chapter-iv indian tax structure – history, developments and...
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Chapter-IV
INDIAN TAX STRUCTURE – History, Developments and Reforms
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.
In the present chapter history, developments and reforms concerning
Indian tax structure along with the tax performance is studied. This will
also help in understanding the progress made and acceleration in the rate of
progress achieved.
4.2 TAX – THE CONCEPT
Taxes are as old as civilizations. Taxes are imposed so that a
government may perform its traditional functions (i.e. defense and
maintenance of law and order), undertaking welfare and developmental
activities and to make provision for public goods and services to satisfy
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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
4.3 TAXES IN ANCIENT INDIA
References to taxes in ancient India are found in Arthashastra the
famous work of Kautilya (also known as Chanakya and Vishnugupta).
Arthashasrta embodies values, norms, and beliefs pertaining to public
administration, economics, ethics and diplomacy. Taxes in ancient India
were levied both in cash and in kind and were collected by local officers.
Major sources of revenue for the king included land tax, octroi, taxes on
liquor shops, gambling houses and on professionals like dancing girls. In
his work Raghuvansa, Kalidasa, the greatest Sanskrit scholar of ancient
India, observed, “Just as the sun extracts water from the reservoirs and
gives it back in the form of showers, so does the ruler extract tax from his
subjects and give it back to them in the form of prosperity”3.
Kautilya’s reference to commodity tax in the book Arthashastra is of
significance and can be quoted as follows4:
Taxes in cash and kind included are:
1. Customs duty (Sulka) which consists of import duty (Pravesya),
Export duty (Nishramya) and Octroi and other gate tolls
(Dwarabahiri Kadeya).
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.
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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).
While Kara is assumed to be a tax paid in cash and Pratikara that is
paid in kind, no distinction is made between the two. In the case of customs
duty expressed as a fraction, could be paid either way, only in case of
manufactured jewellery, a cash payment of 20 per cent of the value added
was to be paid as export duty. The taxes paid by batchers, or the production
share paid by farmers, lessees or of mines or fishermen must always have
been paid in kind.
4.4 TAXES DURING BRITISH RULE
Prior to 1947, India was a dependency of the United Kingdom and
encompassed the entire area which now forms the three countries of India,
Pakistan and Bangladesh. It consisted of the British Indian Provinces, and
the Indian Princely States. The political and economic scene changed
greatly after 1947 when India emerged as an independent country merging
with itself the former Princely States (called Part B States), but excluding
areas of the other two countries mentioned above. Although it is desirable
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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
The tax system of British India reflected characteristics of a
traditional agricultural economy. Revenues of the Central Government
were dominated by customs duties as domestic requirement 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. Various
customs and tariff enactments were passed from time to time but the
following two were the main; (i) The Sea Customs Act, 1878, and (ii) The
Tariff Act, 1934. After Independence, the Sea Customs Act and other allied
enactments were repealed by a consolidating and amending legislation
entitled the Customs Act, 1962. Similarly, the Tariff Act of 1934 was
repealed by the Customs Tariff Act, 1975.
Another important source of tax revenue for the Central
Government was excise duty levied on a few commodities. Excise taxation
in its modern form dates back to 1894 when for the first time a duty at the
rate of 5 per cent ad valorem was imposed on cotton yarn of more than
twenty counts. Excise at the rate of 6 annas6 per Imperial Gallon was
imposed on motor spirit in 1917 and on kerosene at the rate of one anna
per Imperial Gallon in 1922. Another landmark in the history of excise
taxation was the year 1934 when excise duties were imposed on sugar,
matches, and steel ingots. Duties were imposed on tyres in 1941 and on 5 Sury, M.M (2006), Taxation in India 1925 to 2007, New Delhi, New Century Publications, p.5-7. 6 One anna was equal to 1/16th of a rupee before the introduction of the metric system of currency from April 1, 1957.
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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
Structure of Central and Provincial Tax Revenues: 1938-39
(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
centre 3.98
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).
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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.
4.5 TAXES IN INDEPENDENT INDIA
"It was only for the good of his subjects that he collected taxes
from them, just as the Sun draws moisture from the Earth to give it
back a thousand fold"
-Kalidas in Raghuvansh
4.5.1 Constitutional Provisions Pertaining to Taxation in India
The constitution of India makes elaborate arrangements relating to
the distribution, between the Centre and the States, of taxes, the power of
borrowing, and provision for grant-in-aid by the Centre to the States. The
fundamental philosophy of these arrangements is to place at the disposal of
the two tiers of Government adequate financial resources to enable them to
discharge their respective responsibilities under the constitution.
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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.
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Table – 4.2
Taxes within Union Jurisdiction as Specified in List I in the Seventh
Schedule of the Indian Constitution
Sl. No.
Entry No. in List-I
Description of the duty/tax
1 82 Taxes on income other than agricultural income.
2 83 Duties of customs including export duties.
3 84 Duties of excise except on alcoholic liquors and narcotics but including medicinal and toilet preparations containing alcohol.
4 85 Corporation tax.
5 86 Taxes on the capital value of assets, exclusive of agricultural land, of individuals.
6 87 Estate duty in respect of property other than agricultural land.
7 88 Duties in respect of succession to property other than agricultural land.
8 89 Terminal taxes on goods and passengers carried by railway, sea or air; taxes on railway fares and freights.
9 90 Taxes other than stamp duties on transactions in stock exchanges and future markets.
10 91 Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies, and receipts.
11 92 Taxes on the sale or purchase of newspapers and on advertisements published therein.
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Table – 4.2 (Contd...)
Sl. No.
Entry No. in List-I
Description of the duty/tax
12 92A* Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce.
13 92B** Taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-State trade or commerce.
14 92C*** Taxes on services.
15 97 Any tax not enumerated in List II or List III of the Seventh Schedule.
* Inserted by the Constitution (Sixth Amendment) Act, 1956: ** Inserted by the Constitution (Forty-sixth Amendment) Act, 1982. *** Inserted by the Constitution (Eighty-eighth Amendment) Act, 2003. Source: Government of India, Ministry of Law, Justice and Company Affairs, The Constitution of India, Seventh Schedule, List I.
Table 4.3
Taxes within the State Jurisdiction as Specified in List II in the
Seventh Schedule of the Indian Constitution
Sl. No.
Entry No. in List-II
Description of the duty/tax
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.
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Table – 4.3 (Contd...)
Sl. No.
Entry No. in List-I
Description of the duty/tax
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.
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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.
1. The power to impose taxes on the sale or purchase of goods other
than newspapers belongs to the States vide entry 54 of List II.
However, Article 286 ensures that sales taxes imposed by the States
do not interfere with imports and exports or inter-State trade and
commerce which are matters of national importance. In view of this,
Article 286 places the following restrictions on the power of the
States to enact sales tax legislation.
(a) No law of a state shall impose tax on the sale or purchase of
goods where such sale or purchase taxes place (i) outside the
State; or (ii) in the course of import into or export out of the
territory of India;
(b) with regard to inter-State trade, there are two restriction (i) the
power to tax sales taking place in the course of inter-State trade
and commerce belongs to the Union vide entry 92A of List I in
the Seventh Schedule, and (ii) the sales tax on intrastate sales of
‘declared goods’ (i.e. goods of special importance in inter-State
trade) is subject to certain restrictions in terms of the nature of
the levy and the rate of tax.
8 Sury, M.M (2006), Taxation in India 1925 to 2007, New Delhi: New Century Publications, p. 10.
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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)].
As the local governments come directly under the control of the
State governments, there is no separate allocation of taxation rights have
been provided to them. For avoiding any dispute between the Centre and
States in the taxation field, “the following constitutional provisions have
been made”9.
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.
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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.
4. Though some taxes are levied by the Central government, the
responsibility to collect them is of the state government. Stamp
duties other than included in the Union List and excise duties on
drugs and cosmetics have been included in this category.
4.6 DIRECT TAXATION – REFORMS AND DEVELOPMENTS
4.6.0 Income and Wealth Taxes
Among the direct taxes levied by the Center taxes on income and
wealth are very significant from not only economic but also from social-
economic point of view. Many a state government exercise their right and
levy tax on agricultural income, but due to very less taxable income being
available with agriculturists from revenue point of view this tax is
unimportant. Owing to the significance attached to the personal income tax
and corporate income tax they are briefly discussed below.
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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.
Like other countries India has a progressive income tax. Before
1974-75, the marginal rate for income tax in India was 97.75 per cent
which was the highest in the world. One negative ramification of such a
high marginal tax rate was that income tax became replete with
exemptions, allowances, deductions and incentives.10 On the
recommendation of the Direct Taxes Enquiry Committee (1970), in 1974-
75 the marginal rate for income tax was brought down to 77 per cent,
including 10 per cent surcharge. In 1976-77, the marginal tax rate was
further reduced to 66 per cent and again the same was subsequently
reduced to 50 per cent, in 1985-86 as part of long-term fiscal strategy. The
marginal rate for income tax was brought down to 40 per cent in the
Budget 1992-93. The tax rates have been reduced at other levels also. Thus
the degree of the progressivity of the schedule has been considerably
reduced. Reduction in tax rates at all levels has been by and large
commended in the country and proved right by way of increased tax
collection. In the Budget for 2003-04, the marginal rate of 30 per cent was
retained. However, a surcharge of 10 per cent was levied on income tax if
10 Parthasarathi Shome (2002), India’s Fiscal Matters, New Delhi: Oxford University Press, p. 188.
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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
Following the thrust of the Kelkar Task Force recommendations for
the simplification of direct and indirect taxes, the income tax structure in
the Budget for 2005-06 was overhauled. The Finance Minister proposed
new rates for different slabs. The marginal rate of 30 per cent was made
applicable to taxable income beyond Rs. 2.5 lakh. Surcharge of 10 per cent
was levied on taxable income level of Rs. 10 lakh or more. Moreover, the
various kinds of exemptions for savings were replaced by a single
consolidated exemption of Rs. 1 lakh. Important changes were introduced
in income tax structure in Union Budget 2010-11. The budget retained the
basic exemption limit for individuals at Rs. 1.60 lakh as in the year 2009-
10 (the basic exemption limit for women was kept at Rs. 1.90 lakh and for
senior citizens Rs. 2.40 lakh). However, the 10 per cent rate was made
applicable for Rs. 1.6 lakh – Rs. 5 lakh bracket, whereas earlier this was
applicable for income of Rs. 1.6 lakh – Rs. 3 lakh. The 20 per cent tax rate
was made applicable for incomes of Rs. 5 lakh – Rs. 8 lakh instead of the
earlier bracket of Rs. 3 lakh – Rs. 5 lakh. The highest rate of 30 per cent
was introduced on incomes of over Rs. 8 lakh (earlier it was Rs. 5 lakh).
