute to the buoyancy of tax revenues, acceleration of growth, and generation of many positive externalities.

Once the integrated GST across the country is introduced, it will simplify tax administration and eliminate cascading of taxes. It will lead to reduction in the distortions in the structure of production, consumption and exports and further to a more efficient allocation of resources. The demand for manufactured goods can be expected to grow significantly.

The country is keenly awaiting implementation of the Goods and Services Tax (GST) and the Direct Tax Code (DTC). GST is India's most ambitious indirect tax reform. Lack of political consensus is holding up progress and the Government may miss the April 1, 2014 deadline of implementing GST.

Dr. M. M. Sury

Editor-in-Chief