Indian Tax Regime and Fiscal Consolidation

Posted: May 30, 2011 in Uncategorized
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Taxes are the sources of income for the government. The entire tax regime of India is divided into two broad categories, direct tax and indirect tax. Direct taxes are those which are collected directly from the entities, both firms and individuals, by the government and it include Personal Income Tax, Corporate Income Tax, Capital Gain Tax, Dividend Distribution Tax, Wealth Tax etc. On the other Indirect Taxes are those which are collected from entities directly by the government including Customs Duty, Excise Duty, Service Tax, Value Added Tax, Securities Transaction Tax, and other taxes levied by the state.

Fiscal Consolidation: DTC and GST

The existence of multiple tax laws in Indian taxation regime makes things complex both for the entities and the government of India. In order to simplify the taxation system government has proposed two reforms namely Direct Tax Code (DTC), and Goods and Services Tax (GST). These reforms are proposed to consolidate various tax laws. The Direct Tax Code has been proposed for direct taxes to be finalized for enactment during 2011-12 and proposed to be effective from April 1, 2012. DTC proposes widening of the tax slabs and reduction of deduction and exemptions. It will also be providing stable framework for taxation of international transactions and global capital. GST has been proposed to bring the taxation of goods and services under one umbrella, which is the practice adopted by majority of the countries of the world. It has been proposed that the GST will have two components namely Central GST and State GST. The central GST will replace the taxes levied by central government such as central excise duty and service tax whereas the state GST will replace the state indirect taxes such as Value Added Tax and Stamp duties. One of the important aspects of the GST will be the seamless flow of credit across the entire supply chain and across all states under a common tax base. The credits of the goods transaction can be adjusted against the transaction of services and vice versa. The widening of direct tax slabs and capping of majority of the indirect taxes at the same rate of 10% in the Union Budget of 2011 has been step towards an era to DTC and GST.

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