RELATIVE CONTRIBUTION OF DIRECT AND INDIRECT TAX TO TOTAL TAX REVENUE IN INDIA

CASIRJ Volume 5 Issue 5 [Year - 2014] ISSN 2319 – 9202

International Research Journal of Commerce Arts and Science http://www.casirj.com Page 229

RELATIVE CONTRIBUTION OF DIRECT AND INDIRECT TAX TO TOTAL

TAX REVENUE IN INDIA

Rekha Rani

Assistant professor, Department of commerce,

Dyal singh college, Lodi road, Delhi,

Email [email protected], contact no-08053552594.

Usha poonia

Assistant professor, Department of Economics,

Chaudhary Devilal University,

Sirsa, Haryana, contact no-09468196611

ABSTRACT

This study has been conducted to study the relative contribution of direct and indirect tax to

total tax revenue in India . This research is based on secondary data collected from RBI’s

handbook of statistics on Indian economy and other published resources. Simple percentage

analysis has been used as analysis tool to analyse data of direct and indirect taxes . Data have

been represented using tables and line charts. Data pertaining to direct and indirect tax have

been analysed for 22 years i.e. since 1991-92 to 2012-13. It is concluded on the basis of this

study that the contribution of central direct tax to total central tax revenue has increased year by

year whereas central indirect tax contribution has decreased since 1991-92 but in last three years

starting from 2009-10 the contribution of central direct tax has started decreasing. In case of

states’ taxes, proportion of indirect tax has always remained higher with high per centage in

comparison of direct tax revenue. Overall, the contribution of indirect tax has always been

remained more in total tax revenue but the percentage gap between the two has reduced to a

large extent year by year.

Key word: Direct tax, Indirect tax, Central tax revenue, States’ tax revenue.

INTRODUCTION

Government of a country performs a number of functions to discharge its duties. Government

require huge capital to fulfil this purpose. So, this money and capital is collected from the public

in the form of surcharge , fees and fines and taxes. Tax is the major source of income of

government.

mailto:[email protected],


International Research Journal of Commerce Arts and Science http://www.casirj.com 30

Tax

A tax is mandatory payment levied by the government on the persons or companies to meet the

expenditure incurred by government to serve common benefits to the people of a country.

DIRECT TAX AND INDIRECT TAX

A direct tax is a tax which is directly paid by the person to whom it is imposed to the

government. In other words, a direct tax is imposed upon an individual person

(artificial or natural) or property ( real and personal property, wages, rental profits, crops,

livestock, etc.) . Some commentators have argued that "a direct tax is one that cannot be shifted

by the taxpayer to someone else, whereas an indirect tax can be."(1)

TYPES OF DIRECT TAX

Income Tax: Income tax is calculated on basis of gross income less deductions, exemptions

or credits. It is levied on businesses and individuals. Income Tax Act, 1961 imposes tax on the

income of the individuals or Hindu undivided families or firms or co-operative societies (other

than companies) and trusts (identified as bodies of individuals associations of persons) or every

artificial juridical person. Whether an income to be included in total income of a person in India

wholly depends on the his residential status. Residential status can be divided in two parts ( 1)

resident (2)non resident. Resident can be further divided into two parts i.e. ordinary resident and

non ordinary resident.

Estate tax: An estate tax (inheritance tax or death duty) is a tax which is levied at the time of death of an individual. It is charged on total value of the money and property of a person who has died. Estate duty was continued from 1953 to 1985 and has been abolished on 16th march 1985 under the Estate Duty (Amendment) Act, 1985. Corporate Tax: According to Income tax act 1961, Tax is levied on companies and business organizations in India on the income from their worldwide transactions Gift Tax: Gift tax is levied under the Gift Act 1958 in all parts of the country except Jammu and Kashmir. All gifts received by a person in excess of Rs. 25,000 in the form of cash, draft, cheque or others from whom he doesn't have blood relations were

taxable. But it was abolished with effect from 1st

October, 1998 . But in 2004, a new provision was added in the Income Tax Act 1961 .According to which the gift tax would be levied if any individual or Hindu Undivided Family (HUF) receives in excess of Rs. 50,000 in one year. Property Tax: Property tax is levied on the owner of buildings along with appurtenant land