The limit on investments under section 80C was raised from Rs. 1 lakh to
Rs. 1.2 lakh (by Rs. 20,000). However, the benefits were to be granted only
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.
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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.
4.6.2 Corporate Tax
Corporate tax is levied on the incomes of registered companies and
corporations in India. The rationale for the corporate tax is that a joint
stock company has a separate entity and thus a separate tax different from
personal income tax (paid by shareholders) has to be levied on its income.
Until 1960-61, corporations were taxed in a partial sense. A corporation
was required to pay income tax on behalf of its shareholders on dividends
paid to them, and each shareholder got a credit to this effect. Since 1960-
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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.
About four decades ago commenting on the structure of the
corporate tax Raja J. Chelliah had remarked, “The present structure of
company taxation in India is unnecessarily complicated, illogical and
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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.
Raja Chelliah Committee (1991) recommended elimination of most
of the incentives except those meant for promoting savings and exports. In
India, the justification for incentive provisions in the tax laws has been
widely questioned because over the years several prosperous companies
paying handsome dividends have been getting away without paying any
corporate tax. Bagchi points out that “the liberal depreciation provisions
granting 100 per cent depreciation to several items of assets has facilitated
tax avoidance and enabled companies to reduce their taxable profits to zero
or near zero.”15 Therefore, there was a strong case for eliminating
incentives. This has been done by levying a minimum alternate tax (MAT).
MAT rate was 15 per cent of book profits in 2009-10. The Union Budget
2010-11 raised it to 18 per cent for the year 2010-11. This was raised
further to 18.5 in the Union Budget 2011-12. It was continued to be 18.5
per cent for the years 2012-13 and 2013-14. Over a period of time, when
MAT has been in force, a credit scheme has been evolved (under MAT) to
console the aggrieved corporate sector for having been taxed on the basis
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.
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of book profits. However, this is one instrument which nullifies the effects
of MAT to some extent.
The Government of India has been actively pursuing the policy of
practicing corporate tax mechanism to achieve the fiscal objectives of the
Government. In the process various provisions have been evolved,
amended and re-amended over a period of time. The Investment Allowance
Scheme was introduced under Section 32A to give relief to industries
making investments in plant and machinery. Later on the scheme was
converted into Investment Deposit Scheme under Section 32AB, with a
few changes to Section 32A. Subsequently, the scheme was withdrawn.
Various schemes of deductions and tax holiday for new industries and
businesses have been introduced and modified over the period under
Section 80, mainly to encourage new industries and export undertakings.
Earlier, the dividend was subject to tax in the hands of recipients and
subsequently from 1st June 1997 (with an exception of the financial year
2002-03) it is made taxable with the payer (domestic companies) under
Section 115-O. Till 1988-89 the closely held companies were liable for
additional income tax under Section 104-109 of the Income Tax Act on
Undistributed Profits of Distributable Income. This was to avoid non-
declaration or under-declaration of dividend by the closely-held companies
in order to avoid tax on dividend (then subject to tax in the hands of
recipients). Subsequently the same was repealed. In the recent past
provisions dealing with Fringe Benefit Tax (FBT) and Presumptive
Taxation have been introduced and modified. Of late provisions of General
Anti Avoidance Rules (GAAR) have been introduced and they are
expected to be made effective in the near future. Under the Indian Income
Tax Act certain Specific Anti Avoidance Rules (SAARs) have been
operating for a long period. But to embrace all the omnibus or residual kind
of transactions where the intention is to avoid the tax but SAARs have no
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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.
4.6.3 Tax on Wealth and Capital
To avoid the evasion of personal income tax and corporate tax and
to reinforce and strengthen the income tax structure a few supporting direct
taxes were introduced in 1950s they are Estate Duty, Wealth Tax and Gift
Tax. While the Wealth Tax covered both corporate and non-corporate
assessees the Gift Tax and Estate Duty covered only non-corporate
assessees.
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.
In anticipation of death some people used to gift their property to
their heirs. The purpose in all such cases, mainly, was to avoid the estate
duty. In order to check the avoidance of estate duty in this manner, the
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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.
Tax on Wealth was first introduced in 1957. It is levied on the
excess of net wealth over exemption of individuals, joint Hindu families
and companies. For computing the net wealth, net debts and liabilities are
deducted. Certain assets such as land in rural area, balances of provident
fund and life insurance have are exempt from this tax. Accepting the
recommendations of the Raja Chelliah Committee, the government has
now exempted productive assets, such as shares, bonds, bank deposits etc.
Like estate duty, wealth tax has also been a minor source of revenue but
has been active in catch holding of tax evaders.
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.
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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.
4.7.1 Customs Duties
While using its constitutional powers the Central government levies
duties on both imports and exports. From revenue point of view, the
importance of export duty is limited. Over the years both export and import
duties have not only been a source of revenue, they have also been
employed as an instrument to regulate foreign trade. Specifically for this
reason it has been a practice on the part of the Central government to
provide information about the purpose of each import duty in the budget.
Import duties in India are generally levied on ad valorem basis. On
some commodities specific import duties have been levied either singly or
in addition to ad valorem duties. Due to their strategic importance in the
country’s economic development, imports of machinery and essential raw
materials have been taxed at lower rate. As compared to import duties,
export duties are less important from revenue as well as foreign trade
regulation point of view.
86
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.
Even before the Tax Reform Committee, 1991 suggested significant
reform measures, the government had realized the need to reform the structure
of customs duties with a view to reduce the role of quantitative restrictions on
imports and place increasing reliance on tariffs to regulate imports. It was
stated in the Long Term Fiscal Policy of 1985 (LTFP), “the move in this
direction should increase revenues, encourage less import-intensive forms of
production, moderate the unjustifiably high protection granted by quantitative
restrictions to certain industries and reduce the delays and uncertainties
associated with the administration of import licensing.”17 The LTFP also
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.
87
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.
As a part of tariff rationalization, on the basis of the
recommendations of the Raja Chelliah Committee, import duties have been
substantially reduced and in the Budget for 2006-07 the peak tariff level of
import duties was lowered to 12.5 per cent. The general peak tariff level of
import duties was further lowered to 10 per cent in the Budget for 2007-08.
These rates are followed till interim Budget presented in Parliament for
2014-15.
There has been a sharp reduction in the effective rates of protection
too as a result of the tariff reforms involving steep fall in the rates of
import duties which had an adverse effect on the Central government’s
revenue collections. As a proportion of GDP, revenue from customs duties
declined to 1.74 per cent of GDP in 2010-11 (it was 2.09 per cent in 2007-
08) and it has further declined to 1.67 per cent in 2011-12.
4.7.2 Excise Duties
An excise duty is in true sense a commodity tax because it is levied
on production and has absolutely no connection with its actual sale. Until
mid-1930, excise duties were levied only on 5 commodities. Since then the
number of commodities on which the Central government levies excise
duties has steadily increased and now the list is quite comprehensive.
Revenue collection from excise duties has registered a really spectacular
increase during the planning period. Even though the Central government
has levied heavy excise duties on luxury commodities, revenue proceeds
from them are not much.
88
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.
Taxation of inputs, such as raw materials, components and other
intermediates has a number of limitations. It very often distorts the
production structure, results in ‘cascading’ of taxes and does not allow
correct assessment of the tax incidence. Hence, the government now
intends to remove these defects of the central excise system by
progressively relieving inputs from excise and countervailing duties. An
ideal system to realize this objective would be to adopt value added
taxation (VAT). However, on account of some formidable practical
difficulties in this country, the Government proposed to introduce it in a
phased manner. For instance, it initially levied a modified system of VAT
(MODVAT) which is broadly revenue neutral. The government had no
intention to provide substantial reliefs on excise. However, it is in favour of
having a rationalized structure of excise duties. It has, therefore,
restructured Central excise duties in the light of the recommendations made
by the Raja Chelliah Committee.
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
89
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
These reform measures were expected to promote growth of
manufacturing output and employment, they made tax administration
easier and less discretionary and also reduced the scope for
misclassification, disputes and evasion. They increased revenue elasticity
and paved the way for any eventual adoption of a Value Added Tax
(VAT). In the Budget for 2000-01, the Finance Minister replaced the
multiple MODVAT system by a single Central Value Added Tax
(CENVAT).
In the wake of the global economic crisis in 2008-09, the standard
rate of excise duty for non-petroleum goods was reduced from 14 per cent
to 8 per cent in a phased manner. This rate was raised from 8 per cent to 10
per cent in Budget 2010-11. The standard rate of excise duty was again
raised from 10 per cent to 12 per cent in Budget for 2012-13. Whereas, in
interim Budget for 2014-15 the rate of excise duty on few specific items
such as capital goods has been reduced from 12 per cent to 10 per cent and
for automobile goods such as small cars, motor cycles, scooters,
commercial vehicles and trailers has been reduced from 12% to 8%.
18 Misra, S.K and Puri, V.K. (2012) Indian Economy, Mumbai: Himalay Publishing House, p. 660.
90
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.
4.7.3 Service Tax
In India, Service tax was introduced in 1994-95 initially on three
services viz. telephone services, general insurance and stock broking services.
Since then, every year the it has been widened by including more and more
services under the tax net. As a result, the revenue and the number of
assessees have increased considerably over the years. It is clear from Table
4.4, the revenue from service tax has increased considerably from Rs. 407
crore in 1994-95 to Rs. 1,32,518 crore in 2012-13. The rate of service tax in
the Union Budget 2008-09 was kept at 12 per cent. In a bid to stimulate the
economy, the government reduced the rate to 10 per cent with effect from
February 24, 2009. This rate was retained in the Budgets for 2009-10, 2010-
11 and 2011-12. However, The Finance Minister increased the rate of service
tax from 10 per cent to 12 per cent in the Union Budget from 1212-13. From
July 1, 2012 the approach of service taxation have been changed to
‘comprehensive approach’ under which all services have been brought under
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the service tax net except a negative list of specified services provided under
Section 66D.
Table - 4.4
Revenue from Service Tax in India
Year
No. of Services under tax net
No. of Assessees
Growth in
Assessee base
Revenue (Rs. in Crore)
Revenue Growth (in per cent)
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
2003-04 62 403856 81 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
2008-09 106 1204570 104 60941 19
2009-10 109 1307286 10 58422 -4.13
2010-11 117 1372274 10 71016 22
2011-12 119 1535570 10 97509 37
2012-13(P)
Negative List
regime
1712617 125 132518 36
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
92
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.
93
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.
