Taxation system in India

India has a well-developed tax structure with a three-tier federal structure, comprising the Union Government, the State Governments and the Urban/ Rural Local Bodies. The power to levy taxes and duties is distributed among the three tiers of Governments, in accordance with the provisions of the Indian Constitution.

Tax System in India

Taxes are important instruments of Government for raising resources and reducing disparities in the society. As such, the role of income tax in a developing country like ours is very vital. The Government of India has embarked upon economic planning to raise the standard of living of the masses, to reduce disparities and regional imbalances for national integration.

Meaning of Tax

A tax is a fee charged (levied) by a government on a product, income or activity. If tax is levied directly on person or corporate income, it is called direct tax. If tax is levied on the price of a good or service, it is called indirect tax. The purpose of taxation is to finance government expenditure.

Define Tax

Tax is a payment made to the Government of a country without “quid pro quo” i.e. nothing in return. Taxes are generally an involuntary fee levied on individual or corporations that is enforced by a government entity, whether local, regional or national in order to finance government activities.

Compulsory monetary contribution to the State’s revenue, assessed and imposed by a government on the activities, enjoyment, expenditure, income, occupation, privilege, property, etc., of individuals and organisations.

According to Hugh Dalton, “A tax is a compulsory contribution imposed by a public authority, irrespective of the exact amount of service rendered to the tax payer in return and not imposed as penalty for any legal offences.” In general, tax is a levy or other type of a financial charge or fee imposed by state or central governments on legal entities or individuals. Local authorities like local governments, like panchayats or municipal corporations also have right to impose taxes.

Objective of Tax

The concept of tax was initiated with a view to generate government revenue in its very beginning stage. In course of time it has been utilized for various purposes.

(a)   To constitute the basic source of revenue.

(b)   To utilize for meeting the expenses of Government.

(c)   To maintain balanced economy.

Taxes can be used for economic growth

Taxes can be used for economic growth in the following ways.

(a)  Helps in mobilization of resources : It is an instrument by the use of which developmental finance for the public sector can be mobilized.

(b)  Helps in reduction in equalities : As income tax rates are progressive it can be used to reduce inequalities in the distribution of income.

(c)  Reduces conspicuous consumption : A progressive tax on income arrests the purchasing power of rich people and thereby tends to reduce the demand for conspicuous consumption.

(d)  Creation of demand for economic development : A progressive taxation tends to change the allocation of income into consumption and savings with the objectives of increasing consumption and reducing the propensity to save.

Nature of Taxation

v  It is inherent in sovereignty.

v  Legislative in character.

v  Subject to constitutional and inherent limitations.

v  Public purpose.

v  Territorial in operation.

v  Exemption of the Government.

v  Strongest among the inherent power of the State.

Direct Tax and Indirect Tax

Basis	Direct Tax	Indirect Tax
Meaning	Direct tax is referred to as the tax, levied on person’s income and wealth and is paid directly to the government.	Indirect Tax is referred to as the tax, levied on a person who consumes the goods and services and is paid indirectly to the government.
Nature	Progressive in nature i.e., higher tax is levied on a person earning higher income and vice versa.	Regressive in nature i.e., all persons will bear equal wrath of tax on goods or service consumed by them irrespective of their ability.
Incidence and Impact	Falls on the same person. Assessee, himself bears such taxes. Thus, it pinches the taxpayer.	Falls on different person. Tax is recovered from the assessee, who passes such burden to another person. Thus, it does not pinch the taxpayer
Example	Income Tax	GST, Custom Duty
Inflation	Direct tax helps in reducing the inflation.	Cost of goods and services increases due to levy of indirect tax thus indirect taxes promote inflation. However, sometimes it is useful tool to promote social welfare by checking the consumption of harmful goods or sin goods through higher rate of tax.
Imposition and collection	Imposed on and collected from the same person	Imposed on and collected from consumers of goods and services but paid and deposited by the assessee.
Burden	Cannot be shifted	Can be shifted
Event	Taxable income of the assessee	Supply of goods and services

Government get authority to levy tax from Constitution of India

The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the Central and State. An  important restriction on this power is Article 265 of the Constitution which states that “No tax shall be levied or collected except by the authority of law”. Therefore, each tax levied or collected has to be backed by an accompanying law, passed either by the Parliament or the State Legislature.

Purposes of Taxation

(A) PRIMARY PURPOSE

v  To provide funds or property with which to promote the general welfare of its citizens and to enable it to finance its multifarious activities.