Indirect Tax: An indirect tax is one that can be shifted by the taxpayer to someone

else. It leads to increase the price of a commodity. Some of the indirect taxes are given below Types of Indirect tax Sales Tax: Sales tax is imposed on the sale or purchase of a particular commodity by the government within the country. Generally, each State pursues its own Sales Tax

http://en.wikipedia.org/wiki/Tax

http://en.wikipedia.org/wiki/Natural_person



Act and levies tax at various rates. From 2005, most of the States of India replaced sales tax with new Value Added Tax (VAT). Value Added Tax (VAT): Value Added Tax Act has been devised to administer VAT. This tax is imposed on the value addition by each entities. VAT can be calculated by using any of the three methods: (a) Tax credit method: Difference between tax on sales and tax paid on input (b) Subtraction method: value added is computed by subtracting cost of input from total value of output (c) The Addition method: The value added is based on all the payment made to the factors of production (viz. interest payments, wages etc). The manufacturer or importer of goods in a state is liable to pay sales tax as per the current single-point system of tax levy. No sales tax is levied on the further distribution channel. In fact VAT is charged on entities of distribution channel which is also known as multi point levy. Service Tax: The service tax is levied under the provisions of the Finance Act of 1994 which is not applicable to the state of Jammu and Kashmir. This tax came into effect on 1st July, 1994. Service Tax is levied on the service provider’s the gross or aggregate amount charged from his customers. Customs Duty: To prevent illegal imports and exports of goods, the Customs Act was formulated in 1962. In order to protect the interest of indigenous industries as well as to keep the imports to the minimum in the interests of securing the exchange rate of Indian currency,import duty was imposed.To control export ,export duty came into light.The rate of custom duties are levied on import and export under the customs Tariff Act, 1975 which is amended from time to time or any other law for the time being in force. Central Excise Duty: Excise duty is levied under the Central Excise Act,1944 and the Central Excise Tariff Act, 1985 by central government. It is charged on excisable goods that are manufactured in India and made for domestic consumption. The goods which are mentioned in the First Schedule and the Second Schedule to the Central Excise Tariff Act 1985 here refer to the ‘excisable goods’. It is a compulsory payment unless exempted. Securities Transaction Tax (STT): STT is levied on all transactions made on the stock exchanges. It is applicable on sale/purchase of equity shares, equity oriented Mutual Funds and derivatives .There is STT on long term capital gain but it is 10 per cent in case of short term capital gain. But if he is a trader ,all gain would be considered his business and tax would be charged according to tax slabs .

OBJECTIVES OF THE STUDY To know the contribution of direct and indirect taxes to total tax revenue of

government.

To study the change in trend of contribution of direct and indirect tax

RESEARCH METHODOLOGY This research is based on secondary data collected from RBI’s handbook of statistics on Indian economy and other published resources. Simple percentage analysis has been used as analysis tool to analyse data of direct and indirect taxes . Data have been represented using tables and line charts. Data pertaining to direct and indirect tax have



been analysed for 22 years i.e since 1991-92 to 2012-13 .Data for 2011-12 are revised estimates and data for 2012-13 are budget estimates which is mentioned in RBI’s handbook of statistics on Indian economy.

DATA ANALYSIS AND DISCUSSION Table1.1: Contribution of direct and indirect tax to total tax revenue of central government of India

Year Central Direct tax (INR Billions)

Percentage of central direct tax to total central tax revenue

Central Indirect tax (INR Billions)

Percentage of central indirect tax to total central tax revenue

Total central tax revenue (INR Billions)

1991-92 152.07 22.57 521.54 77.43 673.61

1992-93 181.31 24.29 565.05 75.71 746.36

1993-94 202.98 26.80 554.45 73.20 757.43

1994-95 269.66 29.22 653.28 70.78 922.94 1995-96 335.63 30.18 776.61 69.82 1112.24

1996-97 388.91 30.20 898.71 69.80 1287.62

1997-98 482.74 34.67 909.71 65.33 1392.20

1998-99 465.91 32.40 971.97 67.60 1437.88

1999-2000 579.58 33.75 1137.94 66.25 1717.52

2000-01 683.06 36.27 1200.40 63.73 1883.46

2001-02 691.97 37.13 1171.77 62.87 1863.74

2002-03 830.85 38.70 1315.81 61.30 2146.66

2003-04 1050.90 41.58 1476.58 58.42 2527.48

2004-05 1328.47 43.79 1705.46 56.21 3033.93

2005-06 1652.49 45.32 1993.98 54.68 3646.47

2006-07 2302.49 48.83 2412.63 51.17 4715.12

2007-08 3122.43 52.80 2791.04 47.20 5913.47

2008-09 3338.54 55.32 2696.45 44.68 6034.99

2009-10 37774.87 60.75 2438.81 39.25 6213.68

2010-11 4459.94 56.51 3431.78 43.49 7891.72

2011-12 5006.51 55.77 3970.15 44.23 8976.66



2012-13 5702.57 53.15 5027.34 46.85 10729.99

Source: Statistical handbook on Indian Economy(2012-13),Reserve Bank of India

The above table 1.1 depicts that central direct tax revenue has been increasing from 1991-92 to

