This research article aims to provide a comprehensive comparative analysis of India's tax structure. The Indian taxation system is a multifaceted and dynamic structure, crucial for revenue generation and socio-economic development.1This paper presents a comprehensive analysis of the system, encompassing its historical evolution, current structure, key features, and ongoing reforms. It explores the interplay of direct and indirect taxes, highlighting the significance of the Goods and Services Tax (GST) in streamlining indirect taxation.

The abstract further delves into critical challenges confronting the system, including tax evasion, a narrow tax base, and the complexities of taxing the burgeoning digital economy. The paper examines the impact of these challenges on revenue mobilization and equitable distribution. Finally, it outlines potential strategies for enhancing the efficiency, transparency, and fairness of the Indian tax system, emphasizing the need for continued reforms to address emerging economic realities and promote sustainable growth.

Direct Tax

Direct tax in India is a tax that is levied directly on the income or wealth of an individual or entity. The burden of paying this tax cannot be shifted to someone else. In other words, the person who earns the income or owns the wealth is the one who has to pay the tax to the government. Direct taxes are progressive in nature, meaning that the higher the income or wealth, the higher the tax rate. This helps to reduce income inequality and ensure that those who are more able to pay contribute more to the government's revenue.

Types of Direct Taxes in India

• Income Tax: This is a tax levied on the income of individuals, Hindu Undivided Families (HUFs), companies, and other entities. Income tax is calculated based on the individual's or entity's income slab, with different tax rates applying to different income levels.
• Corporate Tax: This is a tax levied on the profits of companies. The corporate tax rate varies depending on the type of company and its turnover.
• Capital Gains Tax: This is a tax levied on the profits earned from the sale of capital assets, such as property, shares, and mutual funds. Capital gains are classified as either short-term or long-term, depending on the holding period of the asset.
• Wealth Tax: This is a tax levied on the net wealth of individuals and HUFs. Wealth tax is calculated on the value of assets such as property, jewelry, and cash, exceeding a certain threshold.
• Securities Transaction Tax (STT): This is a tax levied on the purchase and sale of securities, such as equity shares, derivatives, and mutual fund units. STT is a small percentage of the transaction value and is deducted at the time of the transaction.

Indirect Tax

Indirect tax in India is a tax levied on goods and services rather than directly on income or profits. It is collected from the consumer by the seller, who then remits it to the government. The burden of paying an indirect tax is shifted from the person who pays it to someone else, usually the end consumer. Indirect taxes are a significant source of revenue for the Indian government. They are generally considered to be regressive, as they tend to disproportionately affect lower-income individuals. This is because everyone, regardless of income level, pays the same tax on goods and services.

Types of Indirect Taxes in India

• Goods and Services Tax (GST): GST is a comprehensive indirect tax levied on the supply of goods and services. It is a destination-based tax, meaning that the tax is levied at the place of consumption. GST has replaced many other indirect taxes, such as excise duty, service tax, and VAT.
• Customs Duty: Customs duty is levied on goods imported into India. It is intended to protect domestic industries and generate revenue for the government.
• Stamp Duty: Stamp duty is a tax levied on various legal documents, such as property deeds, agreements, and affidavits. It is a state-level tax, and the rates vary from state to state.

Former Indirect Taxes

• Excise Duty: Excise duty was levied on goods manufactured in India.
• Service Tax: Service tax was levied on services provided in India.
• Value Added Tax (VAT): VAT was a state-level tax levied on the sale of goods.

Tax Administration

Tax administration in India is a complex and multi-layered system responsible for the assessment, collection, and enforcement of taxes. It involves various government bodies, regulations, and processes aimed at ensuring efficient revenue generation while facilitating taxpayer compliance. Here's a detailed breakdown of the key aspects:

1. Structure and Organization:

   • Central Government: The primary body responsible for direct tax administration is the Central Board of Direct Taxes (CBDT), under the Department of Revenue, Ministry of Finance. It administers income tax, corporate tax, and other direct taxes. For indirect taxes, the Central Board of Indirect Taxes and Customs (CBIC) handles GST, customs duties, and other indirect levies.
   • State Governments: State governments have their own tax administrations responsible for collecting state-level taxes like VAT (now subsumed under GST), stamp duty, and land revenue.
   • Local Bodies: Municipal corporations and other local bodies also have the power to levy certain taxes like property tax and octroi (now mostly abolished).