As Bagchi rightly states, “the question therefore is not whether
services be taxed but how.”21 The Tax Reform Committee of 1991 headed
by Raja Chelliah, M. Govind Rao Committee on Service Taxation and
Kelkar Panel Reports on Direct and Indirect Taxes are all in broad
agreement together as part of VAT. The ultimate aim, in Bagchi’s opinion
should be to move towards a dual VAT model on a comprehensive base
both at the Centre as well as the States as recommended in particular by the
Govind Rao Committee.
4.7.4 Value Added Tax (VAT)
The Indirect Taxation Enquiry Committee was constituted under the
chairmanship of L.K. Jha in July 1976, for suggesting reforms in the
indirect taxation. The Committee found that the country’s indirect tax
structure as a whole was progressive, but there was little integration
between different indirect taxes. According to Jha Committee, each indirect
tax was levied independently of other indirect taxes. Further, these taxes
lacked built-in flexibility and every time when revenue collections had to
be increased, upward revision in the tax rates was done. The indirect tax
structure of India was by and large uncertain and complex and its
administration was difficult. The Committee recommended both short-term 20 Sayed Afzal Peerzade (2010), Economics of Taxation, New Delhi: Atlantic Publications p.186-187. 21 Amaresh Bagchi (2004), “Taxing Services – The Way Forward”’ Economic and Political Weekly, May 8, 2004, p.1816.
94
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.
However, based on the theoretical grounds, the Indirect Taxation
Enquiry Committee argued that, a Value Added Tax (VAT) is the best of
all indirect taxes. This view was supported by many tax policy experts too.
As rightly stated by Parthsarathi Shome, VAT is superior because of two
reasons, “First, the VAT has a self monitoring mechanism which assists tax
administration. Second, the VAT, if appropriately structured, eliminates
distortions in decisions by producers that arise from taxation of imports.”22
Moreover, since VAT collects revenue in different stages, it has a higher
revenue potential. On administrative grounds, however, the imposition of
VAT has been considered cumbersome because VAT requires levying of a
tax on the value addition at each stage of production or sale chain.
4.7.4.1 Introduction of State-VAT
The Empowered Committee (EC) of State Finance Ministers in its
meeting held on June 18, 2004, arrived at a broad consensus to introduce
VAT from April 1, 2005. Consequently, VAT has been introduced by all
States and Union Territories (UTs) except for the Union Territories of
Andaman and Nicobar Islands and Lakshadweep. The State level VAT has
replaced the erstwhile State sales tax system.
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.
95
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.
The salient features of the VAT design finalised by the Empowered
Committee23 are presented below.
• The rates of VAT on various commodities shall be uniform for all
the States/UTs. There are two basic rates for 4 per cent and 12.5 per
cent, besides an exempt category and a special rate of 1 per cent for
a few selected items. The items of basic necessities and goods of
local importance (upto 10 items) have been put in the 0 per cent or
the exempted schedule. Gold silver and precious stones have been
put in the 1 per cent schedule. The 4 per cent rate applied to other
essential items and industrial inputs. The 12.5 per cent rate is
residual rate of VAT applicable to commodities not covered by
other schedules. There is also a category with 20 per cent floor rate
of tax, but the commodities listed in this schedule will not be
VATable. This category covers items like motor spirit (petrol, diesel
and aviation turbine fuel), liquor etc.
• There is provision for eliminating the multiplicity of taxes. In fact,
several State taxes on purchase or sale of goods (excluding entry tax
in lieu of octroi) have been subsumed in VAT or made VATable.
• Provision has been made for allowing ‘Input Tax Credit’ (ITC).
However, since the VAT being implemented is intra-State VAT
23 Government of India (2008), Economic Survey, 2007-08, Box 3.4, p.55
96
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.
4.8 DEVELOPMENTS IN INDIAN INTERNATIONAL TAXATION
Taxation is a concept which is based on the sovereignty of nations,
whereby each nation taxes income derived from businesses within its
sovereign control. Universally, the world recognises each nation’s right to
tax the economic activity within its jurisdiction. International issues are
addressed, to some extent, through a number of bilateral treaties, many
based on an international model or convention, mutual understandings, and
practice.24
Globalization has made international investments easy,
consequently cross border economic activities have increased. The policies
pertaining to optimum use, economies of scale, sustainability of various
resources are becoming more and more significant at international level.
Trade and Industry policies of Governments worldwide backed by
developments in transportation and communication have made borders
between countries insignificant from the point of view of economic 24Anurag Soan & Shreya Ganju, 2013, “Transfer Pricing: The Law & Practice of Advance Pricing Agreements”, accessed from http://www.itatonline.org, p.1.
97
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.
So, it is necessary that there must be an arrangement to avoid double
taxation and also the uncertainty in taxation. There must be proper
mechanism in the form of legal framework and its application within
domestic level to deal with the international issues. India has attempted for
both the courses, very seriously, in recent years and the same is presented
below.
4.8.1 INDIA’s DOUBLE TAXATION AVOIDANCE AGREEMENTS-
[DTAAs]
DTAA is an agreement between the contracting countries to resolve
the tax issues mainly, double taxation issues.
Due to non-existence of global tax law international economic
transactions are taxed by application of domestic tax laws. This leads to
double taxation of such transactions, first in the source country and next in
the residence country. Double taxation is an injustice act. The double
taxation of this kind cannot be overcome without DTAA.25 Worldwide a
number of countries have signed, mainly bilateral, DTAAs. India is not an
exception to it and hence, we see a number of DTAAs signed by India too.
India is a late starter in signing DTAAs. Until 20 years of
independence no DTAA was signed. Prior to ushering in of globalization
policies in 1991, in all, 21 DTAAs were signed. Subsequently, India felt
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
98
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.
DTAAs promote international trade by allocating taxation rights
between the country of source and the country of residence, avoiding
double tax, and enabling corresponding adjustments in the face of transfer-
pricing adjustments in the other country. In addition, DTAAs can also
enable mutual assistance in collecting information, tax investigation, and
collection of taxes between the respective countries as well as help in
resolution of tax disputes.26
Table - 4.5 reveals the number of cumulative agreements signed by
India from 1965 along with the year-wise agreements signed. It is evident
that upto 1991 India had only 18 agreements out of the total 88 agreements
(as of now). So, 70 agreements i.e. 79.55 per cent are singed during
globalised era. This is due to increase in the India’s international
commercial relations and importance attached to taxation issues in the
globalised era. As many as seven agreements were signed in a single year
in 1994, 1997 and 2011.
26White Paper on Black Money, 2012, Presented by the then Finance Minister of India. Shri Pranab Mukherjee. Pp,34
99
Table - 4.5
Number of DTAAs Signed by India during
Pre and Post Globalization Period (1965 -2014)
Source: Compiled from. 1) www.incometaxindiagov.in 2) Press information bureau, Govt. of India, (http://www.pib.nic.in/newsite/erelease.aspx?relid=92981.)
Year Number of agreements signed
Number of Cumulative 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
100
Chart - 4.1
Year wise and Cumulative DTAAs signed during Pre and Post-
Globalization period
Pre-globalization (1965-1990) Post-globalization (1991-2014)
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.
1 3 6 9 10 12 1318 18
0
10
20
30
40
50
60
70
80
90
100
1965
1969
1982
1985
1986
1987
1988
1989
1990
19 22 27
34 36 42
49 53 58
59
60 64
65 70 72 76 78
85
86 88
0
20
40
60
80
100
1991
1993
1995
1997
1999
2001
2004
2007
2010
2013
101
Table-4.6
Information requests between India and other countries
Year Request from India
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. 4.8.1.2 Tax Residency Certificate (TRC)
To avoid obtaining of treaty benefits by non-residents of a
contracting country Sub Sec. (4) to Sec.90 was introduced in the Finance
Act 2012 to avoid the unintended treaty benefits flowing to third party
residents.
The said provision makes submission of TRC containing prescribed
particulars, as a necessary but not sufficient condition for availing benefits
of the agreement. The amendment has been made effective from the A.Y.
2013 – 14. TRC furnished by resident of a contracting state is considered
as a conclusive proof of residence. However, TRC being not sufficient
condition for claiming treaty benefits Notification No. 57 of 2013 issued on
1/8/2013 by CBDT (which is deemed to have come into force from 1-4-
2013) prescribes the information that is required – in addition to Tax
Residency Certificate – to claim treaty benefits.
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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
Transfer pricing is one of the most important issues faced by MNEs
today, as they attempt to fairly distribute their profits amongst the
companies within the group. On the other hand, the tax authorities
implement transfer pricing regulations and strengthen the enforcement in
order to prevent a loss of revenue for each regime where these companies
are incorporated. The net result of this dichotomy is that transfer pricing
has become a major tax issue for the companies. Rapid advancement in
technology, transportation and communication have given rise to a large
number of MNEs which have the flexibility to place their enterprises and
activities anywhere in the world.28
More than 60 per cent of global trade is carried out between
associated enterprises (AEs) of multinational enterprises and comprises the
international transfer of goods and services, capital and intangibles within
the MNE group; such transfers are called “intra-group” transactions. The
transactions, particularly with regard to transfer of intangibles and multi-
tiered services, involve many complexities since allocation of costs and
overheads and fixing of prices is highly subjective in such cases, thereby
giving considerable discretion to MNEs with regard to cost allocation and 27Ashok Kumar, 2002a, “Transfer Pricing, Multinationals and Taxation – Concepts, Mechanisms and Regulations”, New Century Publications, New Delhi. p.2. 28 M.S.Vasan & Vijay Iyer, 2014, “Transfer Pricing Audit Practices in India”, LexisNexis, Gurgaon, p.1.
103
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
4.8.2.1 Transfer Pricing in India
The Finance Act, 2001, substituted Section 92 of the Income-tax
Act, 1961with Sections 92 and 92A to 92F. These provisions required
commercial outcomes arising from international transactions between
Associated Enterprises (AE) to be consistent with the arm’s length
principle, which is the standard for transfer pricing in India and in tax
jurisdictions around the world. ‘Arm’s’ refers to the conditions that exist
between two entities dealing independently with each other. Rule 10D of
the Income-tax Rules, 1961 requires taxpayers having international
transactions with AEs to prepare and maintain prescribed information and
documentation to establish that their dealings with the AEs are conducted
on arm’s length basis.30
The erstwhile Section 92 of Income Tax Act 1961 with regard to
transfer pricing proved inadequate as it did not cover the case of
intangibles and services in transactions between a resident and a non-
resident. Moreover, the emphasis was on profit rather than on adjustments
in prices and/or income/ expenses. As it did not define the close parties, it
29Aseem Chawla (India – Branch Reporter) Cahiers de droit Fiscal International – International Fiscal Association 2013 Vol.986, p.339. 30ibid.
