3.3.3. Tax Reforms

Tax reforms are concerned with the reforms in the government’s taxation and public expenditure policies, which are collectively known as its fiscal policy.

Tax reforms mainly focus on changing how the government collects taxes and spends money. This is essential to maintain a balance in the economy, ensuring that the government's income (from taxes) matches its expenditure. Effective fiscal policies can create a more stable economic environment.

Think of tax reforms like a family budgeting for the month. They need to balance how much they earn against what they spend on necessities—just as the government must balance tax revenue against public services.

There are two types of taxes: direct and indirect. Direct taxes consist of taxes on incomes of individuals, as well as profits of business enterprises.

Direct taxes are those that are paid directly to the government by individuals and organizations based on their income, like income tax for individuals and corporate tax for businesses. In contrast, indirect taxes are levied on goods and services, like sales tax or VAT, where the tax is included in the price paid by consumers.

Imagine you earn $100 and pay$20 in income tax; that’s a direct tax. If you then buy groceries at a store, which include a 5% sales tax, that’s an indirect tax—you're paying a bit extra for the goods without personal calculation.

Since 1991, there has been a continuous reduction in the taxes on individual incomes as it was felt that high rates of income tax were an important reason for tax evasion.

The government has gradually lowered income tax rates on individuals to reduce the incentive for tax evasion—where individuals do not report their full income to avoid paying more tax. Lowering rates encourages people to declare their true income and pay taxes legitimately, which can ultimately increase government revenue.

This is similar to a school where teachers decide to reduce homework load to encourage students to enjoy learning more. Students are likely to work harder and participate actively rather than try to cut corners.

The rate of corporation tax, which was very high earlier, has been gradually reduced.

Lowering the corporate tax rate has been part of efforts to stimulate business investment and encourage economic growth. When companies pay less in taxes, they have more money to reinvest in their operations, an increase in hiring, or offering better wages and services.

Imagine a lemonade stand; if the stand's owner can keep more of the money they make instead of paying high taxes, they might buy more supplies and hire a friend to help them make even more lemonade.

Efforts have also been made to reform the indirect taxes, taxes levied on commodities, in order to facilitate the establishment of a common national market for goods and commodities.

Reforming indirect taxes involves making taxation on goods simpler and more uniform across different states, which can encourage trade and make the market more efficient. The introduction of the Goods and Services Tax (GST) was a major step in this direction, allowing a single tax to be applied nationally.

Think of it as replacing a complex system of varied toll booths with a single, easier-to-understand toll at a bridge—making travel smoother and more efficient for everyone.

In the year 2016, Indian constitution was amended to empower state governments and the union Government to come out with laws to impose Goods and Services Tax. This has led to the introduction of GST in India.

The introduction of GST aimed to simplify the taxation framework, potentially increasing compliance and revenue. It allows businesses to charge a flat rate of tax, reducing barriers between states and streamlining the collection process.

It’s like a universal ticket for a theme park, instead of separate tickets for each ride; you pay once and can enjoy everything without worrying about extra fees everywhere you go.

Another component of reform in this area is simplification. In order to encourage better compliance on the part of taxpayers, many procedures have been simplified and the rates also substantially lowered.

Simplifying tax processes means fewer forms and clearer instructions for taxpayers, making it easier for people to understand and comply with tax regulations. Lower rates also incentivize individuals to report their earnings honestly and contribute more to government revenue.

Think of it as reorganizing a messy closet; by simplifying where everything goes, you make it easier for everyone to put items away rather than leaving them all on the floor.

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