India’s Tax System – A Comprehensive Study
Taxes are most important part of any country’s financial structure. The govt. needs to mobilize a significant amount of financial resources in order to fulfill its many commitments. The govt. mobilizes financial resources for funding its different activities through,
- User fees/ Service Charges
There are two types of receipts through which govt. mobilizes financial resources –
- Revenue Receipts – The source of funds which neither creates liabilities nor reduce assets. This can be further divided into Tax Revenue and Non-Tax Revenue.
- Tax Revenue: Revenue collected by the govt. through payment imposed by law.
- Non-Tax Revenue: Revenue of govt. raised through instruments other than taxes such as user charges, dividend, and profit of public sector enterprises, interest receipt, penalty or fine etc.
- Capital Receipts – The sources of funds which creates liability or that reduce assets. E.g. Borrowings and disinvestment.
Tax Revenue broadly can be divided into two main categories
- Direct Taxes Those taxes for which, the burden of the tax falls on the entity that is being taxed are known as Direct Taxes. Taxes on income, property and wealth.
- Indirect Taxes those taxes for which the tax burden can be shifted or passed on to other persons later through the business transaction of goods/ services. It includes Custom Duties, Excise, Service Tax, Sales Tax/ VAT.
|Direct Taxes||Indirect Taxes|
|Corporation Tax The Tax is levied on the incomes of registered companies in the country.||Excise Duties Tax levied on goods which are manufactured in the country and are meant for domestic consumption.|
|Securities Transaction Tax on Transaction in listed securities on stock markets and in mutual funds.||Sales Tax It is charged at the point of purchase or exchange of certain taxable goods.|
|Capital Gains Tax Profits generated from the sale of capital assets(Physical or Financial)
Long Term or Short Term
|Value Added Tax (VAT) is a multistage tax levied only on the value added at each stage of a supply chain and not on the entire value of sales.|
|Wealth Tax is levied on the specific assets of certain persons including individuals and companies under the wealth Tax Act 1957. Wealth Tax is not applicable on productive assets. Abolished and replaced by Super rich tax in 2015-16.||Service Tax levied on services provided by an entity and responsibility lies on the service provider.|
|Property Tax levied on income from the property.||Custom Duties Tax on imported and exported goods to and from the country.|
Division of Taxation Powers
- Central Govt.
- State Govt.
- Local Bodies
Central Govt. – Taxes on Corporations and Person income (except agricultural Income). Indirect taxes Govt. can impose excise duties on production or manufacturing and service tax on services provided. Custom duties, Central Excise, Sales Tax, and Service Tax
State Govt. – Tax on Sale of goods (Sales Tax), State Excise, Land Revenue, Entertainment Tax, Tax on professionals Sales Tax replaced by VAT (Value Added Tax).
Local Bodies – Can levy tax on properties, Octroi( Tax on various products meant to be consumed with in the local boundaries of local Bodies), Tax on Markets, and User Charge.
Some important Facts about taxation in India
- Finance commission is set up every 5 years for sharing of financial resources between center and state.
- The 14th Finance commission ( 1st April 2015) has recommended devolution of 42% of the shareable pool of Central Tax revenue to states every year and center is to retain the remaining amount for the union budget.
- Lowest Tax to GDP ratio among BRICS countries.
- Regressive Taxes – That imposes a proportionately greater burden on the lower income group than on the upper-income group. Eg. Indirect Taxes
- Progressive taxes –They are linked to the taxpayer’s ability to pay and the average tax rate increases as the taxable income of the tax payer’s increases. Eg. Direct Taxes
- India is extremely regressive in nature as there is 60 % income of the govt. from the indirect taxes.
- In 2016 Parliament passes GST (Goods and Services Tax) which will replace existing tax structure in India. This is supposed to be implemented by April 2017.
- Project SAKSHAM is a New Indirect Tax Network of the Central Board of Excise and custom (CBEC) pertaining to system Integration. This will help in the implementation of GST, Extension of the Indian customs Single Window Interface for Facilitating Trade (SWIFT) and will facilitate taxpayer-friendly under Digital India and Ease of Doing Business.
- Number of Taxpayers under existing system administered by CBEC is 36 lakhs which will increase up to 65 lakhs after the introduction of GST.
- Total cost involved is 2256 Cr. Which will incur over a period of 7 years.
Also Read : India Polity A Detailed Analysis