104
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.
31Debasish Dutt, 2009, “Transfer Pricing – A Study’ The Management Accountant Journal, p.636.
105
Table – 4.7 (Contd...)
Sections Issues Covered
92E Report from an accountant to be furnished by persons entering into international transaction or specified domestic transaction.
92F Definitions of certain terms relevant to computation of arm’s length price.
94A Special measures in respect of transactions with persons located in notified jurisdictional area.
144C Reference to Dispute Resolution Panel.
271AA Penalty for failure to keep and maintain information and documentation in respect of certain transactions.
271BA Penalty for failure to furnish report under Section 92E.
271G Penalty for failure to furnish information or document under Section 92D.
10A Computation of income from international transactions involving transfer pricing having regard to arm’s length price and Meaning of Act.
10AB “Other Method” of computing arm’s length price.
10B Arm’s length price determination.
10C Most appropriate method of transfer pricing.
10D Maintenance of documents and information.
10E Report from an accountant to be furnished under Section 92E.
4.8.2.2 Transfer Pricing Methods in Indian Context
Transfer pricing mechanism is basically a methodology adopted to
find out arm’s length price to a transaction between related parties. In this
regard the transfer pricing regimes have following five methods,
extensively, to achieve the objective. These methods are listed below.
1) Traditional transaction methods
a) Comparable Uncontrolled Price Method (CUP).
b) Resale Price Method (RPM).
c) Cost plus Method (CPM).
106
2) Transactional Profit Methods
d) Profit Split Method (PSM).
e) Transactional Net Margin Method (TNMM)
4.8.2.3 Indian Developments in Transfer Pricing
As an extension of CUP method the CBDT introduced “Other
Method” vide Rule 10AB of the Income Tax Rules, 1962 on 23 May, 2012
with effect from 1 April 2012. It reads “_ _ _ _ _ the other method for
determination of arm’s length price in relation to an international
transaction shall be any method which takes into account the price which
has been charged or paid, for the same or similar uncontrolled transaction,
with or between non-associated enterprises, under similar circumstances,
considering all the relevant facts”.
Comparability concept is the heart and soul of any process of
deriving the arm’s length price. Reliable and meaningful framework
decides the quality of comparability. Finding an effective comparable
transaction is a highly complex but inevitable task in determining arm’s
length price. The OECD and prominent transfer pricing regimes worldwide
have been in search of such mechanisms from the beginning of the
application of transfer pricing to the related party transactions in deciding
tax liability. Because of the lessons learnt out of experience, support of
information technology in generating and holding data bases and providing
them to the disposal of needy stake-holder, quest for making the system
efficient and pool proof have led Indian transfer pricing regime to propose
switchover to the concept of range (except where the number of
comparables is inadequate) from the concept of mean, changes are also
proposed to adopt multiple years data as against the current year data,
which had its own limitations.
107
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.
108
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
TP Audit Year
No. of TP audits
completed
Number of adjusted
cases
Percentage of cases adjusted
Amount adjusted (Rs.
in crores)
2005-06 1,061 239 23 1,220
2006-07 1,501 337 22 2,287
2007-08 1,768 471 27 3,432
2008-09 1,945 754 39 7,754
2009-10 1,830 813 44 10,908
2010-11 2,368 1,207 50.97 24,111
2011-12 2,638 1,343 50.91 44,532
2012-13 3,171 1,686 53.17 70,016
2013-14 3,617 1,920 53.08 59,602
Source: Annual Report, 2013-14 (Ministry of Finance, Government of India) p250.
109
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
Financial Year
Transfer Pricing Adjustments
(Rs. in crores)
Revenue from corporate taxes (Rs. in crores)
Transfer Pricing adjustments as a % of corporate
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).
110
Chart - 4.2
Transfer pricing revenue as a percentage of corporate tax revenue
collection in India
Table 4.11 depicts the revenue from international transactions in
India, for the period 2002-03 to 2013-14. It is clear from the table that the
India’s revenue from cross country transactions has been steadily
increasing. During the said period of ten years, there is an increase by
twenty five times in the revenue from international transactions. The year-
on-year growth rate reveals that there is an increase in revenue from
international transactions all the years under study. However, the rate of
increase is volatile. While it is as high as 155 per cent in 2004-05, it is as
low as 2.14 per cent in the year 2012-13.
2.974.05
1.482.26 2.38
0.84
2.88
4.46
7.78
13.79
19.65
15.10
0.00
5.00
10.00
15.00
20.00
25.00
Per
cent
age
of T
P to
CT
R
Transfer Pricing collection as a % of corporate tax revenue
111
Table: 4.11
Comparison between Revenue from International Transactions &
Transfer Pricing adjustments in Indian context
Financial Year
Revenue from International Transactions (Rs. in crore)
Transfer Pricing
Adjustments (Rs. in crore)
Percent of TP Adjustment to Revenue from International Transactions
Growth Rate of Revenue from International
Transaction (in per cent)
Growth Rate of TP
Adjustments (in per cent)
2002-03 1,356 1,373 101.25 -- --
2003-04 1,729 2,575 148.93 27.51 87.55
2004-05 4,418 1,220 27.61 155.52 -52.62
2005-06 8,049 2,287 28.41 82.19 87.46
2006-07 9,147 3,432 37.52 13.64 50.07
2007-08 11,790 1,614 13.69 28.89 -52.97
2008-09 15,740 6,140 39.01 33.50 280.42
2009-10 16,198 10,908 67.34 2.91 77.65
2010-11 21,509 23,237 108.03 32.79 113.03
2011-12 27,442 44,531 162.27 27.58 91.64
2012-13 28,179 70,016 248.47 2.69 57.23
2013-14 31,855 59,602 187.10 13.05 -14.87
Source: Compiled from www.finmin.nic.in (Ministry of Finance) and White Paper on Black Money, 2012.
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.
The above figures prove that the transfer pricing is becoming a key concept
in international taxation. The table also shows transfer pricing 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.
Tax Revenue from International Tra
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
55000
60000
65000
70000
75000
Tax
rev
enue
am
ount
in r
upee
s in
cro
res
The above figures prove that the transfer pricing is becoming a key concept
in international taxation. The table also shows transfer pricing 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 and TP Adjustments
Revenue from International Transactions
Revenue from Transfer Pricing Adjustments
112
The above figures prove that the transfer pricing is becoming a key concept
in international taxation. The table also shows transfer pricing adjustments
as a percentage of revenue from international transactions, which is
continuously increasing but the growth rate is more volatile as compared to
nsactions and TP Adjustments
113
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).
4.8.5 ADVANCE PRICING AGREEMENT (APA)
APA is an agreement between taxpayer and taxing authority /
authorities of one/ multiple jurisdictions for determining the price of a
future international transaction in advance by applying agreed method of
transfer pricing as per the framework of negotiated agreement.32
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.
114
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 highlights the volume of transfer pricing adjustments and
percentage of audit cases in the last twelve years (2002-03 to 2013-14).
Chart - 4.4
Percentage of TP cases adjusted in India (2002-03 to 2013-14)
Source: Compiled from Ministry of Finance, Government of India (www.itatonline.org).
The Transfer Pricing Officers are aggressive in their job. We come
across a huge amount of adjustments which in turn leading to litigations.
And in the process of litigation resolution, majority of the cases have been
adjudged in favour of taxpayers (chart – 4.5).
33S.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.
22 23 23 22
27
38 39
44
4951
53 53
0
10
20
30
40
50
60
Pe
rce
nta
ge
of
Ca
ses
Year
115
Chart - 4.5
Analysis of the recent 781 judgments of the Income Tax Appellate Tribunals (ITAT)
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.
To address the problem of increasing tax disputes, locking of
government revenue in the litigation cases and loss of time and litigation
cost of the tax payers the Government of India has introduced two new
mechanisms. They are Advance Pricing Agreement (APA) and Safe
Harbour Rules (SHRs).
An APA is the alternative counterpart (in transfer pricing
assessment) to an advance ruling, since under the current law; an advance
ruling cannot be used to determine the price of any transaction.34 From 1st,
July 2012 APA scheme has been introduced in India.
34Freddy R Daruwala (2012), “Advance Pricing Agreements” International Taxation, Vol.6, p.514.
Ruling in favour of taxpayers
47%
case remanded back for fresh adjudication
24%
Rulings partly in favour of
taxpayers and partly in favour of
tax authorities 15%
Rulings in favour of tax authorities
14%
4.8.5.1 Types and Process of APAs
There are three types of APAs
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 bila
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.
APA process is a voluntary process initiated by a taxpay
entered into or proposes to enter into an international transaction. The
various stages involved in finalising an APA are shown in the following
flow-chart:
Steps in finalising APAs (in Indian Context)
Types and Process of APAs
There are three types of APAs-Unilateral, Bilateral 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 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 bila
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.
APA process is a voluntary process initiated by a taxpay
entered into or proposes to enter into an international transaction. The
various stages involved in finalising an APA are shown in the following
Figure – 4.1
Steps in finalising APAs (in Indian Context)
116
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 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 and
multilateral APAs ensure certainty and help to avoid double taxation. At
the same time signing multilateral and bilateral APA is time taking and
APA process is a voluntary process initiated by a taxpayer who has
entered into or proposes to enter into an international transaction. The
various stages involved in finalising an APA are shown in the following
Steps in finalising APAs (in Indian Context)
117
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.
4.8.5.2 Features of India’s APA Scheme
The salient features of India’s APA Scheme, as introduced in the
Finance Bill, 2012, are as under:35
• The Central Board of Direct Taxes is empowered to enter into an
APA with any person undertaking an international transaction;
• The arm’s length price may be determined under any method,
whether prescribed or not;
• The term of the APA would not exceed five consecutive years;
• The APA would be legally binding on the taxpayer and the income
tax authority for the international transactions to which the APA
applies, unless there is a change in law or facts;
• The APA would be void in case of fraud or misrepresentation;
• The taxpayer would file a modified return within three months from
the end of the month in which the APA was entered into for
applicable fiscal years when income tax return has already been
filed;
35Shanto Ghosh (2012), “APAs in India: The Last Frontier in Disputes Resolution”, International Taxation, Vol.6, p.490.
118
• 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
Recently, the Government has amended APA provisions and made
the arm’s length price decided under APA methodology applicable to past
4 years (roll back). This is mainly to provide an opportunity and easy way
in resolving pending disputes in such transactions. The rollback of APA is
an international practice also.