(B) SECONDARY PURPOSES

v  To strengthen anaemic enterprises by giving tax exemptions.

v  To protect local industries against foreign competition through imposition of high customs duties on imported goods.

v  To reduce inequalities in wealth and income by imposing progressively higher taxes.

v  To prevent inflation by increasing taxes or ward-off depression by decreasing taxes.

Essential characteristics of tax

v  It is an enforced contribution and is a compulsory contribution of a person or entity to the State as per the rules.

v  It is generally payable in money.?

v  It is proportionate in character.

v  It is levied on persons or property and paid only by those persons and entities who earn income exceeding a certain specified limit.

v  It is levied by the State which has jurisdiction over the person or property.

v  It is levied by the law-making body of the State.

v  It is levied for public purpose and spent by the government for the common interest and benefit of the people.

Characteristics of a sound Tax system

A good tax system should meet following basic conditions:—

(i)  ADEQUACY

“Adequacy” means that taxes must provide enough revenue to meet the basic needs of society. A tax system meets the test of adequacy if it provides enough revenue to meet the demand for the public services.

(ii) ADMINISTRATIVE EASE

“Administrative ease” means that the tax system is not too complicated or costly for either taxpayers or tax collectors. Rules are well-known and fairly simple, forms are not too much complicated, it is easy to comply voluntarily.

(iii) TRANSPARENCY

“Transparency” means that taxpayers and leaders can easily find information about the tax system and how tax money is used with a transparent tax system, we know who is being taxed, how much he is paying, and what is being done with the money. We also can find out who pays the tax and who benefits from tax exemptions, deductions and credits.

(iv) CLARITY AND CERTAINTY

Certainty is a principle in the tax system which are apt to take for granted; that the individual’s tax liability should not be arbitrary and should be calculable in advance; retrospective legislation may infringe this principle. It contributes significantly to voluntary tax compliance and reduces costs of compliance.

(v) CONVENIENCE

Taxes should be levied at such a time or in the manner which is most likely to be convenient for the taxpayer to pay it.

(vi) EFFICIENCY

Another principle of taxation is ‘efficiency’. Generally it is understood that a tax system is inefficient insofar as it distorts the free choices of the individual. In other words, efficient tax system is that which causes least excess burden or welfare loss. According to Kaldor, the purpose of an efficient tax is to restrain private expenditure.

(vii) FAIRNESS

Fairness, or equity, means that everybody should pay a fair share of taxes. There are two important concepts of equity: horizontal equity and vertical equity.

Horizontal equity means that taxpayers in similar financial condition should pay similar amounts in taxes.

Vertical equity is just as important, however. Vertical equity means that taxpayers who are better off should pay at least the same proportion of income in taxes as those who are less well off. Vertical equity involves classifying taxes as regressive, proportional, or progressive.

(viii) SIMPLICITY

A tax system should be sufficiently simple both in content and terminology for the taxpayer or average intelligence to comprehend at least its main principles. Simplicity also embraces the need for a tax to be relatively inexpensive to assess and collect. In other words,  Simplicity means that taxpayers can avoid a maze of taxes, forms and filing requirements. A simpler tax system helps taxpayers better understand the system and reduces the costs of compliance.

Importance of Tax

v  Economic growth

v  Government revenue

v  Private savings

v  Restraining the consumer demand

Entities exempted from Taxation

v  Government Institutions

v  Foreign Diplomats

v  Charitable Institutions

v  Religious Institutions

v  Non-profit Organisations

v  Educational Institutions

v  Non-profit Cemeteries

Brief History of Taxation in the world

Taxation goes back as far as recorded history. However, it was not until the start of the great civilizations that we see tax collected for a kingdom by an organized group dedicated to that sole task. There have been taxes to help maintain resources like boats, cities safe passage, ports palaces, construction projects and perhaps the most popular reason, to fund conflicts and all through this tax has grown and evolved as civilizations themselves evolved.

India (Pre 300 BC)

In India Direct taxes have been levied for centuries. Two great literary works, the (Manusmriti and Arthasastra) consisted of detailed advice given to kings by wise sage, on the matter of taxation. The Manusmriti laid down that traders and artisans should pay 1/5th of their profits in silver & gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending upon their circumstances.

