Tax Reforms

Tax reforms deal with changes in the government's taxation and public expenditure policies. Taxation and public expenditure together are known as the government's fiscal policy, so tax reform is really one half of a wider reform of how the government raises and spends money.

The two kinds of taxes:

Taxes are of two broad types:

• Direct taxes are levied directly on the incomes of individuals and on the profits of business enterprises. Because the person who pays the tax also bears its burden, they are called direct taxes.
• Indirect taxes are levied on goods and services. Here the tax is collected through the price of goods and services rather than directly on income.

Reform of direct taxes:

Since 1991 there has been a continuous reduction in the taxes on individual incomes. The reasoning was that very high rates of income tax were an important cause of tax evasion — when rates are punishingly high, people are tempted to hide income and avoid paying. It is now widely accepted that moderate rates of income tax actually encourage saving and the voluntary, honest disclosure of income, which in the long run can improve compliance and even revenue. Similarly, the rate of corporation tax (the tax on company profits), which was very high earlier, has been gradually brought down.

Reform of indirect taxes:

Efforts were also made to reform indirect taxes so as to help establish a common national market across the country, in place of a fragmented system where goods faced different state-level taxes as they moved around. A major step came in 2016, when the Indian Constitution was amended to empower both the state governments and the union government to make laws to impose a Goods and Services Tax (GST). This led to the introduction of GST in India. GST is expected to generate additional revenue for the government, reduce tax evasion, and create the ideal of one nation, one tax and one market.

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