International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 10, October 2013
Tax Structure in India and Effect on Corporates
Abhishek Jha, Assistant Professor, PDM College of Engineering, Sarai Aurangabad, Bahadurgarh
ABSTRACT
In the present paper an attempt has been made to study the
impact of old and reformed tax structure as per FRBMA
Road Map. Their impact is analyzed on the mode of
financing of companies and different types of investments.
It would be worthwhile to see if the reformed tax system
would lead the companies to more carefully link their
mode of financing with their investments or not.
Keywords
Tax Structure, FRBMA, Wedge, Inventory, Retained
Earnings
INTRODUCTION
As per Income Tax Act 1961, every person (Individuals,
Companies, Hindu undivided families, Firms, Cooperative
Societies and all other artificial judicial persons) whose
total income exceeds maximum exemption limit is liable
to pay income tax at the rates prescribed in the act. It is not
a voluntary payment but an enforced contribution that is
why tax is known as financial charge or levy. Despite the
fact that money provided by taxation is used to carry out
many functions for the welfare of the society, it usually
gives a feeling of displeasure to tax payee. Actually, tax
payer does not want that his hard core earned money
should be taken away from him. History is witness that
there is always a struggle between tax payer and tax
collector. The present study focuses on the effect of
reformed tax structure on the mode of financing of
companies.
REVIEW OF LITERATURE
It is a matter of general belief that taxes on income and
wealth are of recent origin but there is enough evidence to
show that taxes on income in some form or the other were
levied even in primitive and ancient communities.(IT
circular, 2010). India has a tax charter with three-tier
federal structure (Union, state governments. & local
bodies). (Bernardi, 2005) The rapid changes in
administration of direct taxes, during the last decades,
reflect the history of socio-economic thinking in India.
(CBDT report, 2009) Governments use different kinds of
taxes and vary tax rates because taxes are one of the
significant sources of revenue(Asia trade hub.com). Quite
apart from its role of raising revenue, the personal income
tax has long been regarded as a potent weapon of effecting
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distributive justice (Nayak, 1989). Secondly, it is an
instrument of equity, social justice and income
distribution.(Sahota,1961) Another common and most
empirically used way to understand its role is the ratio of
personal income tax to total tax revenue and national
income.(Agarwal,1991) A good tax system is
characterized by a high responsiveness of tax revenue to
changes in income of public bodies or national income; the
technique of measuring this response is tax elasticity and
tax buoyancy. Tax policyforms an important part of
development process in a developing economy. The total
tax revenue is dependent upon three variables viz., tax
rate, tax base, and national income.
(Ankita, 2009) Tax reforms sometime bring changes in
taxation system. A tax payer sometime finds it difficult to
understand whether change in tax liability is due to
legislative change in the federal tax code or shift in his or
her own circumstance. (Troy et all). Even corporate are
not immune to changes in the tax system. As per data from
an IMF working paper, mode of financing of corporates
for different types of investments has been directly linked
to tax structure. According to the IMF working paper,
Indian tax system is characterized by high dependence on
indirect taxes, low average effective tax rates and tax
productivity and large tax induced distortions on
investment and financing decisions.
OBJECTIVE OF THE STUDY
The objectives of the study are:-
1. To the effect of present tax structure on mode of
financing of companies.
2. To determine the present scenario and future
prospects of reformed tax structure as per FRBMA
Road Map.
3. To suggest suitable measures for rationalizing
corporate tax structure.
LIMITATIONS AND SCOPE OF THE
STUDY
Present study borrows data from an IMF working paper on
Tax System in India which was developed under staff
estimates. Hence, the validity of the data may be
questioned. The current tax system refers to a data from
2005-06 and an assumption is made that the current tax
structure has not evolved since then. Also, the FRBMA
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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 81
Volume 2, No. 10, October 2013

Road Map has been assumed to be not implemented

during the presentation of the study.
RESEARCH METHODOLOGY
Present study is analytical in nature. The study has taken
figures available from the IMF working paper. The data
available has been presented in a table form which shows
the relationship between mode of financing and type of
investments. A second table shows modified data after
FRBMA tax reforms have been implemented. The study
uses Chi Square Test of independence to test if mode of
financing is related to the type of investments. The test
also tries to clarify if a change in tax system leads to any
change in the relationship or not.
HYPOTHESIS
1) The mode of financing in not related to the type of
investments in any way.
2) The reformed tax structure has no effect on the
relationship between mode of financing and type of
investments if any.
DATA ANALYSIS
The data presented by the IMF working paper links mode
of financing of companies with the type of investment they
are making. Another modified data is presented for the
changes applicable if FRBMA tax reforms are
implemented. The data is as presented below:-

The totals of each column and row have been presented to facilitate Chi Square study. The tables presented below
represent the estimated frequencies for values of different cells in order to calculate chi square value.

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International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 10, October 2013
The2value calculated for the old tax system of 2005/06
2 like transfer pricing should be checked.
comes out to be 843.694. This value is greater than
upper tailed critical value of 14.86 for =0.005 and 4
degrees of freedom. Hence, the null hypothesis for
independence is rejected and conclusion is made that there
is a relationship between mode of financing and type of
investment.
2
The value calculated for the reformed tax structure (as
per FRBMA) comes out to be 4325.516. This value is
greater than 2 upper tailed critical value of 14.86 for
=0.005 and 4 degrees of freedom. Hence, the null
hypothesis for independence is rejected and conclusion is
made that there is a relationship between mode of
financing and type of investment even under the reformed
2 [2] Carey, David and Josette Rabesona, 2002, Tax
tax structure. Since, value increases for values related to
reformed tax structure, it can be concluded that the level of
dependence between the mode of financing and type of
investment increases after the implementation of the
reformed tax system.
FINDINGS
1) There is dependence relationship between mode of
financing and type of investment under the old tax
system of 2005/06.
2) The dependence relation increases if the reformed tax
system under FRBMA is implemented.
3) Any tax structure which induces the distortions in
financing and investment decisions is not considered
worthwhile and is not welcome.
SUGGESTIONS
1) The tax system proposed under FRBMA need to be
modified such that it does not induce distortions in
financing and investment decisions.
2) High dependence on indirect taxes should be reduced
by raising non tax revenues and direct taxes on the
super rich.
3) The Corporate tax rates should be increased in such a
way that it is not detrimental to the growth of
corporates.
4) Corporate Tax Structure should motivate companies
to make more investments.
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5) Tax evasion and avoidance techniques of corporates
CONCLUSION
The Indian tax system has not fully evolved. It will take
time to evolve. Hence, we should not make any decisions
based on a knee jerk reaction to the changes in the
economy.
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