No full-text available
To read the full-text of this research,
you can request a copy directly from the author.
Direct Taxation in a Liberalized Economy: Challenges and Implications for Corporate Strategy
Abstract
This paper aims at understanding the effects of direct tax reforms on corporate planning in a liberalised economy with specific reference to India. The study looks at the impact of dynamic tax policies including the use of the Goods and Services Tax (GST) and Minimum Alternative Tax (MAT) on the planning and management. Some of the areas covered are managing change such as adapting to policy change, investment and growth decision making, managing risks and broadening corporate tax base. It is found that taxes play a key role in strategic decision-making by changing the level of compliance costs, investment profiles, and profitability. Empirical findings indicate that high corporate tax rates and increased cost of compliance with tax laws reduce profitability but strategic management of taxes can reduce these effects. The two examples of Tata Consultancy Services and Reliance Industries explain how firms respond to tax changes by deploying technology and organizational changes. The results of the study imply that despite the fact that direct tax reforms may raise short-term compliance costs and tax liabilities, they also stimulate corporations to enhance their efficient tax management. The study therefore concludes that there is need for proper tax reforms that will help generate revenues while at the same time not overburdening business with taxes that will affect their profitability; the study also pointed out the need for proper management of taxes as well as anticipation of taxes that are likely to be implemented by the government in future.
ResearchGate has not been able to resolve any citations for this publication.
The Direct Tax regime has witnessed many changes every year since its inception. The proposed change or reform in tax policy has manifold objectives. The impact of such reform should be judged in regard to its contribution to government treasury which is the primary purpose of tax reform. This research work dissects the impact of direct tax policy reform, direct tax administrative reform and economic policy reform on direct tax revenue and total revenue. Notable research work in the similar field is reviewed and gap is traced out. Anova and regression is applied to assess such impact.
This paper presents the case for tax progressivity based on recent results in optimal tax theory. We consider the optimal progressivity of earnings taxation and whether capital income should be taxed. We critically discuss the academic research on these topics and when and how the results can be used for policy recommendations. We argue that a result from basic research is relevant for policy only if 1) it is based on economic mechanisms that are empirically relevant and first order to the problem, 2) it is reasonably robust to changes in the modeling assumptions, and 3) the policy prescription is implementable (i.e, is socially acceptable and not too complex). We obtain three policy recommendations from basic research that satisfy these criteria reasonably well. First, very high earners should be subject to high and rising marginal tax rates on earnings. Second, low-income families should be encouraged to work with earnings subsidies, which should then be phased-out with high implicit marginal tax rates. Third, capital income should be taxed. We explain why the famous zero marginal tax rate result for the top earner in the Mirrlees model and the zero capital income tax rate results of Chamley and Judd, and Atkinson and Stiglitz are not policy relevant in our view.
Although penalties and audits exist, tax evasion is a widespread phenomenon and continues to be a problem for many countries. National culture may contribute to a further understanding of intentional noncompliance across countries. In this study, we investigate the influence of national culture on tax compliance levels across 50 countries. Using Hofstede's (1980) cultural framework as a basis for our hypotheses, we find that a noncompliant country's profile is characterized by high uncertainty avoidance, low individualism, low masculinity, and high power distance. Our results have implications for both research and practice. This is the first study to employ Hofstede's cultural framework as an explanator of international tax compliance diversity and serves as the starting point for the development of an international tax compliance framework. Tax policy implications also are addressed.
Indian tax system has come a long way from the narrow based, complicated and confiscatory to the one that is far more efficient. Over the years, the thrust and direction of reforms have been to improve revenue productivity while minimising distortions. The reform to convert the state level sales tax into VAT this year is a major initiative. The recent focus on tax administration promises rich dividends.Despite reforms since 1991, much remains to be done to make the tax system broad-based, productive and efficient. In corporate tax, excise, customs and sales taxes, revenue concentration on diesel and petrol has high efficiency costs. The personal income tax continues to be narrow based. Reform in the sales tax has only just begun and a lot remain to be done to evolve destination-based retail VAT. The reforms in tax administration promise increased revenues and, hopefully, that will provide the elbow room necessary for calibrating future reforms.
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.