Taxation system in India

Taxes are as old as civilization. India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies. Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), GST (Central), Customs duties, GST (State), stamp duty, land revenue and tax on professions are levied by the State Governments. Local bodies are empowered to levy tax on properties, Octroi and for utilities like water supply, drainage etc.

Evaluation of Indian Tax System

Evaluation of Indian Tax System can be made with along the following four criteria, which are necessary to sub-serve the objectives of planned economic development:—

(i)   Adequacy and productivity

(ii)  Efficiency

(iii) Equity

(iv) Certainty

Progressive Tax Rate Structure

A progressive tax requires higher income individuals to pay a higher share of their income in taxes. The Philosophy behind progressive taxes is that higher income people can afford and should be expected to provide a bigger share of public services than those who are less able to pay.

The tax structure has been designed in such a manner that all relevant ability indices are considered. In particular, the direct tax structure has been made progressive by ensuring that as the base grows the yield will also increase.

Thus, reformations have resulted in the following:—

v  Better compliance

v  Better enforcement

v  Easy payment of the levied taxes

Taxes in India

Taxes in India are levied by the Central Government and State Governments. Some minor taxes are also levied by the local authorities such as Municipality.

Thus, the taxation system in India is featured with a 3-tier federal structure that comprises off the f

ollowing:—

The authority to tax is derived by the Government from the Constitution of the country i.e. Article 265 of the Indian Constitution. It states that no tax shall be levied or collected by the government without the authority of law.

(A)    Taxes levied by the Central Government

The Central Government is responsible for the imposition of both direct taxes as well as indirect taxes. Listed below are some of the taxes that are levied by the Central Government:—

(i) TAXES ON INCOME OTHER THAN AGRICULTURAL INCOME (INCOME TAX)

Every person (which denotes individual, company, BOI, AOP, etc.)

is liable to pay income-tax who exceeds the maximum limit of the exemption (Exemption limit for individual in assessment year 2021-22 – Rs. 2,50,000/-).

(ii) GST (GOODS AND SERVICES TAX)

CGST, SGST and IGST are three components of GST law. In India, GST will be levied both by the Centre and the States. CGST (Central GST) is to be levied by Central and SGST (State GST) is to be charged by State. Further IGST will be levied in case of inter-State supply of goods and services.

(iii) CUSTOM DUTY

Custom duties which are levied by on goods imported to/exported from India.

(iv) SECURITIES TRANSACTION TAX

Securities Transaction Tax (STT) is levied on transactions (sale/ purchase) done through the stock exchanges. STT is applicable on purchase or sale of various financial products like stocks, derivatives, mutual funds etc.

(v) All residuary types of taxes not listed in any of the three lists of Seventh Schedule of Indian Constitution.

(B) Taxes imposed by the State Government

Though the majority of the taxes are levied by the Central Government, there are some taxes, which cannot be levied by them. These kinds of taxes are the one of the sole responsibility of the governments of the individual States. Listed below are some of the taxes that are levied by the State Government.

(i) GOODS AND SERVICES TAX (State GST)

It falls under the State Goods and Services Tax Act, 2017. It is levied on the Intra State movement of goods and services. The revenue collected under State Goods and Services Tax is for the State Government. However, Input Tax Credit on it is given partly to the Centre and partly to the States as it will be utilized against the payment of both SGST and IGST.

(ii) STAMP DUTY

Stamp duty means, a tax payable on certain legal documents specified by statute. It is basically a kind of tax paid on any transaction based on exchange of documents or execution of instruments.

(iii) LAND REVENUE

(iv) DUTY ON ENTERTAINMENT/TAXES ON LUXURIES/ AMUSEMENTS/BETTING AND GAMBLING

(v) TAX ON VEHICLES

(vi) Taxes on agricultural income/Taxes on mineral rights/Taxes on the consumption or sale of electricity/Taxes on vehicles suitable for use on roads.

(C) Taxes levied by the Local Bodies

(i) OCTROI

    Octroi is tax applicable on goods entering into municipality or any other jurisdiction  for use, consumption or sale. In simple terms one can call it as Entry Tax.

(ii) Tax on Properties

(iii) Tax on Markets

(iv) User charges for utilities like water supply, drainage etc.

Penalty for not paying taxes

Each type of tax has its own penalties associated with it. These penalties can range from fines to imprisonment depending on the severity of the crime. In some cases the penalty could be that you will have to pay what is owed in taxes alongwith additional sums as fine, which are decided upon by government officials.