2. Key Functions:

   • Tax Assessment: Determining the tax liability of individuals and entities based on their income, transactions, and applicable tax laws. This involves processes like filing tax returns, scrutiny of returns, and audits.
   • Tax Collection: Collecting taxes from taxpayers through various methods, including online payments, direct deposits, and tax deducted at source (TDS).
   • Tax Enforcement: Ensuring compliance with tax laws by conducting inspections, investigating tax evasion, and imposing penalties for non-compliance.
   • Taxpayer Services: Providing information and assistance to taxpayers regarding tax laws, filing procedures, and resolving tax-related queries.
    

3. Processes and Mechanisms:

   • Tax Identification Number (TIN): Unique identification numbers like PAN (Permanent Account Number) for direct taxes and GSTIN (Goods and Services Tax Identification Number) for indirect taxes are used to track taxpayers and their transactions.
   • Tax Returns: Taxpayers are required to file periodic returns declaring their income or transactions, based on which their tax liability is assessed.
   • Tax Deducted at Source (TDS): A mechanism where tax is deducted from certain payments like salaries, interest, and rent, ensuring a regular flow of revenue to the government.
   • Advance Tax: Taxpayers are required to pay advance tax in installments throughout the year based on their estimated income.
   • E-governance Initiatives: The tax administration has been increasingly leveraging technology to streamline processes, such as online filing of returns, e-payment of taxes, and online tracking of refunds.
    

4. Challenges and Reforms:

   • Tax Evasion: Tax evasion remains a significant challenge, particularly in the informal sector. The government is taking measures to curb evasion through stricter enforcement and promoting digital transactions.
   • Complexity of Tax Laws: The tax laws can be complex, making it difficult for taxpayers to understand and comply with them. Simplification of tax laws is an ongoing process.
   • Improving Taxpayer Services: Enhancing taxpayer services and reducing compliance burden is crucial for improving tax morale and encouraging voluntary compliance.
   • Technology Integration: Further integration of technology is needed to improve efficiency, transparency, and reduce human interface in tax administration.

Tax Compliance In India

Tax compliance in India refers to the adherence of individuals and businesses to the tax laws and regulations of the country. It encompasses a range of activities, including:

• Accurate reporting of income and transactions: This involves maintaining proper records, filing tax returns on time, and disclosing all relevant financial information to the tax authorities.
• Timely payment of taxes: This includes paying taxes as per the applicable rates and deadlines, whether through advance tax, tax deducted at source (TDS), or self-assessment tax.
• Compliance with tax procedures: This involves following the prescribed procedures for filing returns, responding to tax notices, and undergoing audits or assessments.

Importance of Tax Compliance

Tax compliance is crucial for several reasons:

• Revenue generation: It ensures that the government receives the necessary funds to finance public services, infrastructure development, and social welfare programs.
• Fairness and equity: It promotes a level playing field by ensuring that everyone contributes their fair share of taxes, preventing tax evasion and unfair competition.
• Economic stability: It contributes to the overall stability of the economy by providing a predictable and reliable source of revenue for the government.
• Legal and ethical obligations: It is a legal requirement for individuals and businesses to comply with tax laws, and it also reflects ethical behavior and good corporate citizenship.

Recent Developments

1. New Income Tax Bill 2025: A Move Towards Simplification

   • The Goal: The primary objective of the new Income Tax Bill 2025 is to consolidate and simplify the existing income tax laws. The current Income-tax Act, 1961, has become complex over the years with numerous amendments and additions. This has led to difficulties in understanding the law and increased litigation.
   • Key Changes:
     • Unified "Tax Year": The bill proposes a unified "tax year" to replace the existing financial year (FY) and assessment year (AY) distinction. This is aimed at reducing confusion and simplifying the tax filing process.
     • Reduced Litigation: The bill seeks to clarify tax provisions and remove obsolete clauses to minimize disputes and litigation between taxpayers and the tax department.
     • No Change in Tax Slabs: While the bill focuses on the legal framework, it does not propose any changes to the income tax slabs and rates announced in the Union Budget 2025.
   • Impact: The new bill is expected to make the income tax system more transparent and easier to understand, leading to improved compliance and reduced litigation.

