Taxation Structure in India

Aadheesh Sood
2020991606
B.com Y Sem 4
Vanshika Chhabra
2020991588
B.com Y Sem 4

Tax structure in India is a three tier federal structure.

1. Central Government
2. State Governments
3. Local Municipal bodies

The entire system is clearly demarcated with specific roles for the central and state
government. The Central Government of India levies taxes such as customs duty, income
tax, service tax, and central excise duty. The taxation system in India empowers the state
governments to levy income tax on agricultural income, professional tax, value added tax
(VAT), state excise duty, land revenue and stamp duty. The local bodies are allowed to
collect octroi, property tax, and other taxes on various services like drainage and water
supply. Taxes are of two distinct types, direct and indirect taxes. The difference comes in the
way these taxes are implemented. Some are paid directly by you, such as the dreaded income
tax, wealth tax, corporate tax etc. while others are indirect taxes, such as the value added tax,
service tax, sales tax, etc.

1.   Direct Taxes
2.   Indirect Taxes

Direct tax
Direct tax, are taxes that are paid directly by you. These taxes are levied directly on an entity
or an individual and cannot be transferred onto anyone else. One of the bodies that overlooks
these direct taxes is the Central Board of Direct Taxes (CBDT) which is a part of the
Department of Revenue. It has, to help it with its duties, the support of various acts that
govern various aspects of direct taxes.
Merits
 It is easy to determine the incidence of the tax – a person or institution who actually
pays and suffers the burden of tax.
 Direct taxes tend to be progressive – people in the higher income group pay a greater
percentage than poorer people, e.g., income tax is graduated so that high income
earners pay a larger percentage; also a selective wealth tax would only apply to those
owning more than a certain level of wealth.
 Direct taxes are easy to collect. Consider, for example, the PAYE system which is
used to collect income tax from most wage and salary earners.

Demerits
 Direct taxation may be a disincentive to hard work. High rates of income tax, for
example, may discourage people from working overtime or trying to gain promotion
at work. Some economists blame the ‘brain drain’ (i.e., the emigration of highly
qualified persons, such as scientists and doctors) on India’s high levels of taxation.
 Direct taxation discourage savings because, after paying tax, individuals and
companies have less income available to save. This means that investment, which
relies on the level of savings, is low and this could cause less production and
employment.
 This type of taxation encourages tax evasion – to avoid paying so much tax.

Indirect Tax
Indirect taxes are those taxes that are levied on goods or services. They differ from direct
taxes because they are instead levied on products and are collected by an intermediary, the
person selling the product. These taxes are levied by adding them to the price of the service
or product which tends to push the cost of the product up.

Merits
 Indirect tax is fairly easy to collect.
 The government can use it to discourage certain types of consumption. A high rate of
tax on tobacco can, for example, affect smoking habits.
 Indirect taxation is a good way of raising revenue when levied on goods with an
inelastic demand, such as necessities.
Demerits
 Indirect taxes are regressive. A regressive tax is one which causes a poor person to
pay a higher percentage of his or her income as tax than a rich person. For instance,
the tax ingredient of the price of a new television set would be the same for the poor
and the rich person, but as a percentage of the poor person’s income, it is far greater.
 These taxes are not impartial. In recent years, certain groups of consumers have
complained that they are being heavily penalised by taxation, e.g., drinkers, smokers
and drivers.
 Indirect taxes may contribute to inflation. The imposition of an indirect tax on an item
like petrol will increase its price. Since petrol is an essential input in a large number
of industries, this may set off an inflationary spiral. Moreover, trade unions demand
higher wages to maintain the real incomes of workers.

Goods and Service Tax (GST)

As a significant step towards the reform of indirect taxation in India, the Central Government
has introduced the Goods and Service Tax (GST). GST is a comprehensive indirect tax on
manufacture, sale and consumption of goods and services throughout India and will subsume
many indirect taxes levied by the Central and State Governments. GST will be implemented
through Central GST (CGST), Integrated GST (IGST) and State GST (SGST).

Revenue Authorities
CBDT
The Central Board of Direct Taxes (CBDT) is a part of the Department of Revenue under the
Ministry of Finance. This body provides inputs for policy and planning of direct taxes in
India and is also responsible for administration of direct tax laws through the Income Tax
Department.
CBEC
The Central Board of Excise and Customs (CBEC) is also a part of the Department of
Revenue under the Ministry of Finance. It is the nodal national agency responsible for
administering customs, central excise duty and service tax in India.
CBIC
Under the GST regime, the CBEC has been renamed as the Central Board of Indirect Taxes
& Customs (CBIC) post legislative approval. The CBIC would supervise the work of all its
field formations and directorates and assist the government in policy making in relation to
GST, continuing central excise levy and customs functions.