New Delhi: Individual tax payers may have difficulty believing this but India’s tax regime would appear to have become more equitable. This is because collections from direct taxes, paid by individuals and companies who can afford to pay taxes, are narrowing the gap with indirect taxes that often do not discriminate between people of varying income. For instance, the income tax (part of direct taxes) an individual pays, is a function of his or her income while any indirect tax (say customs or excise duties) paid by a company or individual, is independent of income.
The proportion of direct taxes in total tax collections is a handy measure to gauge the fairness of the tax regime. The greater the share of direct taxes, the more equitable the system as the better off bear most of the tax burden. Conversely, higher the collection from indirect taxes, the less equitable the system.
In March 1991, indirect tax collections were four times direct tax collections. Now, the two are almost equal. In 2006-07, corporate tax (income tax paid by companies) is set to become the single largest component of total tax collections. This will be the first time in the past 16 years that a component of direct tax has accounted for the largest portion of total tax collections.
In 1990-91, the total direct tax collection was Rs10,947 crore, about one-fourth the total indirect taxes collection. In the current financial year, direct taxes are budgeted to record Rs2,10,684 crore against the budgeted figure of Rs2,31,469 crore for indirect taxes. A paper on tax trends prepared by the National Institute of Public Finance and Policy, using data till 2003-04, concludes that the recent past has seen both horizontal and vertical equity in the tax system. The increase in the number of taxpayers represents horizontal equity as more people now pay taxes, the paper said. The number of tax payers has increased from 3.9 million in 1989-90 to about 32.7 million in 2005-06.
Consequently, the paper said, a higher proportion of income is also under the tax net.