Government of Tamil Nadu

Department of Employment and Training

Course : TNPSC Combined Civil Services Examination - IV(Group IV / VAO)

Subject : Indian Economy
Topic : Tax System

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 Inadian Economy 1

Tax System
Meaning and definition of a tax
A tax is one of the important sources of public revenue. A tax is a compulsory charge or payment
levied by the government on an individual or corporation. Therefore an element of compulsion is
involved in taxation. Other sources of public revenue are excluded from this compulsory
element. There is no direct give and take relationship between a taxpayer and the government.

Definition of a tax

According to Prof. Seligman, “A tax is a compulsory contribution from the person to the State to
defray the expenditure incurred in the common interest of all without any reference to the special
benefits conferred”.
Kinds of tax
1. Direct and Indirect taxes.
2. Proportional, progressive, Regressive and digressive taxes.
3. Specific and ad valorem taxes.
4. Value-added tax (VAT)
5. Single and multiple taxes.

Direct and Indirect taxes

According to Dalton, “A direct tax is one which is really paid by a person on whom it is
imposed whereas an indirect tax, though imposed on a person, is partly or wholly paid by
another”.
In the case of a direct tax, the tax payer who pays a direct tax is also the tax bearer. In the case of
indirect taxes, the taxpayer and the tax bearer are different persons.

Direct taxes

Direct taxes are collected from the public directly. That it is to say, these taxes are imposed on
and collected from the same person. One cannot evade paying the tax if it is imposed on him.
Income tax, wealth tax, corporate tax, gift tax, estate duty, expenditure tax are good examples of
direct taxes.

Indirect taxes

Taxes imposed on commodities and services are termed as indirect taxes. There is a chance for
shifting the burden of indirect taxes. The incidence is upon the person who ultimately pays it.
Examples of indirect taxes are excise duties, customs duties and sales taxes (commodity taxes).
 Inadian Economy 2

The classification of direct taxes and indirect taxes is based on the criterion of shifting of
the incidence of tax. The burden of a direct tax is borne by the person on whom it is levied. For
example, income tax is a direct tax. Its burden falls on the person who is liable to pay it to the
Government. He cannot transfer the burden to some other person.
An indirect tax is initially paid by one person but ultimately the burden of the tax is fully
or partially borne by another person because there is a possibility of transfer of burden of an
indirect tax. For example, the excise duty on a motorbike is initially paid by the manufacturer.
But he subsequently shifts this burden to the consumer by including the tax in the price of the
bike.

Taxes of Central Government and State Governments

The financial system of India is federal in character. Therefore, the powers and functions to
raise revenue are divided between central government and state and local governments as
scheduled in the Indian Constitution. This division has been made to avoid any clash in financial,
administrative and other areas.

Taxes of the central government

The main sources of tax and non-tax revenue of the central government are
1. Taxes on income (other than on agricultural income),
2. Corporate tax
3. Expenditure tax
4. Taxes on properties (Estate duties)
5. Gift tax
6. Wealth tax
7. Taxation on capital gains
8. Union excise duties
9. Customs duties (Import and Export duties)

The sources of non-tax revenue of the central government include

1. Fiscal services
2. Receipts from interest on loans
3. Dividend and profits
4. General and administrative services
5. Social and community services
6. Economic services
 Inadian Economy 3

Taxes of the State Governments

Under the Constitution of India, only the State governments are provided
With separate powers to raise revenue, while the Union territories are financed by the Central
government directly.
The main sources of tax and non-tax revenue are
1. Land revenue
2. Taxes on the sale and purchase of goods except newspaper
3. Taxes on agricultural income
4. Taxes on land and building
5. Succession and estate duties in respect of agricultural land
6. Excise duty on alcoholic liquors and narcotics
7. Taxes on the entry of goods into a local area
8. Taxes on mineral rights
9. Taxes on the consumption of electricity
10. Taxes on vehicles, animals and boats
11. Taxes on goods and passengers carried by road and inland water ways
12. Stamp duties, court fees and registration
13. Entertainment tax
14. Taxes on advertisements other than those in newspaper
15. Taxes on trade, profession and employment
16. Income from irrigation and forests
17. Grants from the central government
18. Other incomes such as income from registration and share in the income-tax excise and estate
duties and debt services, loans and overdrafts.

Tax classification – based on rate structure

• Progressive
• Proportional
• Regressive
• Digressive taxes
 Inadian Economy 4

Goods and Services (GST) Tax

Introduction

The one hundred and first amendment of the constitution of India, introduced a national
Goods and services tax in India. It was implemented in July 1,2017.

GST

 The GOI is committed to replace most indirect taxes levied on goods and services by the
centre and states and implement GST by April 2017.
 Central taxes such as central exercise duty, Additional excise duty, service tax, Additional
custom duty.
 State level taxes such as VAT or sales tax, Central sales tax, entertainment tax, entry tax,
Purchase tax, Luxury tax and octroi will subsume GST.
 Petroleum and petroleum products shall be subject to GST.
 Administration of GST will be the responsibility of the GST council which will be the apex
policy making body for GST.

Understanding GST
 The power to make laws in respect of supplies in the course of interstate trade will be vested
only with the union government. States will have the right to levy GST on intra-state
transactions, including on services.
 Centre will levy IGST on inter-state supply of goods and services.
 In addition to IGST in respect of supply of goods. An additional tax of up to 1% has been
proposed to be levied by the centre. Revenue from this tax is to be assigned to origin states.

Benefits of GST
 Elimination of multiplicity of taxes and their cascading effects.
 Rationalisation of tax structure and simplification of compliance procedure.
 Harmonization of centre and state tax administration which would reduce
 duplication and compliance cost.

GST Council
The GST council has been created under Article 279-A of the constitution of India.
Composition of GST council
 GST council is a federal forum with both centre and states in India on board.
 Union finance minister (as chairman)
 The union minister of state in charge of Revenue or finance, and the minister in charge of
finance or taxation or any other minister nominated by each state government.
 Inadian Economy 5

Functions of GST council

 As per Article 279A (4), the council will make recommendations to theunion and the states
on important issues related to GST like
 Taxes, cesses, surcharge to be subsumed under the GST.
 The Threshold limit of turnover for application of GST.
 Rates of GST.
 Special Provision with respect to the eight north eastern states.

GST ‘slabs
 A four tier GST tax structure of 5 , 12, 18 and 28 percent, with lower rates of essential items
and highest for luxury and de-merits goods that would also attract an additional cess was
decided by the GST council.
 Essential items including food, which presently constitute roughly half of the consumer
inflation basket will be taxed at zero rates.
 The lowest rate of 5 percent would be for common use items while there would be two
standard rates of 12 and 18 percent under the GST.
 Highest tax slab will be applicable to items which are currently taxed at 30-31 percent
(excise duty plus VAT).
 Luxury cars, tobacco and aerated drinks would also be levied with in additional cess on top
of the highest tax rate.