2. Union Budget 2025-26: Relief for the Middle Class

   • Increased Rebate under New Tax Regime: The most significant announcement in the budget was the increase in the rebate under Section 87A. This rebate allows individuals with taxable income up to a certain limit to pay no income tax. The limit has been increased, effectively making income up to ₹12 lakh tax-free under the new regime. For salaried individuals, this limit goes up to ₹12.75 lakh with the standard deduction.
   • Revised Tax Slabs: The tax slabs under the new regime have also been revised. The minimum income subject to tax has been increased to ₹4 lakh, and the 30% tax rate now applies to income above ₹24 lakh. This will result in significant tax savings for individuals in various income brackets.
   • Other Key Announcements:
     • Increased TCS on Remittances: The threshold for Tax Collected at Source (TCS) on remittances under the Liberalized Remittance Scheme (LRS) has been increased.
     • Extended Time Limit for Updated Returns: The time limit to file an updated return has been extended, allowing taxpayers more time to rectify any errors or omissions in their original returns.
     • Removal of Higher TDS/TCS for Non-Filers: The higher TDS/TCS rates for non-filers of income tax returns have been removed to reduce the compliance burden on taxpayers.
    

3. Continued Focus on Simplification and Digitalization

   • Simplifying Tax Laws: The government is actively working towards simplifying tax laws to make them more accessible and user-friendly. This includes simplifying the language of tax laws, removing redundant provisions, and clarifying complex regulations.
   • Digitalization of Tax Administration: The tax administration is increasingly relying on technology to streamline processes and improve efficiency. This includes promoting online filing of returns, e-payment of taxes, and online tracking of refunds.
    

4. Taxation of Virtual Digital Assets: Bringing Clarity

   • Legal Recognition: Cryptocurrencies and other digital assets have been legally recognized as taxable assets, bringing more clarity to their regulatory treatment.
   • Taxation of Gains: Gains from crypto transactions are taxed at 30%, with no provision to offset losses against other income. This has been a point of concern for crypto investors, as it can result in a higher tax burden.
      

5. Measures to Improve Tax Compliance: A Multi-pronged Approach

   • Strengthening Enforcement: The government is taking stricter measures to enforce tax laws and deter tax evasion. This includes increased scrutiny of high-value transactions and stricter penalties for non-compliance.
   • Awareness Campaigns: The government is conducting awareness campaigns to educate taxpayers about their obligations and the benefits of compliance.
   • Simplifying Tax Procedures: The government is also working to simplify tax procedures and make them more accessible to taxpayers.

Overall, the recent developments in the Indian tax system demonstrate a clear focus on:

• Simplification: Making tax laws and procedures easier to understand and comply with.
• Digitalization: Leveraging technology to improve efficiency and reduce compliance burden.
• Compliance: Taking measures to improve tax compliance and reduce tax evasion.
• Fairness: Providing relief to the middle class and ensuring that everyone pays their fair share of taxes.

It's important to keep in mind that the tax landscape is constantly evolving. It's always a good idea to stay updated on the latest changes and consult with tax professionals for personalized advice


Challenges

• Tax Evasion: A Persistent Problem
  • The Scope: Tax evasion remains a significant challenge, particularly in the vast informal sector. This includes underreporting income, inflating expenses, and engaging in outright illegal activities to avoid paying taxes.
  • Impact: This leads to significant revenue loss for the government, hindering its ability to fund public services and development programs. It also creates an uneven playing field for businesses that comply with tax laws.
    
  • Contributing Factors:
    • Large Informal Sector: A significant portion of India's economy is still informal, making it difficult to track transactions and enforce tax compliance.
    • Complex Tax Laws: Complex tax laws can create loopholes and make it easier for individuals and businesses to evade taxes.
    • Weak Enforcement: In some cases, weak enforcement mechanisms can embolden tax evaders.
      
• Narrow Tax Base: A Limited Pool of Taxpayers
  • The Issue: A relatively small percentage of the population actually files income tax returns and contributes to direct tax revenue. This puts a greater burden on those who do pay taxes.
  • Reasons:
    • Low Income Levels: A large segment of the population falls below the income tax threshold.
    • Lack of Awareness: Many people are not aware of their tax obligations or the benefits of paying taxes.
    • Exemptions and Deductions: Numerous exemptions and deductions reduce the taxable income of many individuals and businesses.
      
• Complexity of Tax Laws: A Burden on Compliance
  • The Problem: The tax laws in India, both direct and indirect, can be complex and difficult to understand, especially for small businesses and individuals.
  • Consequences:
    • Increased Compliance Costs: Businesses have to spend significant resources on hiring tax professionals or using software to navigate the complex tax regulations.
    • Unintentional Non-Compliance: Complexity can lead to unintentional errors in tax filing, resulting in penalties and legal issues.
    • Discouragement of Investment: Complex tax laws can discourage investment and hinder economic growth.
      