This paper proposes a method for evaluating the impact of tax structure changes on tax revenue. The technique consists of decomposing the gap between actual revenue and potential revenue into components attributable to changes in (i) the tax rate structure (ii) deductions and (iii) tax evasion. Our results indicate that, for the Indian reform episode we examine, there were initial gains which could not be sustained over time. The magnitude of the gains from the reform were limited and failed to significantly curtail losses from tax evasion. Copyright Kluwer Academic Publishers 2000
Aggregate data are used to study determinants of income tax revenues and taxpayer compliance in India during 1965–1966 to 1992–1993. The estimates show that both revenues collected and compliance were significantly affected by tax structure (marginal tax rates and exemption limit). In addition, inflation as well as declining assessment intensity had a significant negative effect, while traditional enforcement tools (searches, penalties and prosecution activity) had only a limited effect. “Best practice” enforcement, assessment and tax structure policies could have yielded at most a 90% revenue increase, leaving India's income tax performance below the average of countries with similar GDP per capita. Thorough reform of tax administration is therefore needed to raise income tax collection in India to international standards.
The responsiveness of tax revenues vis-a-vis changes in national income (or the tax base) may not always be consistent. Specifically, in developing economies where the tax base is already skewed and narrow, tax revenues may perhaps not turn out to be responsive to changes in economic growth. Hence, the present study is an attempt to estimate income tax revenue responsiveness in India posts the structural reforms of 1991. The trends in income tax revenue have been examined using the tax to GDP ratio measure and estimating income tax revenue's buoyancy for the period 1991-2015 using the Divisia index approach.The tax buoyancy coefficient for the study period has been found to be 1.879. The tax elasticity coefficient for the study period (1991-2015) has been 0.53, thus depicting the low magnitude of automatic responsiveness for income tax collections vis-à-vis variations in economic growth post the reforms era. The regression results depict that the present model explains 20.8 per cent variance in the dependent variable, income tax revenue.
This article appeared in the December 31, 2007 Annual Report to Congress of the National Taxpayer Advocate, which commissioned this research. Why do people follow the law? The answer, under the traditional theory of compliance, is fear of detection and punishment. The deterrence model, however, accounts for only a minor portion of actual compliance levels. It has such poor explanatory power because it assumes that the decision to comply is based solely on a rational cost-benefit analysis in which people weigh the benefits of non-compliance against the costs of detection and penalties. Recent literature reveals, however, that the decision to comply is not purely rational. Rather, personal values, social norms, and non-rational cognitive processes also strongly affect the decision. What holds true for law in general holds true for tax compliance specifically. Traditional methods of enforcement through audit and penalties explain only a small fraction of voluntary tax compliance. Theorists and researchers attribute the vast majority of compliance to what they loosely describe as internal motivations or “tax morale.” The field is still young, the subject complex, and some of the empirical data is inconclusive. Nevertheless, the literature clearly indicates that tax morale plays a major role in tax compliance.Although neither the exact components of tax morale nor the precise mechanisms by which they work have yet been fully delineated the literature has identified certain elements. Research shows that tax compliance is affected by (social and personal) norms such as those regarding procedural justice, trust, belief in the legitimacy of the government, reciprocity, altruism, and identification with the group. Cognitive processes, such as prospect theory, also influence an individual’s reaction to tax issues. Studies also indicate that certain demographic factors such as age, gender and education correlate with the tax morale.The components of tax morale, like internal motivators in other areas of the law, are not static. They interact with each other and the environment and are influenced by each individual’s own cognitive framework. Consequently, an external agent, such as the IRS, can influence tax morale norms and thereby tax compliance. It can activate compliance norms in a variety of ways including education, properly framing communications, fair procedures, and a regulatory framework that incorporates current and future findings of tax morale research into its operations and dealings with taxpayers.The Report makes three major recommendations. First, the IRS should establish a department devoted solely to exploring tax morale issues and implementing the findings. Second, the IRS should adopt a tax morale approach to tax compliance that recognizes the importance of taxpayers’ internal motivations and the effects on these motivations of societal conditions and institutions (such as the IRS) that interact with them. Third, using behavioral science research, the IRS should implement ongoing educational (long term and short term) programs and media campaigns. Since the subject of this Report is tax compliance of individual taxpayers, both the literature review and the recommendations focus on individuals. Both the tax morale concept and this Report, however, are relevant for all taxpayers.
