The following are some of the important features and problems observed in Indian tax system:
Multiplicity of taxes: Taxes by Union Government, State Governments and the local governments have resulted in difficulties and harassment to the tax payer. He has to contact several authorities and maintain separate records for each of them.
Dominance of Indirect taxes: Central government revenues from indirect and direct taxes were in the ratio of 74:26 respectively in 1994-95. In the same year the ratio for State government was 83:17. It is well known that indirect taxes are more burdensome to the poor than the wealthy.
Adhocism: Several taxes are imposed on ‘adhoc’ basis to meet deficits and they are withdrawn later on. Some taxes are introduced and withdrawn later for political reasons.
Bias in incidence of taxes: According to indirect taxation enquiry committee, “The burden of the urban households was distinctly higher than the rural households in the corresponding expenditure class”. Urban population is taxed far higher than the rural rich.
Complexity and corruption: A provoking feature of the Indian tax system is its complexity. Both direct and indirect tax laws are highly complex. This provides enough scope for avoiding and evading taxes.
Imbalance in tax system: Excessive emphasis on indirect taxes has resulted in the glaring imbalances of nearly 100% citizens affected by indirect taxes but hardly 1% of the population coming under the purview of direct taxation.
Lack of co-ordination: Our Federal Finance system allows Union and States levy taxes independently at different rates. There is no coordination between the taxes to allow a well organized, planned and co-ordinated tax system to evolve.
Lack of built-in elasticity: Income from taxation does not increase automatically in India in proportion to increase in National income. Hence, the government is compelled to increase taxes every year to maintain a constant tax income ratio.
Squandering away of resources: Colossal amounts of taxes realized are spent on civil administration and defence. “Vote Bank Politics” result in “populist schemes” subsidized by the governments. As a result, resources for the rapid economic development of the country are always lacking.
Administrative inefficiency and corruption: A baneful feature of the Indian tax system is the lack of administrative efficiency. Corruption exists in the administrative machinery from top to bottom. Such a system encourages the spirit of corruption among the tax payers also.