User:Jgoldfiner/Taxation in India

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Taxes in India are levied by the Central Government and the state governments. Some minor taxes are also levied by the local authorities such as the Municipality.

The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the Central and the State. An important restriction on this power is Article 265 of the Constitution which states that "No tax shall be levied or collected except by the authority of law". Therefore, each tax levied or collected has to be backed by an accompanying law, passed either by the Parliament or the State Legislature. None the less, tax evasion is a massive problem in India, ultimately catalyzing various negative effects on the country. In 2015-2016, the gross tax collection of the Centre amounted to inr 14600000000000.

Tax Evasion:
The Indian government’s deficiency in governmental expenditures is most notably attributed to wide spread tax evasion. Relative to other developing countries, the fact that India’s income tax comprises .5% of its GDP is due to the fact nearly 2-3% of the population is exposed to income taxation. India faces more difficulties in proliferating its income tax than a country like China, who subjects 20% of its population, because there is an emphatically low amount of formal wage earners. Even though India’s income tax was instituted in 1922 by the British, their tax history explains their high degree of tax delinquency today.

History and Methods:

In the beginning of the income tax operation, the rates of taxes were comparatively low to levels today, and thus, so were levels of evasion. However, World War Two catalyzed a set of conditions that inspired mass tax evasion. As many supplies were cut off and shortages were rampant, the prices of commodities and the level of taxes imposed by the government augmented. This ultimately generated black markets, and stimulated a nationwide sentiment of tax evasion. Consequently, as the government tried to combat this extensive issue, the government continued to impose extortionate levels of taxation, only exacerbating the normalcy of tax evasion. Today, opportunities for tax evasion are comprehensive amongst self-employed individuals, as they have more opportunities to lie about the origination of their income. For instance, many individuals exaggerate or lie about their wealth deriving from agriculture, because agricultural income is excluded from the purview of the central income tax. In addition, many individuals divert their incomes to spouses and children, or even create fictitious partnerships, in order to evade taxation. The general consensus asserts the following to be chiefly responsible for increasing tax evasion and generation of black money in India: Additionally, enormous amounts of black income and tax evasion are fueled by bribery and corruption. In India, corrupt businessmen sponsor political parties with black money, in order to augment their wealth reduce their taxation. Inherently then, the lack of revenue for governmental expenditures is partly created by the government themselves. While individuals blame the government for difficulties and shortages, many do not understand the importance of taking accountability and paying one’s taxes.
 * Complicated tax structure
 * Frequent amendments
 * Shortage of personnel
 * High tax rates
 * Non-levy of deterrent penalties
 * Ineffective prosecution machinery
 * Operation of ill- thought-out controls
 * Price fixation without proper regulation of production and distribution
 * Evasion of sales tax
 * Excise duty

Effects of Mass Tax Evasion:

The exorbitant levels of tax evasion has inspired the creation of a black money parallel economy. Black money inherently causes inflation and hinders the government’s ability to bring down the prices of commodities. In fact, the large volume of black money actually diverts governmental resources from national welfare and encourages the continuation of illegal activity. Unfortunately, it is the honest individuals who are in the salaried class who feel the negative externalities of this situation. Besides depriving the state’s exchequer and understating India’s GDP, extensive tax evasion has encouraged the payment of huge dowries at the time of marriages. This ultimately makes it difficult for low and middle class individuals to marry off their children, adding a social detriment to this widespread economic problem. More than anything though, the normalcy of tax evasion has understated positive societal values like honesty and hard work.

Governmental Attempts To Combat Tax Evasion:

The Indian government has taken several steps in order to mitigate the effects and degree of tax evasion. Amongst actual legislations, Searches, seizures, surveys, and scrutiny of income tax returns are being done by the Income Tax Department. The government has also created Voluntary Disclosure of Income Schemes, whereby black income and assets can actually be declared without penalty or prosecution. In addition, the introduction of the Prevention of Money‐Laundering Act makes any and all activities related to the laundering of money a federal offense with a minimum imprisonment of less than three years. Similarly, the Finance Act of 2004 prosecutes for the falsification of books and taxing gifts worth more than 25,000 Rupees. Given that tax evasion is one of the most wide spread, yet difficult issues a government can deal with, they have historically relegated this issue to recommendations made by Taxation Enquiry Commission (1953), Administrative Reforms Commission (1969),and Direct Tax Enquiry Committee (1971). Additionally, India has attempted to eradicate tax evasion by requiring an identification number for all major financial deals. ( However, this method has proven very ineffective, as many transactions are conducted with cash and therefore often go unreported.