2009-10 i.e. 22.57 per cent to 60.75 per cent except 1998-99 when it has decreased to32.40 per

cent from 34.67 per cent. It starts decreasing continue after 2009-10 to 2012-13.On the other

hand, central indirect tax revenue has been decreasing year by year from 1991-92 to 2009-10

i,e.77.43 per cent to 39.25 per cent except 1998-99 when it has increased from 65.33 to

67.60and then starts continue increasing after 2009-10 to 2012-13 . In other words , the revenue

contribution of central indirect tax has remained higher in previous years as compared to

central direct tax revenue but now the situation has changed. Now the proportion of central

direct tax revenue is higher than central indirect tax to total central tax revenue. The

contribution of central direct tax has been calculated 53.15 per cent to total whereas it has been

46.85 per cent in case of central indirect tax revenue .

Chart 2.1: contribution of central direct and central indirect tax to total central tax revenue of India

Chart 2.1 reflects the increasing trend of central direct tax to total central tax revenue but after

2009-10 it starts decreasing. On the other hand,ratio of central indirect tax to total central tax is

decreasing up to 2009-10,thenafter it starts increasing.Before 2007-08 the proportion of central

0

10

20

30

40

50

60

70

80

90

Per centage of central direct tax to total central tax revenue

Per centage of central indirect tax to total central tax revenue



indirect tax in central tax revenue has remained higher as compared to ccentral direct tax but

since 2007-08 situation has been reversed.

Table 1.2:contribution of states’direct and indirect taxes to States’ total tax revenue year Direct(1)

(INR billions)

Per centage of

direct tax to

total

Indirect(2)

(INR billions)

Per centage of

indirect tax to

total

Total(1+2)

(INR billions)

1991-92 38.40 10.85 315.68 89.15 354.08

1992-993 43.53 10.90 355.73 89.10 399.26

1993-94 50.12 10.89 410.15 89.11 460.27

1994-95 69.02 12.78 470.90 87.22 539.92

1995-96 79.13 12.86 536.03 87.14 615.16

1996-97 82.88 12.09 602.55 87.91 685.43

1997-98 63.52 8.45 688.00 91.55 751.52

1998-99 106.53 12.36 755.30 87.64 861.83

1999-2000 129.79 13.01 868.13 86.99 997.92

2000-01 128.57 11.42 997.69 88.58 1126.26

2001-02 156.79 12.79 1068.94 87.21 1225.73

2002-03 172.17 12.53 1201.35 87.47 1373.52

2003-04 202.13 13.01 1351.38 86.99 1553.51

2004-05 239.81 13.18 1580.01 86.82 1819.82

2005-06 301.79 14.24 1817.68 85.76 2119.47

2006-07 388.29 15.38 2136.82 84.62 2525.11

2007-08 434.46 15.18 2427.03 84.81 2861.49

2008-09 441.32 13.67 2786.73 86.33 3228.05

2009-10 473.87 13.05 3158.56 86.95 3632.43

2010-11 627.25 13.61 3981.70 86.39 4608.95

2011-12 764.02 13.75 4793.77 86.25 5557.79

2012-13 902.55 13.99 5550.81 86.01 6453.36

Source: Statistical handbook on Indian Economy(2012-13),Reserve Bank of India.



States direct taxes,indirect taxes and total taxes excludes states’ share in central taxes as reported

in central government budget documents.

Table 1.2 represents the direct tax revenue and indirect tax revenue of states. Contribution of

state s’ direct tax revenue has been 10.85 per cent in 1991-92 whereas it has been 89.15 per cent

in case of indirect tax contribution .Situation has remained almost same in 2012-13 as the

contribution of states’ direct tax revenue to total has increased up to 13.99 per cent whereas

contribution of states’ indirect tax has still remained 86.01 per cent. Hence the contribution of

direct tax has remained lower than states’ indirect tax to total revenue.

Chart 2.1: contribution of states’ direct and indirect taxes to States’ total tax revenue

The chart 2.1 reflects that proportion of states’ indirect tax to total states’ tax revenue has always

been remained higher than states’ direct tax contribution since 1991-92.

