Volume 19, Number 1 Article by Jaspal Singh and Poonam Sharma March, 2007
Individual Assessees’ Responsiveness towards Tax Rate Changes in India: An Analysis of the Post-Liberalisation Scenario :
The introduction of economic reforms in 1990 and the subsequent revisions in Indian income tax laws for rationalising the tax administration of India have resulted in the increase of tax collections from the individual assesses from Rs 24.56 billion in 1990 to 103.76 billion in 2000. However, these figures do not provide any information as regards the relationship between tax rates and revenue. Jaspal Singh and Poonam Sharma carried out a study with the objectives of:
(1) estimating the progressivity of the Indian income tax system along with the measurement of responsiveness of the individual assessees;
(2) estimating the built-in elasticity and buoyancy elasticity of the individual income tax system of India; and
(3) finding out the determinants of individual tax responsiveness in India.
The study used a modified version of G S Sahota’s methodology, and incorporated the income expansion effect, the dynamic progressivity effect, the technical effect of tax rate changes and the taxpayer responsiveness to tax rate changes. A regression equation was fitted to the data points to study the long-run quantitative relations and the determinants of responsiveness.
The findings of the study clearly show a fluctuating trend with respect to the relationship between tax rates and revenue during the post liberalisation period. The average effective tax rate has also showed a declining trend particularly after 1995-96. Built-in elasticity and buoyancy elasticity are very far from the magic figure of unity, thus reflecting a very poor tax administration. The major reasons for poor responsiveness are the narrow base, which is mainly confined to the salaried class, and the fact that very little consideration has been given to the enforcement provisions in the tax statute. There is also an urgent need to address the increasing manpower requirements of the tax department.
Reprint No 07106