Tax Structure in India

The government imposes taxes to fund various projects related to infrastructure, public schools, military production, and law enforcement, among others, for the overall development of the nation.

The tax system in India is a three-tier structure, which includes the State Government, Central Government, and local authorities such as municipal corporations. It is important to note that taxes in the country cannot be levied unless it is passed as a law.

Types of Tax in India

An equitable and efficient tax structure ensures that the burden of taxation is distributed fairly among citizens and businesses, promoting economic stability and development. The tax system in India consists of two types of taxes in India – direct tax and indirect tax.

Direct Tax

A direct tax is imposed on individuals and corporate entities. Such a type of tax is borne solely by the taxpayer and is dependent on the income group in which the taxpayer falls. The lower income group assumes a lower tax liability and vice versa. Some common types of direct taxes include income tax, wealth tax, gift tax, and capital gains tax. There are two major types of direct tax in India – Income tax and corporation tax.

• Income Tax: Income tax is a progressive tax levied on an individual’s or entity’s income. The rates vary based on income slabs. The Income Tax Act governs the provisions related to income tax.
• Corporate Tax: Corporate tax is imposed on the income earned by companies and other corporate entities. The Finance Act determines corporate tax rates, which can vary based on the type of company and its turnover.

Indirect Tax

Indirect taxes, on the other hand, are those which are levied through goods and services. Earlier, there were numerous indirect taxes in play, such as Value Added Tax, octroi, entry tax, entertainment tax, and Central Sales Tax, among others.

• Customs Duty: Customs duty is levied on goods imported into India. It helps regulate imports and protect domestic industries.
• Excise Duty (Replaced by GST): Excise duty was imposed on the production of goods within India. With the implementation of GST, it has been subsumed under the new tax regime.
• The Goods and Services Tax (GST), which came into effect on 1st July 2017, replaced the tax structure in India. The main aim of GST was to eliminate the cascading effect of taxes on the sale of goods and services. This, in turn, had a direct impact on the cost of goods. As the cascading effect of the tax was removed, the cost of goods decreased.
• The GST regime eliminated around 17 taxes and imposed just three taxes – namely, Central GST (CGST), State GST (SGST), and Integrated GST (IGST).
• Central GST: This tax is levied on intra-state sales and is collected by the Central Government.
• State GST: This tax is imposed on intra-state sales and is collected by the State Government.
• This means that for any sale within a state, say within Tamil Nadu, CGST is levied in addition to SGST. Therefore, the revenue will be shared equally between both the State and the Central Government.
  
• Integrated GST: This tax is applicable to an inter-state sale, for instance, a sale transaction between Tamil Nadu to Maharashtra. It is collected by the Central Government.

Other Taxes

Apart from direct and indirect taxes, there are various other taxes and levies, such as:

• Property Tax: Property tax is levied on real estate properties based on their value. Local municipalities and authorities collect this tax.
• Capital Gains Tax: Capital Gains tax is applicable when an individual or entity sells an asset (like property or stocks) for a profit. The tax rate depends on the holding period of the asset.
• Securities Transaction Tax (STT): STT is levied on the purchase or sale of equities and other securities traded on stock exchanges.
• Dividend Distribution Tax (Abolished): Dividend Distribution Tax, previously levied on companies distributing dividends, was abolished in 2020. Instead, dividends are now taxed in the hands of recipients.

Revenue Authorities in India

There are various bodies governing and regulating the tax system in India. The following are the two main revenue authorities in the country.

Central Board of Direct Taxes

This body is responsible for providing inputs regarding planning and policies about direct taxes. The Central Board of Direct Taxes is a part of the Department of Revenue in the Ministry of Finance.

Central Board of Indirect Taxes & Customs

This body is also part of the Department of Revenue in the Ministry of Finance. It was renamed from the Central Board of Excise and Customs, based on the proposal by Finance Minister Arun Jaitley. This revenue authority assists the government in formulating policies in relation to GST, along with central excise levy and customs functions.

Final Thoughts

The tax structure in India has undergone numerous modifications in the past years. There have been changes with regard to the standardization of income tax rates and easier governing laws. Due to this, the government has achieved results such as higher compliance with tax laws, enhanced enforcement, and ease of paying taxes.

Key takeaways

• A direct tax is imposed on individuals and corporate entities.
• Goods and Services Tax (GST) replaced the tax structure in India.
• The GST regime eliminated around 17 taxes and imposed just three taxes – namely, Central GST (CGST), State GST (SGST), and Integrated GST (IGST).
• The Central Board of Direct Taxes is responsible for providing inputs regarding planning and policies about direct taxes.