Table1.3:contribution of combined direct tax and combined indirect tax to total combined tax

revenue year Combined

central and

states’ Direct

tax revenue

(INR

billions)(1)

Percentage of

combined direct

taxes to total

Combined

central and

states’ indirect

tax revenue

(INRbillions)

(2)

Percentage of

combined

indirect taxes to

total

Total(1+2)

(INR billions)

1991-92 190.47 18.53 837.22 81.47 1027.69

0

10

20

30

40

50

60

70

80

90

100

Per centage of states'direct tax to total states' tax revenue

Per centage of states' indirect tax to total states' tax revenue



1992-993 224.84 19.63 920.78 80.37 1145.62

1993-94 253.10 20.78 964.60 79.22 1217.70

1994-95 338.68 23.15 1124.18 76.85 1462.86

1995-96 414.76 24.01 1312.64 75.99 1727.40

1996-97 471.79 23.91 1501.26 76.09 1973.05

1997-1998 546.26 25.48 1597.46 74.52 2143.72

1998-99 572.44 24.89 1727.27 75.11 2299.71

1999-2000 709.37 26.12 2006.07 73.88 2715.44

2000-01 811.63 26.97 2198.09 73.03 3009.72

2001-02 848.76 27.48 2240.71 72.52 3089.47

2002-03 1003.02 28.49 2517.16 71.51 3520.18

2003-04 1253.03 30.70 2827.96 69.3 4080.99

2004-05 1568.28 32.31 3285.47 67.69 4853.75

2005-06 1954.28 33.89 3811.66 66.11 5765.94

2006-07 2690.78 37.16 4549.45 62.84 7240.23

2007-08 3556.89 40.54 5218.07 59.46 8774.96

2008-09 3779.86 40.81 5483.18 59.19 9263.04

2009-10 4248.74 43.15 5597.37 56.85 9846.11

2010-11 5087.19 40.70 7413.48 59.30 12500.67

2011-12 5770.53 39.70 8763.92 60.30 14534.45

2012-13 6605.12 38.44 10578.15 61.56 17183.27

Source: Statistical handbook on Indian Economy(2012-13),Reserve Bank of India

Table 1.3 depicts that contribution of both central and states’ direct tax revenue has been 18.53

per cent whereas their indirect tax revenue contribution has been 81.47 per cent which is more

than the former. But it has increased year by year up to up to 2009-10 i,e. 43.15 percent of direct

tax revenue and 56.85 per cent of indirect tax. contribution of direct tax has increased but still

less as compared to the contribution of combined indirect tax After 2009-10 contribution of

direct tax has started decreasing and combined indirect tax’s contribution has started decreasing.

Chart 2.3: contribution of combined direct tax and combined indirect tax to total combined tax

revenue



Chart 2.3 indicates that the proportion of combined contribution of central and states’ indirect tax

has always been higher than their direct tax contribution but this gap has been remained higher in

earlier years. With the passage of time it has been reduced.

CONCLUSION

It is concluded on the basis of this study that the contribution of central direct tax to total central

tax revenue has increased year by year whereas central indirect tax contribution has decreased

since 1991-92 but in recent three years starting from 2009-10 the contribution of central direct

tax has started decreasing. In case of states’ taxes, proportion of indirect tax has always remained

higher with high percentage in comparison of direct tax revenue. Overall, the contribution of

indirect tax has always been remained more in total tax revenue but the percentage gap between

the two has reduced to a large extent year by year.

REFERENCE

1. Foster, Robert (1895), “ Commentaries on the Constitution of the United States: Historical and Judicial”, Boston: The Boston Book Co. pp. 415–423.

2. Handbook of statistics on Indian economy,2012-13,Reserve Bank of India.

3. Cremer, H., Pestieau, P., & Rochet, J. C. (2001), “ Direct versus indirect tax: The

design of the tax structure revisited” International Economic Review, 42 (3), 781-

799.

0

10

20

30

40

50

60

70

80

90

Per centage of combined direct taxes to total

Per centage of combined indirect taxes to total

http://books.google.com/books?id=Rd49AAAAIAAJ&printsec=titlepage&source=gbs_summary_r&cad=0#PPA415,M1

http://books.google.com/books?id=Rd49AAAAIAAJ&printsec=titlepage&source=gbs_summary_r&cad=0#PPA415,M1



4. Emran S., & Stiglitz, J.(2005), “ On selective indirect tax reform in developing

countries”, Journal of Public Economics, 18, 599 –620.

5. Daveri, F. and Tabellini, G.,(2000), “Unemployment, Growth and Taxation in

Industrial countries”, Economic Policy 30, pp. 47-104.

6. http://business.tm-india.com/taxation-system/direct-tax

7. http://appscgroup.blogspot.in/2010/06/indirect-taxes-in-india-and-their-basic.html

8. http://www.wikipedia.com

http://business.tm-india.com/taxation-system/direct-tax

http://appscgroup.blogspot.in/2010/06/indirect-taxes-in-india-and-their-basic.html

http://www.wikipedia.com/

RELATIVE CONTRIBUTION OF DIRECT AND INDIRECT TAX TO TOTAL TAX REVENUE IN INDIA

Documents

Transcript of RELATIVE CONTRIBUTION OF DIRECT AND INDIRECT TAX TO TOTAL TAX REVENUE IN INDIA