Deloitte reveals that the APA scheme had garnered an enthusiastic
response from multinational enterprises, both foreign and Indian, in the
first year itself. India has seen the highest number of APA applications
filed in the first year, with record 146 applications (reportedly) filed by 31
March 2013. The overwhelming number of close to 225 applications
(estimated) filed in the second year is an evidence of the faith reposed by
the corporate fraternity in the entire process. This takes the total tally to
close to 370 applications in the initial two years of the APA program,
which is an astounding achievement36.
36 Deloitte (2014), “India successfully concludes first batch of Advance Pricing Agreements (APAs)” Transfer pricing – Insight with information, p.2.
119
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:
a) Information Technology (IT) Sector.
b) Information Technology Enabled Services (ITES) Sector.
c) Contract Research and Development (R & D) in the IT and
Pharmaceutical Sector.
d) Financial Transactions – Outbound Loans.
e) Financial Transactions – Corporate Guarantee.
f) Auto Ancillaries – Original Equipment Manufacturer.
The Committee submitted a total of six reports in a span of nine
months from September 2012 to April 2013. The Government after
considering the stakeholders’ comments and suggestions notified the safe
harbour rules on 18th September 2013 by amending the Income Tax Rules
1962 to insert Rule 10TA to 10TG.
As per the guidelines of OECD37 the following are considered as
objectives of safe harbour –
1) Simplifying compliance for eligible tax payers in determining
generalised arms’ length conditions for controlled transactions;
37Para 4.97 of OECD Guidelines
120
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.
OECD defines safe harbour as a statutory provision that applies to a
given category of tax payers and that relieves eligible tax payers from
certain obligations otherwise imposed by the tax code by substituting
exceptional, usually simpler obligations. In the specific instance of transfer
pricing, the administrative requirements of a safe harbour may vary from a
total relief of targeted tax payers from the obligation to conform with a
country’s transfer pricing legislation and regulations to the obligation to
comply with the various procedural rules as a condition for qualifying for
safe harbour.38
Table 4.12 gives the list of eligible international transactions and the
margins prescribed for each activity.
Table - 4.12 Safe Harbour Margins for different sectors
Sl. No.
Eligible International Transaction Safe Harbour Margin
1. Provision of software development services and provision of information technology enabled services.
The operating profit margin declared by the assessee - (i) not less than 20 per cent, where the aggregate value of such transactions entered into during the previous year does not exceed a sum of five hundred crores rupees; or (ii) not less than 22 per cent, where the aggregate value of such transactions entered into during the previous year exceeds a sum of five hundred crores rupees.
38 Para 4.94, Page 160 of the ‘OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations’.
121
Table – 4.12 (Contd...)
Sl. No.
Eligible International Transaction
Safe Harbour Margin
2. Provision of knowledge process outsourcing services.
Operating profit margin declared by the assessee is not less than 25 per cent.
3. Advancing of intra-group loans (where the amount of loan exceeds fifty crore rupees).
The Interest rate declared is not less than the base rate of State Bank of India as on 30th June of the relevant previous year plus 150 basis points.
4. Advancing of intra-group loans (where the amount of loan exceeds fifty crore rupees).
The Interest rate declared is not less than the base rate of State Bank of India as on 30th June of the relevant previous year plus 300 basis points.
5. Providing corporate guarantee to Wholly Owned Subsidiary (WOS) for an amount of guarantee ≤ INR 100 crores.
The commission or fee declared is not less than 2 per cent per annum on the amount guaranteed.
6. Providing corporate guarantee to WOS where guarantee amount > 100 crores. Credit rating of the AE done by agency registered with SEBI is of adequate to highest safety.
The commission or fee declared is not less than 1.75 per cent per annum on the amount guaranteed.
7. Provision of contract research and development services wholly or partly relating to software development.
Operating profit margin is not less than 30 per cent.
8. Provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs.
Operating profit margin declared is not less than 29 per cent.
9. Manufacture and export of core auto components.
Operating profit margin declared is not less than 12 per cent.
10. Manufacture and export of non-core auto components.
Operating profit margin declared is not less than 8.5 per cent.
Source: SHRs notified by CBDT on 18.09.2013.
Safe harbour provisions are meant to provide certainty as well as
simplicity to the tax payer hence, if the eligible tax payer’s eligible
international transactions satisfy pre-announced criteria by following the
prescribed procedure, then the actual transfer prices used for the
122
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
Salient Features of the Safe Harbour Rules:
• 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.
4.9 TAX-GDP RATIO - TRENDS
The study of tax-GDP ratio is important because trends in taxation
in a country or a group of countries are analysed mainly in terms of this
ratio, and the composition of tax revenues. The latter may change owing to
variations in tax-GDP ratio.
39Vijay Krishnamurthy (2013), “Indian Safe Harbour Rules”, International Taxation, Vol.9, p.368. 40S.P.Singh (2013), “Safe harbour, Advance Pricing Agreement and Normal Audit in India; Analysis of the Emerging Scenario”, International Taxation, Vol.9, p.384.
123
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.
Tax-GDP ratio has been extensively recognized as an indicator of
development of a country. Tax-GDP ratio is an indicator of the level of
taxation and relative tax burden in a country.42 Level of taxation in a
country is traditionally judged in terms of the ratio which taxes bear to
some measure of national income. This ratio is called tax-GDP ratio and
the change in it is determined by variations in both the numerator (total tax
revenue) and the denominator (national income). Investopedia defines the
tax-GDP ratio as, ‘The ratio of tax collection against the national gross
domestic product (GDP)’.43
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.
124
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?
In choosing from the alternative measures of national income, the
important considerations are, (a) the measure chosen should be readily
available, (b) it is widely understood, and (c) it is reliable. In view of these
considerations, it is a common practice to use GDP at market prices as the
denominator of the tax-GDP ratio. GDP is preferred because it avoids
estimation of depreciation which is subject to various statistical and
conceptual problems. The Organisation for Economic Co-operation and
Development (OECD) uses GDP at market prices as the denominator for
comparing tax-GDP ratio among its member countries.
Tax-GDP ratio is generally regarded as an index of relative tax
burden in a country over a period of time or when countries are compared
for the same period. Thx-GDP ratio indicates the percentage of national
income that is compulsorily transferred from private pockets to public
exchequer, and hence the relative share of government in the disposition of
national income. Since tax-GDP ratio reflects movements in both tax
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.
125
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)
GDP Rank Country/Economy
Tax-GDP Ratio (per cent) Tax-GDP
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). India is believed to have lower tax-GDP ratio. According to the
World Bank Database (Taxes collected by Central Government) the 10.4
per cent ratio in case of India (Table 4.13), during 2011, is less than the
world average of 14.6 per cent and much lower than 17.6 per cent ratio in
case of European zone, which has traditionally higher tax-GDP ratio. When
compared with the average of South Asian countries, it is just marginally
126
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)
As a percentage of GDP, during pre-liberalization period, the share
of direct taxes which was 2.29 per cent in 1950-51, fell to 2.18 per cent in
1970-71 and further to 2.15 per cent in 1990-91 (Table-4.14).
Consequently, the share of indirect taxes which was 3.93 percent in 1950-
51 rose to 8.09 per cent in 1970-71 and further to 13.25 per cent in 1990-
91. It is fact that the indirect taxes provide more effective way of reaching
semi-subsistence population and their burden is felt less by tax payers
because tax gets camouflaged in the price of the product. Nevertheless,
“the fact remains that more effective way of imparting equity and justice to
the tax payers in the long run can only be through increasing reliance on
direct tax”.45 Whereas, the reverse trend can be seen during post-
liberalization period.
45 Jain, Anil Kumar (2001), Direct Taxation in India - Some Aspects, Jaipur, RBSA Publishers, p.15.
17.6
14.6
10.4 10.3
02468
101214161820
European Area World India South Asia
Tax-GDP Ratio (%) - 2011 (Central Govt.)
127
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).
128
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.
4.9.2 Tax-GDP Ratio of Center and State (Combined): Time series data for pre-liberalization period are presented in Table
4.15. It reveals that the tax collection as a percentage of GDP of India has
increased from 6.22 per cent in 1950-51 to 15.40 per cent in 1990-91.
Whereas, direct tax-GDP ratio has decreased from 2.29 per cent in 1950-51
to 2.15 per cent in 1990-91. During the same period, indirect tax-GDP ratio
has increased from 3.93 per cent in 1950-51 to 13.25 per cent in 1990-91.
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
129
Table – 4.15 (Contd...)
Year Direct Indirect Total 1961-62 2.43 5.93 8.37 1962-63 2.82 6.58 9.41 1963-64 3.04 7.17 10.21 1964-65 2.80 6.99 9.78 1965-66 2.62 7.81 10.43 1966-67 2.42 7.86 10.28 1967-68 2.10 7.21 9.31 1968-69 2.14 7.42 9.56 1969-70 2.22 7.48 9.70 1970-71 2.18 8.09 10.27 1971-72 2.36 8.89 11.26 1972-73 2.47 9.32 11.79 1973-74 2.34 8.79 11.12 1974-75 2.34 9.42 11.76 1975-76 2.96 10.32 13.28 1976-77 2.85 10.74 13.59 1977-78 2.61 10.27 12.88 1978-79 2.56 11.38 13.94 1979-80 2.53 11.94 14.48 1980-81 2.25 11.40 13.65 1981-82 2.42 11.71 14.13 1982-83 2.35 11.91 14.26 1983-84 2.21 11.96 14.17 1984-85 2.14 12.23 14.37 1985-86 2.22 13.16 15.38 1986-87 2.19 13.55 15.74 1987-88 2.09 13.83 15.92 1988-89 2.30 13.47 15.76 1989-90 2.29 13.64 15.93 1990-91 2.15 13.25 15.40
Source: Indian Public Finance Statistics – 2012-13. 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.
130
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.
131
Chart - 4.7
Combined Tax-GDP Ratio of Center and States
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.
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
Per
cent
age
Year
Direct Indirect Total
132
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)
Country/ Year
Direct Tax to GDP
Indirect Tax to GDP
Total Tax to GDP
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
133
Table – 4.17 (Contd...)
Country/ Year
Direct Tax to GDP
Indirect Tax to GDP
Total Tax to GDP
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 Kingdom
15.0 15.9 13.3 13.6 28.3 29.5
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)
29.8
19.9
19.1
46.7
23.1
20.7 23.9
21.8
19.3
27.0 29.1
26.5
19.0
16.2
26.1
23.9 27.4
23.6
27.5
21.0 23.9
19.2 22.2
16.3
30.9
37.3
29.5 33.0
31.8
16.4
0.0
10.0
20.0
30.0
40.0
50.0
Bel
gium
Bul
gari
aC
zech
Rep
ublic
Den
mar
kG
erm
any
Est
oni
aIr
elan
dG
reec
eS
pai
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ranc
eIt
aly
Cyp
rus
Latv
iaLi
thua
nia
Luxe
mb
our
gH
unga
ryM
alta
Net
herl
and
sA
ustr
iaP
ola
ndP
ort
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Ro
man
iaS
love
nia
Slo
vaki
aF
inla
ndS
wed
enU
nite
d K
ingd
om
No
rway
Icel
and
Ind
ia
134
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.
