Indian Taxation System | All about Indian Tax System & Structure
- Why is tax imposed?
- Distribution of tax at 3 levels
- Types of Taxes
- Constitutional Provisions regarding Taxation in India
- Tax Regulatory Bodies in India
Tax has always been a major source of government income. The tax system in India had started since ancient times. Ancient Indian texts like Arthashastra and Manusmriti describe the taxes, called Bali (religious tax), Sita (stand land) and Kara (taxes paid in cash).
In that era, farmers and artisans paid taxes in the form of silver or gold or in the form of a part of agricultural produce.
The modern tax system in India is believed to be introduced by Sir James Wilson in the year 1860 during British rule. At that time, the tax was imposed to fill the English treasuries that were emptied to suppress the revolt of 1857.
After independence, the newly formed Government of India continued with this system and made constitutional provisions for it. The system continues even today with modifications as per the time.
1. Why is tax imposed?
A tax is a compulsory fee levied by a government on an individual or institution. It is the basic source of government income. The government uses money received from taxes to maintain administration in the country and achieve the vision of a welfare state.
2. Distribution of tax at 3 levels
In India, taxes are collected at three levels-
- Central Government: Income Tax, Custom Duty, Central Excise.
- State Government: Tax on agricultural income, professional tax, value-added tax, state excise, stamp duty.
- Local bodies: property tax, water tax, drainage and other taxes on minor services.
3. Types of Taxes
There are mainly two types of taxes -
3.1. Direct Tax
- This tax is levied directly on the taxpayer. It cannot be transferred by taxpayer to any other person.
- A direct tax is also called a progressive tax.
- Examples of direct taxes are income tax, corporate tax, etc.
- Income Tax is imposed on individuals or entities which differ according to the income or profit. Farmers are excluded from paying income tax. The tax is governed by Income Tax Act, 1961.
- Corporate Tax is imposed on the net income or profit of a company.
- Direct taxes levied by the Central Government- Income tax, Corporate tax, Capital gains tax, Commodities Transaction Tax, Money tax (abolished), Estate duty (abolished)
- Direct taxes levied by the state government- Land Revenue, Stamp duty, Property tax, Agricultural Income Tax, Professional tax
3.2. Indirect Tax
- In this, the tax is levied on the suppliers or manufacturers, but its final burden falls on the customers.
- Indirect tax is also called regressive tax.
- Examples of indirect tax are Customs duty, Central Excise duty and Sales Tax.
- Indirect taxes levied by the central government- Customs duty, Central Excise duty (included in GST), Central Sales Tax (included in GST), Service tax (included in GST), GST
- Indirect taxes levied by the state government- Sales tax (included in GST), Electricity tax, Entry tax (included in GST), Excise duty on liquor, Tax on luxury and entertainment (included in GST), Tax on betting and gambling (included in GST)
3.3. Goods and Services Tax (GST)
- This is the biggest tax reform in the history of India. It was suggested by Kelkar Task Force on indirect tax in 2003.
- Service Tax was given constitutional status under Article 268 (A) by the 88th Constitutional Amendment in 2003.
- GST was brought through 101st amendment to the Constitution. Article 366 (12A) of the Constitution says that "goods and services tax" means any tax on the supply of goods, or services or both except taxes on the supply of alcoholic liquor for human consumption.
- It is an indirect destination tax based on the consumption of goods and services. It came into force on 1 July 2017.
- There are different tax slabs for GST: 0%, 5%, 12%, 18% and 28%.
3.3.1. GST Council
- GST Council has been provided under Article 279 (A) of the Constitution.
- The President constituted the GST Council. Union Finance Minister is the Chairperson of the GST Council.
- Every decision of the GST Council shall be taken at a meeting, by a majority of not less than three-fourths of the weighted votes of the members present and voting, in accordance with the following principles,
- the vote of the Central Government shall have a weightage of one-third of the total votes cast, and
- the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast in that meeting.
3.3.2. Types of GST
There are three types of GST-
- Central Goods and Services Tax (CGST): Share of Tax to central government on intrastate sales.
- Integrated Goods and Services Tax (IGST): Tax on interstate sales.
- State Goods and Services Tax (SGST): Share of Tax to state governments on intrastate sales.
Parliament has been allowed to impose CGST and IGST under Article 246 of the Constitution, while states have been allowed to impose SGST under the same article.
3.3.3. Taxes subsumed under GST
At the central level, the following taxes have been included in GST-
- Central Excise Duty
- Additional Excise Duty
- Service Tax
- Additional Customs Duty (commonly known as countervailing duty)
- Special Additional Customs Duty
At the state level, the following taxes have been included in GST-
- State Value Added Tax/ Sales Tax
- Entertainment tax other than the tax levied by local bodies
- Central sales tax levied by the center and collected by the state
- Octroi and Entry Tax
- Purchase tax
- Luxury tax
4. Constitutional Provisions regarding Taxation in India
- Article 265 of the Indian Constitution states that no tax can be levied without the authority of the law, that is, whatever tax is being imposed, it has to be supported by a law passed by the Parliament or state legislatures.
- Parliament and State Legislatures are empowered to make laws under Article 246 of the Seventh Schedule of the Indian Constitution.
- There are three types of lists under the Seventh Schedule-
- Center List: It contains subjects on which only Parliament is competent to legislate.
- State List: It contains subjects on which only the state legislature can legislate.
- Concurrent List: It contains subjects on which both Parliament and State Legislature can legislate concurrently. If there is a dispute between the state and the Center on a subject in this list, the law made by the Center will be valid.
- Article 248 mentions that the residuary powers of the legislation are vested in the Parliament. This means that Parliament has the special power to make laws on any subject not included in List-1, 2 and 3.
- Under Article 249, Parliament can legislate on any subject of the state in the interest of the nation.
- Article 243 (H) and 243 (X) empower panchayats and municipalities to levy taxes.
5. Tax Regulatory Bodies in India
5.1. Central Board of Direct Taxes (CBDT)
It is a statutory body under the Central Revenue Act, 1963. It deals with matters related to levy and collection of direct taxes like personal income tax, corporate tax, etc. CBDT heads the Income Tax Department which functions under the Department of Revenue of the Ministry of Finance.
The Central Board of Direct Taxes consists of a Chairman and the following six Members: -
- Member (Income Tax & Revenue)
- Member (Legislation)
- Member (Admn.)
- Member (investigation)
- Member (TPS & system)
- Member (Audit & Judicial)
The Current Chairman of CBDT is J B Mohapatra.
5.2. Central Board of Indirect Taxes and Customs (CBIC)
After GST, Central Board of Excise and Customs (CBEC) was renamed as Central Board of Indirect Taxes and Customs. It is a part of the Department of Revenue under the Ministry of Finance. It deals with the formulation of policy related to the collection of levy and customs, Central Excise, Central Goods and Service Tax and IGST.
It also deals with the prevention of smuggling and administration of matters relating to Customs, Central Excise, Central Goods & Services Tax, IGST and Narcotics to the extent under CBIC's purview.
The Current Chairman of CBIC is Vivek Johri.