Argues that direct tax reform in India should include elimination
of income tax and capital gains taxes. Presents an analysis of how the
unbelievably high direct tax rates over several years, coupled with
several types of controls, drastically distorted the price and incentive
system. Shows that, in comparison with several other developing
countries, India is still a high taxed economy. The institutionalized
corruption resulting from these direct taxes over several years cannot
be reduced without elimination of these taxes, and measures such as
broadening of direct tax base, higher penalties, etc. are
counter-productive. The official national accounts statistics in such a
high tax regime do not reflect the economy, and the government policy
and planning based on these statistics often proved ineffective. The
success of liberalization programmes, environmental conservation, and
general socio-economic development requires the elimination of these
taxes.
In a developing economy like India, tax occupies a strategically important position in the overall development of the country due to its significant contribution to the national exchequer, which is ultimately spent on the overall development of different sectors of the economy. The budget for 1991-92 indicated a major effort toward correcting the fiscal imbalances and increasing the tax revenue through increase in the direct taxes. The study analyzes the impact of direct tax reforms on Indian economy in terms of various economic indicators and compares it with the pre-reform period. The study reveals that tax reforms introduced during the post-liberalization period could not generate the results as desired. The reduction in direct tax rates could not lead to better tax compliance in a much desired manner. Tax reforms have increased the number of assessees but the resultant increase in the tax revenue has not been sufficient. The major share of taxes comes from low income groups. This ineffectiveness will widen the gap between rich and poor and will lead to further inequality in the society. The rising arrears of taxes have further put a question mark on the efficiency and effectiveness of the tax collecting machinery. The widening fiscal deficit over the period will reduce investments in social sectors, like education and health. Therefore, there is again a very strong need to review the tax reform policies being followed in the post-liberalization period.
This paper takes cognizance of existence of bribery-type corruption in the tax system. The study seeks to analyze the strategic interaction between a tax evader and a corrupt auditor within a given tax situation. An equilibrium bribe rule is derived for the situation where a tax evader comes face to face with a corruptible auditor. In our stylized model, situations are found where both parties adopting the agreed bribe rule, benefit from cheating the system In addition, the existence of an equilibrium point is established in a two-person fixed threat Nash bargaining situation. A comparative static exercise brings out some intuitively appealing findings. Lastly, when the probability of a super audit is internalized within the system, besides other results, we find that, in a bribe situation, the effect of neither the increase in penalty rate for evasion nor the vigilance over the activities of a tax auditor on their behavior is straightforward. Rather they are ambiguous or at best situation specific. From the policy point of view, we find that if the government is successful in keeping the value of the expected probability of super audit above some value qo, bribery will vanish from the system. The age old method of the carrot and stick policy to obtain a desirable state also gets established in our setting. Bribery can be made unprofitable by adopting an appropriate carrot and stick policy towards the corruptible auditors.
Direct tax reforms and various schemes of income tax in india
- K B Nidheesh
Nidheesh, K. B. (2010). Direct tax reforms and various schemes of income tax in india. Asia Pacific Journal of
Research in Business Management, 1(3), 131-140.
Priorities for a Tax Programme
- A Bagchi
Bagchi, A. (2013). Priorities for a Tax Programme. Economic & Political Weekly, 8(8), 435-443.
Problems and Recommendations over Tax Policies
- O N E R Engin
Engin, O. N. E. R. (2015). Problems and Recommendations over Tax Policies. Expert Journal of Finance, 3(1).
National Commission on Urban Problems: Property Tax Recommendations
- C Woodbury
Woodbury, C. (1969, January). National Commission on Urban Problems: Property Tax Recommendations. In
Proceedings of the Annual Conference on Taxation under the Auspices of the National Tax Association (Vol. 62, pp.
89-97). National Tax Association.
The Law Institute's Income Tax Project: An Answer to a Challenge
- R N Miller
Miller, R. N. (1951). The Law Institute's Income Tax Project: An Answer to a Challenge. American Bar Association
Journal, 191-194.
A CRITICAL ANALYSIS AND EVALUATION OF SOME OF THE INEQUITIES OF THE UNITED STATES FEDERAL INCOME TAX SYSTEM WITH SOME RECOMMENDATIONS FOR REFORM. The University of Arizona
- H E Olivera
Olivera, H. E. (1975). A CRITICAL ANALYSIS AND EVALUATION OF SOME OF THE INEQUITIES OF THE
UNITED STATES FEDERAL INCOME TAX SYSTEM WITH SOME RECOMMENDATIONS FOR REFORM.
The University of Arizona.