4.10 ECONOMIC LIBERALIZATION AND TAX PERFORMANCE
IN INDIA
The primary objective of any tax system is to raise revenue in
efficient and unbiased manner. “However, in India, the government has
tried to use taxation to achieve various social-economic objectives also”46.
In this regard, the Indian government tried to make the integrated and
broad based tax system. However, changes in various tax measures were
initiated and implemented in hurry that the tax system in India got
overloaded with numerous provisions at providing incentives and
disincentives. The result was that the Indian tax system became one of the
complicated tax systems in the world and many a time the implementation
of various provisions tended to beat their original objectives. No sooner
certain reforms were implemented on the basis of recommendation of some
commissions and committees, it was realized that the tax system had
become unreasonably complicated and there was need for further reform.
“In an attempt to design the tax system to achieve vertical equity (unequal
treatment of unequals), there was serious violation of horizontal equity
(equal treatment of equals).
46 Jain, Anil Kumar (2001), Direct Taxation in India - Some Aspects, Jaipur: RBSA Publishers, p.13.
135
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
Of the total revenue, indirect taxes have been contributing a larger
share and this share has increased over the years during pre-liberalization
period. The share of indirect taxes in total tax revenue was 63.2 per cent in
1950-51. It increased to 70.2 per cent in 1960-61, to 78.8 per cent in 1970-
71, to 83.5 per cent in 1980-81 and further to 86 per cent in 1990-91 (Table
– 4.18). As a consequence, the share of direct taxes in total tax revenues
declined from 36.8 per cent in 1950-51 to 29.8 per cent in 1960-61, to 21.2
per cent in 1970-71, to 16.5 per cent in 1980-81 and further to around 14
per cent in 1990-91.
Table - 4.18 Combined Tax Revenue of Central and State Governments in India
(Pre-liberalization Period) (Rs. in Crores)
Year Total Tax
Revenue
Direct Tax
Indirect Tax
Revenue
Share of Direct Tax (per cent)
Share of Indirect Tax
(per cent) 1950-51 627 231 396 36.84 63.16 1955-56 768 259 509 33.72 66.28 1960-61 1,350 402 948 29.78 70.22 1965-66 2,922 734 2,188 25.12 74.88 1970-71 4,752 1,009 3,743 21.23 78.77 1975-76 11,182 2,493 8,689 22.29 77.71 1980-81 19,844 3,268 16,576 16.47 83.53 1985-86 43,267 6,252 37,015 14.45 85.55 1990-91 87,723 12,260 75,463 13.98 86.02 Note: Figures reflects both State & Centre’s tax collection. Source: Data compiled from Indian Public Finance Statistics of various years.
47 Jain, Anil Kumar (2001), Direct Taxation in India - Some Aspects, Jaipur, RBSA Publishers, p.13-14.
136
Chart - 4.9
Combined Tax Revenue (Pre-liberalization Period)
Chart - 4.9(a)
Share of Direct and Indirect Taxes in Combined Tax Revenue
(Pre-liberalization Period)
0100002000030000400005000060000700008000090000
100000R
even
ue
Period
Total Tax Direct Tax Indirect Tax
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
1950-511955-561960-611965-661970-711975-761980-811985-861990-91
Rev
enue
Sha
re
Period
Share of Direct Tax Share of Indirect Tax
137
Chart - 4.10
Combined Tax Revenue (Post-liberalization Period)
Chart - 4.10(a)
Share of Direct and Indirect Taxes in Combined Tax Revenue
(Post-liberalization Period)
0.00
250,000.00
500,000.00
750,000.00
1,000,000.00
1,250,000.00
1,500,000.00
1,750,000.00
2,000,000.00
Rev
enue
Period
Total Tax Direct Tax
0.0010.0020.0030.0040.0050.0060.0070.0080.0090.00
Rev
enue
Sha
re
Period
Share of Direct Tax Share of Indirect Tax
138
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)
Year Total Tax Revenue
Direct Tax
Indirect Tax
Revenue
Share of Direct Tax (percent)
Share of Indirect
Tax (percent)
1991-92 103,198 16,657 86,541 16.14 83.86
1995-96 175,259 35,778 139,481 20.41 79.59
1996-97 200,056 41,062 158,994 20.53 79.47
1997-98 213,065 42,946 170,119 20.16 79.84
1998-99 233,018 49,121 183,897 21.08 78.92
1999-2000 274,583 60,864 213,719 22.17 77.83
2000-01 305,320 71,764 233,557 23.50 76.50
2002-03 356,638 87,093 269,546 24.42 75.58
139
Table – 4.19 (Contd...)
Year Total Tax Revenue
Direct Tax
Indirect Tax
Revenue
Share of Direct Tax (percent)
Share of Indirect
Tax (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 (RE)
1,475,032 507,888 967,144 34.43 65.57
2012-13 (BE)
1,751,124 578,364 1,172,759 33.03 66.97
Note: Figures reflects both State & Centre’s tax collection. Source: Data compiled from Indian Public Finance Statistics of various years.
4.10.1 Share of Direct and Indirect Taxes in Total Taxes in India
Table 4.20 shows the dominating role of indirect taxes in total tax
revenue of India in pre-liberalized period. It reveals that the share of direct
taxes was 36.84 percent in 1950-51 as compared to 63.16 per cent of
indirect taxes in the same period. The share of direct taxes declined to
19.89 per cent in 1974-75. This was the period when highest marginal
effective tax rate at 97.75 per cent was existed in India, which led to
massive tax evasion in India. The table further shows that the share of
direct tax in total tax revenue further reduced to 13.98 per cent in 1990-91.
140
Table - 4.20 Share of Direct and Indirect Taxes in Total Taxes in India
(Center and States) (Pre-liberalization Period)
Year Rs. in Crore In Per cent
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.
141
Table - 4.21 Share of Direct and Indirect Taxes in Total Taxes in India
(Center and States) (Post-liberalization Period)
Year Rs. in Crore In Per cent
Direct Indirect Total Direct Indirect
1991-92 16657 86541 103198 16.14 83.86
1992-93 19387 94779 114166 16.98 83.02
1993-94 21713 100248 121961 17.80 82.20
1994-95 28878 118971 147849 19.53 80.47
1995-96 35777 139482 175259 20.41 79.59
1996-97 41061 159995 201056 20.42 79.58
1997-98 50538 170121 220659 22.90 77.10
1998-99 49119 183898 233017 21.08 78.92
1999-2000 60864 213719 274583 22.17 77.83
2000-01 71762 233558 305322 23.50 76.50
2001-02 73109 241426 314535 23.24 76.76
2002-03 87365 268912 356277 24.52 75.48
2003-04 109546 304538 414084 26.46 73.54
2004-05 137093 357277 494370 27.73 72.27
2005-06 167635 420053 587688 28.52 71.48
2006-07 231376 505331 736708 31.41 68.59
2007-08 318839 551490 870329 36.63 63.37
2008-09 327981 587469 915450 35.83 64.17
2009-10 376995 623849 1000844 37.67 62.33
2010-11 450822 820843 1271666 35.45 64.55
2011-12 (R.E) 507888 967144 1475032 34.43 65.57
2012-13 (B.E) 578364 1172759 1751123 33.03 66.97
Source: Indian Public Finance Statistics, 2012-13. 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
142
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.
4.10.2 Growth Rate of Different Taxes in India
Tables 4.22 and 4.23 show the growth rates of various taxes of
Center and State governments for pre-liberalization period from 1950-51 to
1990-91 and post-liberalization period from 1991-92 to 2012-13
respectively. Both the tables reveal that, the growth rate of both direct taxes
and indirect taxes have been volatile. However, the growth rate of direct
taxes has been more volatile than that of the indirect 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
143
Table – 4.22 (Contd...)
Year Direct Taxes Indirect Taxes Total Tax 1961-62 11.69 15.40 14.30 1962-63 24.72 19.29 20.87 1963-64 23.75 25.06 24.66 1964-65 7.22 13.73 11.78 1965-66 -1.21 17.89 12.43 1966-67 4.50 13.99 11.60 1967-68 1.69 7.30 5.98 1968-69 7.69 9.08 8.77 1969-70 14.64 10.89 11.73 1970-71 4.78 15.63 13.14 1971-72 16.06 17.66 17.32 1972-73 14.94 15.58 15.44 1973-74 15.30 14.68 14.81 1974-75 18.17 26.59 24.82 1975-76 35.93 17.59 21.24 1976-77 3.69 12.18 10.28 1977-78 3.68 8.31 7.34 1978-79 6.38 20.08 17.31 1979-80 8.59 15.07 13.88 1980-81 5.56 13.64 12.22 1981-82 26.47 20.71 21.66 1982-83 8.69 13.70 12.84 1983-84 9.24 17.00 15.72 1984-85 8.62 14.52 13.61 1985-86 17.30 21.42 20.81 1986-87 10.19 15.22 14.50 1987-88 8.62 16.04 15.01 1988-89 30.40 15.51 17.46 1989-90 14.42 16.37 16.09 1990-91 9.81 13.43 12.91
Source: Estimated from Indian Public Finance Statistics, 2012-13.
144
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.
145
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.
4.10.3 Growth Rate of Components of Various Taxes (Net of States
Share) in Pre- and Post-Liberalization Period
Time series data with respect to the growth rates of components of
various taxes of the central government for both pre- and post-liberalized
periods are presented in Table 4.24 and Table 4.25 respectively.
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.