• Tax Administration Challenges: Need for Efficiency and Transparency
  • Issues:
    • Bureaucracy: The tax administration can be bureaucratic and time-consuming, leading to delays in refunds and resolution of tax-related issues.
    • Lack of Transparency: There can be a lack of transparency in the tax administration, leading to concerns about corruption and arbitrary decision-making.
    • Inadequate Infrastructure: In some areas, the tax administration lacks the necessary infrastructure and technology to efficiently process tax returns and provide taxpayer services.
      
• Inefficient Dispute Resolution: Prolonged Litigation
  • The Problem: Tax-related disputes can take a long time to resolve, leading to prolonged litigation and uncertainty for taxpayers.
  • Impact: This can tie up significant resources for both taxpayers and the government, and it can also discourage investment.
    
• Challenges in Taxing the Digital Economy
  • Evolving Landscape: The rapid growth of the digital economy has created new challenges for tax administration. It can be difficult to track transactions and determine the tax liability of businesses operating in the digital space.
  • Cross-Border Transactions: Taxing cross-border digital transactions is particularly complex, as it involves coordinating with other countries and addressing issues of tax jurisdiction.
    
• GST Implementation Challenges
  • Multiple Tax Rates: The GST system, while a significant improvement, still has multiple tax rates, which can be complex for businesses to manage.
  • Compliance Burden: GST compliance can be challenging for small businesses, especially those that are not technologically savvy.
  • Input Tax Credit Issues: Issues related to input tax credit, such as delays in refunds and mismatches in invoices, can create difficulties for businesses.
    

Addressing these challenges requires a multi-pronged approach, including:

• Simplifying Tax Laws: Making tax laws easier to understand and comply with.
• Strengthening Enforcement: Taking stricter measures to deter tax evasion.
• Expanding the Tax Base: Bringing more people into the tax net.
• Improving Tax Administration: Making the tax administration more efficient, transparent, and taxpayer-friendly.
• Addressing Digital Economy Challenges: Developing effective mechanisms for taxing digital transactions.
• Streamlining GST: Further simplifying the GST system and addressing implementation challenges.

Conclusion
Several key conclusions can be drawn about the Indian taxation system:

1. A System in Transition: The Indian tax system is constantly evolving, with ongoing reforms aimed at simplification, digitalization, and improved compliance. The shift towards GST and the introduction of new income tax bills exemplify this dynamic nature.
2. Dual Focus: The system balances the need for revenue generation with the objective of promoting economic growth and social equity. Measures like increasing rebates and revising tax slabs demonstrate this balancing act.
3. Significant Strides: India has made significant progress in modernizing its tax administration, particularly with the adoption of GST and the push for digitalization. These initiatives have streamlined processes and improved efficiency.
4. Persistent Challenges: Despite the progress, several challenges persist, including tax evasion, a narrow tax base, the complexity of tax laws, and issues related to GST implementation. These challenges require continuous attention and innovative solutions.
5. Importance of Compliance: Tax compliance is crucial for the nation's development. Efforts to improve compliance, through both enforcement and taxpayer education, are essential.
6. Need for Simplification: Simplifying tax laws and procedures is a key priority. This reduces the compliance burden on taxpayers, particularly small businesses, and minimizes the scope for misinterpretation and litigation.
7. Digitalization as a Key Driver: Digitalization is playing a transformative role in tax administration. It enhances efficiency, transparency, and reduces human interface, contributing to a more taxpayer-friendly environment.
8. Taxing the Digital Economy: The rise of the digital economy presents unique challenges. Developing effective mechanisms to tax digital transactions, both domestic and cross-border, is crucial for ensuring a fair and equitable tax system.
9. GST: A Work in Progress: GST has been a landmark reform, but its implementation has faced challenges. Addressing issues related to multiple tax rates, compliance burden, and input tax credit is essential for realizing the full potential of GST.
10. Continuous Improvement: The Indian tax system requires continuous improvement. Regular review of tax laws, feedback from taxpayers, and adaptation to the changing economic landscape are crucial for ensuring its effectiveness and relevance.

In essence, the Indian tax system is a complex and evolving entity. While significant progress has been made, addressing the remaining challenges is crucial for building a robust and equitable tax system that supports the nation's economic and social goals. The ongoing reforms and focus on digitalization offer hope for a more efficient and taxpayer-friendly future.

Written By: Pratha Sharma, BA LLB-Manav Rachna university, Faridabad