Tax system and tax reforms in India

Abstract

This paper is part of a wider research on South-East Asia countries' taxation carried on under the supervision of. V. Tanzi. India is a federal republic and a big, highly populated and poor country, which however since some years has entered the catching up stage of development and shows impressive rates of GDP growth. General Government budget is structurally imbalanced and public debt stays high. Public spending (about 25 percent of GDP) is mainly devoted to general services, defense, and the support of economic activities, rather than to public health and welfare programs. Total fiscal pressure (about 17 percent of GDP) is in line with per capita GDP and is shared evenly enough between central and states governments. The structure of the tax system is not much beyond the Musgravian "early stage". A complex structure of taxes on goods and services is largely the main heading of the tax system and it is difficultly moving towards a VAT-kind structure. Direct taxes still are in an infant state, both as weight as well as structure. Import duties remain at not negligible levels. Social contributions are entirely lacking. A tax system of a country like India unavoidably raises more than one problem: foremost among these problems appear to be a too large dominance of a complex and obsolete indirect taxation and the fiscal relations among government layers. The road to updating and improving the Indian tax system has been entered since the early 1990s, but the reform is still largely to be accomplished. Introducing VAT ( so successfully adopted in other developing countries ) is the most striking but not the only example.