146
Table - 4.24
Growth Rate of Various Taxes (Net of States Share) in Pre-
Liberalization Period
(In percent)
Year Direct
tax
Personal income
tax
Corporation tax
Indirect tax
Excise duties
Customs duties
Other Indirect
Tax
Total 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)
147
Table - 4.25
Growth Rate of Various Taxes (Net of States Share) in Post-
Liberalization Period
(In percent)
Year Direct tax
Personal income
tax
Corporation tax
Indirect tax
Excise duties
Customs duties
Other Indirect
Tax
Total 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
1994-95 47.01 155.94 37.40 19.84 22.29 20.71 -21.06 26.20
1995-96 21.07 24.51 19.28 21.63 5.28 33.48 44.21 21.47
1996-97 13.85 9.19 12.62 14.54 5.80 19.84 17.04 14.35
1997-98 7.09 -23.88 7.80 0.25 8.75 -6.20 38.72 2.10
1998-99 18.21 60.49 22.55 5.89 12.01 1.18 17.63 9.39
1999-00 29.00 58.52 25.13 19.72 22.26 19.06 5.79 22.57
2000-01 19.83 160.28 -17.97 0.20 42.39 -29.44 -11.14 6.54
2001-02 -3.92 -6.98 -0.17 -1.36 9.47 -17.04 -2.17 -2.29
2002-03 29.16 25.66 34.85 12.94 14.54 12.55 -12.36 18.73
2003-04 24.31 10.75 34.85 13.89 12.59 8.43 110.17 17.94
2004-05 25.27 15.21 31.91 16.72 9.96 20.89 76.26 20.22
2005-06 25.79 27.64 24.71 16.08 12.17 11.56 66.14 20.23
2006-07 40.64 38.62 41.91 21.31 6.94 34.67 59.50 29.94
2007-08 36.43 38.04 35.58 14.62 3.81 20.00 40.19 25.16
2008-09 7.16 0.49 11.16 -6.16 -14.87 -8.18 21.06 0.86
2009-10 9.46 8.68 9.95 -5.25 3.07 -12.99 -8.56 2.98
2010-11 15.42 8.33 18.28 38.64 30.62 62.06 20.44 24.82
2011-12 9.51 15.45 8.75 11.74 5.45 8.21 33.10 10.51
2012-13 (R.E)
15.74 20.95 10.95 20.36 18.58 9.31 41.61 17.84
2013-14 (B.E)
19.01 21.06 18.54 19.27 14.08 13.55 34.32 19.13
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).
148
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.
4.10.4 Buoyancy of the various taxes (Center and States Combined)
Tax buoyancy is another key indicator of competency of revenue
mobilization in response to the growth in GDP. It is the ratio of annual
growth in tax revenue to annual growth in GDP. If buoyancy value is equal
to one, it implies that the growth rate of tax revenue is equal to the growth
rate of GDP. If the buoyancy value is less than one, it implies that the
growth rate of tax revenue is less than the growth rate of GDP. Whereas, if
buoyancy ratio is more than one, it implies that the growth rate of tax
revenue is more than the growth rate of GDP.
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
149
Table – 4.26 (Contd...)
Year Direct Tax Indirect Tax Total Tax
1976-77 0.48 1.57 1.33
1977-78 0.28 0.63 0.55
1978-79 0.76 2.41 2.07
1979-80 0.89 1.56 1.43
1980-81 0.29 0.72 0.64
1981-82 1.51 1.18 1.24
1982-83 0.73 1.16 1.08
1983-84 0.56 1.03 0.96
1984-85 0.72 1.21 1.13
1985-86 1.34 1.67 1.62
1986-87 0.86 1.28 1.22
1987-88 0.63 1.17 1.10
1988-89 1.63 0.83 0.94
1989-90 0.97 1.10 1.08
1990-91 0.58 0.80 0.77
AAGR 1.13 1.36 1.30
Source: Estimated from Indian Public Finance Statistics 2008-09.
Table 4.27 presents the tax buoyancy ratios for post-globalization
period. It reveals that, a significant improvement shown by the direct taxes
except in the year 1993-94, 1996-97 and 1998-99. The buoyancy value was
highest in 2002-03 at 2.53 and lowest being in 1998-99 as negative (-0.19).
However, the performance was unsatisfactory from 2008-09 during post-
globalization period. On the other hand, the buoyancy of indirect tax
during post-globalization period was shown mixed performance. The
buoyancy value was highest in 2002-03 at 1.72 and lowest in 2001-02 at
0.36. But it remained unsatisfactory during post-globalization period.
150
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. From the above tables it can be inferred that the overall
performance of tax revenue collection effort from both direct and indirect
taxes remained unsatisfactory, especially during globalized era, not much
difference can be seen in total tax revenue between both pre and post-
globalized periods.
151
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
Year
Number of Assessees (in lakhs)
Income up to Rs.2 Lakh
Income Between
Rs. 2 Lakh-
10 Lakh
Income Above Rs. 10 Lakh
Search and Seizure
Assessments Total
1996-97 110.02 (96.37)
3.57 (3.15)
0.31 (0.27)
0.24 (0.21)
114.16 (100)
1997-98 123.70 (95.94)
4.63 (3.59)
0.41 (0.32)
0.19 (0.15)
128.93 (100)
1998-99 163.39 (96.34)
5.46 (3.23)
0.48 (0.28)
0.26 (0.15)
169.59 (100)
1999-2000 187.45 (95.80)
7.49 (3.82)
0.58 (0.30)
0.15 (0.08)
195.67 (100)
2000-01 216.07 (95.32)
9.72 (4.29)
0.73 (0.32)
0.16 (0.07)
226.68 (100)
2001-02 243.50 (94.09)
14.15 (5.47)
0.79 (0.31)
0.33 (0.13)
258.77 (100)
2002-03 255.25 (90.84)
21.89 (7.79)
0.88 (0.31)
2.98 (1.06)
281.00 (100)
2003-04 265.46 (92.08)
21.67 (7.52)
1.05 (0.36)
0.12 (0.04)
288.30 (100)
152
Table – 4.28 (Contd...)
Year
Number of Assessees (in lakhs)
Income up to Rs.2 Lakh
Income Between
Rs. 2 Lakh-
10 Lakh
Income Above Rs. 10 Lakh
Search and Seizure
Assessments Total
2004-05 243.63 (90.92)
22.96 (8.57)
1.22 (0.46)
0.14 (0.05)
267.95 (100)
2005-06 258.98 (88.10)
27.22 (9.26)
5.62 (1.91)
2.13 (0.73)
293.95 (100)
2006-07 273.30 (88.46)
27.87 (9.02)
5.79 (1.87)
2.00 (0.65)
308.96 (100)
2007-08 287.90 (86.81)
41.47 (12.5)
2.18 (0.66)
0.10 (0.03)
331.65 (100)
2008-09 278.36 (86.12)
42.08 (13.01)
2.67 (0.83)
0.12 (0.04)
323.23 (100)
2009-10 283.72 (84.15)
50.22 (14.89)
3.11 (0.92)
0.12 (0.04)
337.17 (100)
2010-11 271.29 (81.70)
56.14 (16.91)
4.49 (1.35)
0.12 (0.04)
332.04 (100)
2011-12 267.68 (74.85)
81.49 (22.79)
6.57 (1.84)
1.87 (0.52)
357.61 (100)
Note: Figures presented in parentheses indicate percentage shares. Source: Compiled from Reports of the Comptroller and Auditor General of India, of various issues. 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
153
to conclude whether assessees in higher income brackets are escaping tax
net by declaring lesser income and hence the trend is slow.
4.10.6 Profile of Corporate Assessees
The profile of the corporate assessees in India is presented in Table
4.29. More than a half (50.43 per cent) of the total corporate assessees have
been reporting the income below Rs. 50,000, 24.3 per cent reporting
income between Rs. 50,000 and 10 lakh. While, only 11.85 per cent
assessees reporting their income Rs. 10 lakh and above. A thorough
analysis of why majority of the companies are struck in lower income
brackets is needed.
Table - 4.29
Profile of Corporate Assessees
Year
Number of Assessees (in lakhs)
Income up to Rs. 50000
Income Between
50,000 and 10 Lakh
Income Above Rs. 10 Lakh
Search and Seizure
Assessments Total
1996-97 1.28
(56.39) 0.69
(30.32) 0.27
(11.86) 0.03
(1.43) 2.27 (100)
1997-98 1.61
(58.68) 0.86
(31.42) 0.25
(9.28) 0.02
(0.62) 2.74 (100)
1998-99 1.73
(58.64) 0.91
(17.97) 0.29
(12.88) 0.02
(0.83) 2.95 (100)
1999-2000 1.82
(58.71) 0.92
(29.67) 0.33
(10.65) 0.03
(0.97) 3.10 (100)
2000-01 1.95
(58.38) 0.96
(28.75) 0.41
(12.27) 0.02
(0.60) 3.34 (100)
2001-02 1.91
(54.73) 1.22
(34.96 0.34
(9.74) 0.02
(0.57) 3.49 (100)
2002-03 1.83
(50.14) 1.29
(35.84) 0.39
(10.68) 0.14
(3.84) 3.65 (100)
154
Table – 4.29 (Contd...)
Year
Number of Assessees (in lakhs)
Income up to Rs. 50000
Income Between
50,000 and 10 Lakh
Income Above Rs. 10 Lakh
Search and Seizure
Assessments Total
2003-04 2.00
(53.76) 1.25
(33.60) 0.44
(11.83) 0.03
(0.81) 3.72 (100)
2004-05 2.05
(53.95) 1.19
(31.32) 0.54
(14.20) 0.02
(0.53) 3.80 (100)
2005-06 1.99
(50.64) 1.24
(31.55) 0.68
(17.30) 0.02
(0.51) 3.93 (100)
2006-07 2.05
(51.25) 1.25
(31.25) 0.68
(17.00) 0.02
(0.50) 4.00 (100)
2007-08 3.16
(63.45) 1.21
(24.30) 0.59
(11.85) 0.02
(0.40) 4.98 (100)
2008-09 1.67
(50.91) 1.07
(32.62) 0.51
(15.55) 0.03
(0.91) 3.28 (100)
2009-10 1.84
(50.00) 1.26
(34.24) 0.56
(15.22) 0.02
(0.54) 3.68 (100)
2010-11 1.69
(44.95) 1.43
(38.03) 0.62
(16.49) 0.02
(0.53) 3.76 (100)
2011-12 2.95
(50.43) 1.87
(31.97) 1.00
(17.09) 0.03
(0.51) 5.85 (100)
Note: Figures presented in parentheses indicate percentage shares. Source: Compiled from Reports of the Comptroller and Auditor General of India, of various issues. 4.10.7 Assessee Base in Central Excise
The profile of the Central Excise assessees in India from 2002-03 to
2011-12 is presented in Table 4.30. It describes that, the number of
assessees in Central Excise has increased significantly till 2007-08.
However, a slowdown in growth rate in assessee base from 2008-09 has
been reported. The global economic situation during 2008 impacted
negatively on the growth of manufacturing sector, which may be the main
reason for lower growth rate in assessee base in Central Excise. However,
it has picked up in 2011-12.
155
Table - 4.30
Number of Assessees in Central Excise during last 10 years
Year No. of Assessees % of Growth
2002-03 126618 --
2003-04 186001 46.90
2004-05 210141 12.98
2005-06 231830 10.32
2006-07 255605 10.26
2007-08 277480 8.56
2008-09 298425 7.55
2009-10 305622 2.41
2010-11 299357 -2.05
2011-12 317005 5.90 Source: Report of Comptroller and Auditor General of India on Indirect Taxes – 2013.
4.10.8 Assessee Base in Service Tax
Table 4.31 describes the assessee base and number of taxable
services in Service Tax from 1994-95 (since inception) to 2012-13. It
reveals that the number of services under tax net has been increased from 3
in 1994-95 to 119 in 2011-12. At the same time the number of service tax
assessees has increased significantly from 3943 in 1994-95 to 17,12,617 in
2012-13. This indicates, the result of bringing additional services into tax
net almost every year and the growth of service sector during liberalized
period. However, the recent development of switching to comprehensive
approach in service taxation is expected to increase the revenue and widen
the assessee base in the coming days.
156
Table - 4.31
Tax Base and Number of Assessees in Service Tax
Year No. of Taxable Services
No. of Assessees % of Growth
1994-95 03 3943 Base year
1995-96 06 4866 23.41
1996-97 06 13982 187.34
1997-98 18 45991 228.93
1998-99 26 107479 133.70
1999-2000 26 115495 7.45
2000-01 26 122326 5.91
2001-02 41 187577 53.34
2002-03 52 232048 23.71
2003-04 62 403856 74.04
2004-05 75 774988 91.89
2005-06 84 846155 9.18
2006-07 99 940641 11.17
2007-08 100 1073075 14.08
2008-09 106 1204570 12.25
2009-10 109 1307286 8.53
2010-11 117 1372274 4.97
2011-12 119 1535570 11.90
2012-13 (P) Negative list regime
1712617 11.53
Note: 2012-13 (P) – Provisional. Source: 1. No. of assessees as reported by Zones (http://www.servicetax.gov.in/). 2. Report of Comptroller and Auditor General of India on Indirect Taxes – 2013.
157
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.
4.11.1 Tax debt – Uncollected demand
Table 4.32 gives the trend of uncollected demand pending during
2007-08 to 2011-12. It reveals that, the pending demand has significantly
increased from Rs.1242.74 billion in 2007-08 to Rs. 4084.18 billion in
2011-12, almost 3.3 times in five years. The uncollected demand is also
increasing in spite of clear provisions in the Act to enforce tax collections
and recovery of outstanding demand viz. connection and sale of assessee’s
movable and immovable property, appointment of a receiver for the
management of assessee’s properties and imprisonment. The amounts of
demand remain irrecoverable for a long period in spite of exercise of the
powers of recovery conferred under the Act.
Table - 4.32 Position of Uncollected Demand – Direct Taxes
(Rs. in crore)
Year
Demand of earlier year’s
pending collection
Current year’s demand pending
collection
Total demand pending
Demand difficult to
recover
2007-08 86859 37415 124274 NA
2008-09 93344 107932 201276 187575 (93.19)
2009-10 181612 47420 229032 212758 (92.89)
2010-11 202859 88770 291629 271143 (92.98)
2011-12 265040 143378 408418 387614 (94.91)
Note: Figures presented in parentheses indicate percentage. Source: Comptroller and Auditor General of India’s Report on Direct Tax 2013.
158
“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
4.11.2 Disposal of Scrutiny Assessments in Direct Taxes
Table 4.33 gives the trend of disposal and pendency of scrutiny
assessment during 2002-03 to 2011-12. It describes that, Assessments
pending for disposal increased to 2.85 lakh in 2006-07 from 1.91 lakh in
2003-04. It further increased to 4.05 lakh in 2011-12. While, the pendency
rate has increased to 52.3 per cent in 2011-12 from 49.2 per cent in 2003-
04. This indicates the performance of the Department in disposing the
assessments has not improved at the expected level.
Table - 4.33
Disposal of Scrutiny Assessments – Direct Taxes
(Number)
Year Assessments
due for disposal
Assessments completed
Assessments pending
Pendency in percentage
2002-03 894415 172410 722005* 80.7
2003-04 388275 197390 190885 49.2
2004-05 439258 210866 228392 52.0
2005-06 425225 230698 194527 45.8
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.
159
Table – 4.33 (Contd...)
Year Assessments
due for disposal
Assessments completed
Assessments pending
Pendency in percentage
2006-07 527005 241983 285022 54.1
2007-08 997813 407239 590574 59.2
2008-09 953767 538505 415262 43.5
2009-10 870620 429585 441035 50.6
2010-11 847196 455212 391984 46.3
2011-12 774807 369320 405487 52.3
*524194 cases out of 722005 cases pending for scrutiny in 2002-03 had been converted into summary assessment in 2003-04. Source: Comptroller and Auditor General of India’s Report on Direct Tax 2008 and 2013.
4.11.3 Disposal of Appeal Cases – Direct Taxes
Table 4.34 presents the trend of disposal and pendency of appeal
cases before CIT (Appeals) during 2007-08 and 2011-12. The table reveals
that, the Appeals due for disposal is increased from 1.94 lakh in 2007-08 to
3.06 lakh in 2011-12. At the same time the rate of disposal of Appeals is
from 32.8 per cent in 2007-08 to 24.7 per cent in 2011-12 resulting in the
increase in the pendency per cent on continuous basis. Appeals pending
with CIT(A) increased from 67.2 per cent in 2007-08 to 75.3 per cent in
2011-12. The amount locked up in appeal cases also increased to Rs.2.42
lakh crore (equivalent to 61.4 per cent of the revised revenue deficit of
Government of India) in 2011-12 from Rs.1.99 lakh crore in 2008-09. This
indicates the poor performance in disposal of appeals by the Department.
160
Table - 4.34
Disposal of Appeal Cases by CIT (A) – Direct Taxes
Year
Appeals due for disposal
Appeals disposed of
Appeals pending
Amount locked up in Appeals
Number Rs. in Crore
2007-08 194003 63645 (32.8)
130358 (67.2)
-
2008-09 224382 66351 (29.6)
158031 (70.4)
199101
2009-10 260700 79709 (30.6)
180991 (69.4)
220148
2010-11 257656 70474 (27.4)
187182 (72.6)
293548
2011-12 306134 75518 (24.7)
230616 (75.3)
242182
Note: Figures presented in parentheses indicate percentage. Source: Comptroller and Auditor General of India’s Report on Direct Tax 2013.
4.11.4 Demand under Dispute – Direct Taxes
Table 4.35 and 4.36 list out the status of demand raised and pending
and age-wise analysis of demand not under dispute.
Table 4.35
Demand raised and pending – Direct Taxes
(Rs. in Crore)
Item FY09 FY10 FY11 FY12 Total demand pending at end of the year
201276 229032 291629 408418
Demand Collectible 13701 16274 20486 20804 Disputed Demand 53810 66534 152996 208343 Demand not under Dispute
39330 42950 51331 48980
Source: Comptroller and Auditor General of India’s Report on Direct Tax 2013.
161
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.
4.11.5 Scrutiny of Central Excise and Service Tax Returns
The performance of the department in respect or scrutiny of Central
Excise and Service Tax returns during the last five years and three years
respectively, are presented in Table 4.37 and 4.38.
Table 4.37 Scrutiny of Central Excise Returns
(No. of Cases)
Year Scrutiny due for disposal
Scrutiny completed
Scrutiny pending
2007-08 165326 80386 (48.6)
84940 (51.4)
2008-09 175319 81489 (46.5)
93830 (53.5)
2009-10 185324 85811 (46.3)
99513 (53.7)
2010-11 228552 69422 (30.4)
159130 (69.6)
2011-12 398447 103898 (26.1)
294549 (73.9)
Note: Figures presented in parentheses indicate percentage. Source: Comptroller and Auditor General of India 2013.
162
Table 4.38
Scrutiny of Service Tax Returns
Year Receipts
during the year
Disposals during the
year
Shortage/ Excess
Shortage/ Excess (in
%)
2009-10 783706 738309 (-) 45397 (-) 5.79
2010-11 808760 834532 25772 3.19
2011-12 955996 721123 (-) 234873 (-) 24.57 Source: Comptroller and Auditor General of India 2013. In case of Central Excise, the assessments due for disposal have
increased from 1.65 lakh during 2007-08 to 3.98 lakh during 2011-12 (2.4
times in a span of five years). At the same time, the assessments pending
for disposal increased to 2.94 lakh during 2011-12 from 84,940 during
2007-08 (almost 3.5 times). While, the rate of completion of scrutiny
assessment was decreased to 26.1 per cent in 2011-12 from 48.6 per cent in
2007-08 and on the other hand the per cent of pendency was increased to
73.9 per cent in 2011-12 compared to 51.4 percent in 2007-08. This
indicates the inability of the Department to meet the target of filing
pressure. The trend in case of Service Tax looks slightly better when
compared to Central Excise (Table 4.38). “The Ministry stated (March
2013) that with the increase in the assessee base and mandatory electronic
filing since October 2011, the number of returns for scrutiny has also
increased. Owing to staff shortages, completion of detailed scrutiny of
returns has not been possible”49.
After introduction of self-assessment, scrutiny of returns (and of
assessments) and internal audit are the main mechanisms available to the
department to ensure correctness of duty payable. The Manual for Scrutiny
49 Report no.-17 of 2013-Union Government (Compliance Audit)- Report of the Comptroller and Auditor General of India on Indirect Taxes-Central Excise and Service Tax, p18.
163
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
4.11.6 Refunds status in Central Excise and Service Tax
Table 4.39 shows the details of amounts sanctioned as refund from
Central Excise revenues during the last ten years. The last 10 years Central
Excise refund trend from 2002-03 to 2011-12 shows, on an average 9.02
per cent of Central Excise receipts refunded to the assessees.
Table 4.39
Refunds in Central Excise (Rs. in Crore)
Year Central Excise
Receipts Refunds
Refunds as % of Central Excise
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.
50 Report no.-17 of 2013-Union Government (Compliance Audit)- Report of the Comptroller and Auditor General of India on Indirect Taxes-Central Excise and Service Tax, p18.
164
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)
Year Service Tax Receipts
Refunds Refunds as %
of Service 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. However, Service Tax refund amounts rose from Rs.18 crore to
1327 crore between 2007-08 and 2011-12. Thus, “the tax collections grew
by less than 100 per cent, refunds grew exceptionally in the same five year
period. Therefore, refunds need to be monitored closely by the
department.”51
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
51 Report no.-17 of 2013-Union Government (Compliance Audit)- Report of the Comptroller and Auditor General of India on Indirect Taxes-Central Excise and Service Tax, p18.
165
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.
The reforms and changes while providing an opportunity to exploit
the situation have also been responsible for emergence of new challenges
and problems which are to be attended and tackled on continuous basis.